CARES Act Tax Credit Now Available to Qualifying Employers
By Matthew Diment, Senior Manager
The passage of the CARES Act in March 2020 included the Employee Retention Tax Credit (ERTC) that most employers were unable to take due to limitations inherent in the qualifications to take it. Any business that received a Payroll Protection Plan (PPP) loan was ineligible to take this credit. That all changed with the legislation passed in late December.
The passage of the year-end stimulus package now allows businesses that received PPP loans to claim ERTCs. Additionally, it extended the ERTC into the first two quarters of 2021 and made the credit more favorable and easier to qualify for.
You are an eligible employer for the credit if, for any quarter, you satisfy either of the following: 1) The operation of your trade or business was fully or partially suspended by an appropriate governmental authority due to COVID-19. 2) Your business had a significant decline in gross receipts. This is defined as commencing in the quarter in which gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019 and ending in the quarter when the decline is 20% or less. Anyone who faced a closure in 2020, was limited to to-go only, outdoor-only seating, or even limited indoor capacity, may qualify under the first criteria.
Wages paid during a qualifying quarter as defined above, are eligible for a 50% credit on up to $10,000 of wages for the period starting March 13, 2020 and ending on December 31, 2020. This credit is claimed against your payroll tax on Form 941. For 2020, this may require amending previously filed 941s.
You may not be eligible to claim the credit if your average full-time employee count for 2019 was over 100, calculated using the employer-shared responsibility provision in the Affordable Care Act. If your count was over 100, the credit can only be claimed on wages paid to employees who provide no services. Additionally, you may also not utilize the same compensation costs used for PPP loan forgiveness or other wage-based credits to claim the credit.
The credit has been extended and expanded for 2021. The eligibility criteria are similar, but the significant decline in gross receipts is now defined as a reduction of more than 20% rather than 50%. The comparison period is still 2019, not 2020. If you are ineligible for the current quarter, you are allowed to use the prior period for comparison, i.e., fourth quarter of 2020 for first quarter 2021 eligibility. The 100 average full-time employee rule has been bumped up to 500. The count is still measured using 2019 employees.
The 2021 credit is also potentially a more generous credit than 2020. The credit itself is now 70% of wages rather than 50% and the credit can be taken in each of the first two quarters of the year yielding up to $14,000 per employee over those quarters. Again, compensation costs used for PPP loan forgiveness or to take other wage-based credits are not allowed for ERTC purposes. The credit will again be claimed on your Form 941 against payroll taxes.
If you think you might be eligible for either the 2020 or 2021 credit you should contact your tax professional to verify your fact pattern.