2021 Employee Retention Tax Credit Means More Savings
The financial and operational challenges presented by the COVID-19 pandemic continue to persist into another year. The seemingly endless number of government orders has forced many to operate in a limited capacity, or in some cases, close altogether. This has made it very difficult to generate the revenue needed to pay expenses, including employees. Calls for additional relief from Congress were answered when the Consolidated Appropriations Act, 2021 (CAA), was signed into law on December 27, 2020. The CAA contained several provisions to help businesses cope with current conditions, including an expanded and extended Employee Retention Credit (ERC). Key changes include an increased credit maximum, an expanded per employee saving, and a retroactive provision that allows PPP borrowers to benefit.
To help clients, prospects, and others, Klatzkin has provided a summary of the tax credit’s key details below.
Who is Eligible?
Employers that operate a business between January 1, 2021, and June 30, 2021, are eligible to claim the credit if they experience one of the following:
- A full or partial suspension of operations due to federal, state, or local government orders limiting business activities, travel, or group meetings due to the COVID-19 pandemic.
- Experience a decline in gross receipts in a calendar quarter in 2021 where receipts are less than 80% compared to the same quarter in 2019. This is an important change because under prior regulations, there needed to be a 50% reduction limiting the number of businesses that could qualify.
What are Qualified Wages?
Under prior rules, qualified wages were defined differently depending on the total number of employees. Those with less than 100 full-time employees were any wages paid to employees during a time of (partial/full) suspension of operations, whether they provided services or not. For those with over 100 full-time employees, qualified wages were those paid to employees during a time of (partial/full) suspension of operations, not providing services.
Effective January 1, 2021, the definition of qualified wages has been changed to include more employers. For those with less than 500 full-time employees, qualified wages are any wages paid during a full/partial shutdown, regardless of whether services are provided. For those with more than 500 full-time employees, qualified wages are any wages paid, during a time of partial/full shutdown, only to those not providing services. The employee increase means expanded access to more businesses.
What is the Credit Amount?
The credit amount has been increased to permit qualifying employers to receive a credit equal to 70% of qualified wages. The maximum credit amount is $14,000 per employee. This is a sharp increase over the $5,000 per employee maximum in 2020.
There was also a provision that allows small businesses with less than 500 employees to receive an advance payment against future payroll taxes. This allows those with an immediate cash need to claim the benefit before it would otherwise be available.
What about PPP Borrowers?
The good news for Paycheck Protection Program (PPP) borrowers is they can now claim the credit as long as the wages identified for the credit were not paid from forgiven PPP funds. Also, the change is retroactive to March 2020, permitting certain taxpayers with an additional savings opportunity.
There is a significant planning opportunity to capture for those who have not yet applied for loan forgiveness. When the covered period was extended to 24 weeks, many immediately qualified for full forgiveness based on payroll expenses alone. The need to review non-payroll expenses was irrelevant because it was no longer important. However, the ERC changes mean that borrowers must carefully examine how payroll is handled to ensure access to both benefits.
The ERC changes open the door to new opportunities for New Jersey and Pennsylvania-area businesses. Due to the complexity of the changes, it is important to work with a qualified advisor to guide you through the process. If you have questions or need assistance with a tax planning or compliance need, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.