Today’s Emerging Tax and Regulation Alert – January 7, 2021

Tax Alert: Employee Retention Credit May Provide Benefits to Your Business

The recently approved Consolidated Appropriations Act (“CAA”) updated several tax provisions in the CARES Act to provide additional benefits to many businesses. One expanded and extended tax benefit change is to the Employee Retention Credit (“ERC”).

Under the CARES Act, the ERC allowed for a maximum $5,000 benefit per employee if certain criteria were met. Specifically, employers are eligible for the credit if they operated a trade or business during 2020 and experienced either:

  • A partial or full suspension of the operation of their trade or business because of governmental orders limiting travel, commerce, or group meetings due to COVID-19, or
  • A significant decline in gross receipts (tested based on a 50% decline in gross receipts compared to the same quarter in the previous year).

This credit applied to qualifying wages paid during the period or in any calendar quarter operations was suspended (note, calculation and limits are also affected by the number of employees and qualifying wages). This credit is a refundable payroll tax credit resulting in real dollars for many businesses. However, under the pre-CAA rules, businesses were not allowed to take advantage of both the ERC and Paycheck Protection Program (“PPP”) funding. That has changed under the CAA.

The CAA updated the provisions under the CARES Act and retroactively expanded ERC to include employers who utilized PPP. The CAA also increases the maximum benefit per employee to $7,000 per quarter (beginning in 2021). The updated provisions also changed the previous standards as follows:

  • Extends the ERC benefit through July 1, 2021 (previously limited to 2020);
  • Lowers the gross receipts requirement for 2021 from a 50% decline in gross receipts to a 20% decline in gross receipts (compared to the same quarter of 2019); and
  • Revises certain computational components, including:
    • The full-time equivalent employee threshold for defining and calculating qualifying wages in 2021 increases from 100 employees to 500 employees, and
    • Alternate testing for 2021 allows for the utilization of the previous quarter (Quarter 4 2020) compared to 2019, if necessary.

While these tax provisions can be difficult to navigate, it is important to consider your ability to take advantage of the ERC based on changes to your quarterly gross receipts compared to 2019 and the updated regulations.  Please reach out to your Topel Forman adviser if you would like to discuss the ERC’s applicability further.

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