When the CARES Act was signed into law on March 27, 2020, it established the Employee Retention Tax Credit (ERTC), which entitled eligible employers to a refundable tax credit against certain federal employment taxes.
With the pandemic continuing, the Presidential Administration signed the Consolidated Appropriations Act (CAA) into law on December 27th, and it included a $900 billion COVID-19 relief package. One of the key provisions of the CAA was that it retroactively allowed Paycheck Protection Program (PPP) loan recipients to be eligible for the credit.
Employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds, and the change in eligibility is retroactive for wages paid after March 12, 2020. The CAA also extends the ERTC for two more calendar quarters – through June 30, 2021.
To qualify for the ERTC, one of the following must occur during the period for which the credit is claimed:
- 1. The operation of an employer’s business for the period the ERTC is taken must be fully or partially suspended due to government orders limiting commerce, travel, or group meetings due to COVID-19.
- 2. There must be a significant decline in gross receipts for such period.
In addition, it’s important to note that there is an increase in the credit rate from 50 to 70 percent of qualified wages, and an increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter. There’s also a reduction in the required year-over-year gross receipts decline from 50 to 20 percent.
There’s also a safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility, and there’s a provision to allow certain governmental employers to claim the credit.
These changes are significant, and there are still some unanswered questions when it comes to gross receipts. We are expecting that the IRS will be providing additional guidance soon.Tax, Tax Planning, COVID-19 Resources