New legislation from the Consolidated Appropriations Act, 2021 creates a chance for some of your clients to take advantage of both Paycheck Protection Program (PPP) loans and the Employee Retention Credit (ERC) under the CARES Act.
Several changes specific to the ERC can provide an opportunity for additional relief for your clients. The significant changes that affect small businesses include:
- Extension of the ERC through June 30, 2021
- Increased credit rate from 50% to 70% of qualified wages
- Increased the limit on per-employee qualified wages from $10,000 for the year to $10,000 for each quarter
- Reduced year-over-year gross receipts decline from 50% to 20% and
- Created a safe harbor to allow employers to use prior-quarter gross receipts to determine eligibility
The legislation means that employers who receive PPP loans may still qualify for the ERC retroactive to March 13, 2020.
Previously, clients receiving a PPP loan during the first round of relief couldn’t take advantage of the ERC. However, with the new legislation, a business can take the ERC even if they received PPP funding and loan forgiveness as long as the payroll identified for the ERC was not paid out of PPP funds. As noted above, this change is retroactive to March 13, 2020.
Your clients may not be aware of this planning opportunity. It’s also a chance for you to bring more value to your clients by helping them take full advantage of relief options. And the time to do so is now — before completing your clients’ year-end payroll filings, especially if your clients haven’t applied for PPP debt forgiveness. Your clients can still claim the ERC if they’ve received forgiveness, but planning will be simpler if your clients haven’t applied yet. While waiting for specific IRS guidance needed to implement these provisions, you can begin discussing the opportunity with your clients.
Specifically, the bill allows eligible entities to claim the prior quarter’s credits from 2020 in the quarter in which the bill was signed: the fourth quarter of 2020.
The ERC is a fully refundable payroll tax credit for employers that, for 2020, is equal to 50% of qualified wages employers paid beginning March 13, 2020. Businesses are eligible if:
- They were fully or partially suspended due to an order from a governmental authority limiting travel, business and meetings during the quarter of payroll not paid out of PPP funds, or:
- The business had a reduction in gross receipts of 50% or more during a calendar quarter compared to the same calendar quarter in 2019.
When the covered period for PPP loans was extended to 24 weeks, many clients’ applications for debt forgiveness qualified for 100% forgiveness on payroll alone without considering the other eligible nonpayroll costs. However, those other costs now may play a big role in receiving the ERC benefit. In assisting your clients with their forgiveness calculations, analyzing the ratio of payroll and nonpayroll costs is a critical step. If sufficient nonpayroll costs are available, limiting payroll costs to the 60% threshold required for full forgiveness may allow the remaining payroll to be eligible for the ERC-provided relief.
For your clients with fewer than 100 employees, the credit applies to all employee wages paid. For clients with more than 100 employees, there are further restrictions in analyzing the ERC opportunity. The ERC requirements for qualified wages and business activity for 2020 are different than for the ERC on wages paid in 2021. Make sure you understand the specifics and how they affect your clients.
Now is the time to plan how to help your clients maximize both PPP loans and the ERC, as this expansion also applies to round two of the PPP. A Jan. 22 webcast will review ERC changes and how PPP borrowers can use these credits. We’ll also provide updates during our AICPA Town Hall Series, in which Erik Asgeirsson, President and CEO, CPA.com; Lisa Simpson, VP — Firm Services; and leading subject-matter experts share the latest news and updates on pressing issues affecting the accounting profession. Additionally, you can find more information and resources at our Coronavirus Resource Center, which is continuously updated with news and tools to help you navigate the COVID-19 pandemic.
Carl Peterson, CPA, CGMA, Vice President — Small Firm Interests, Association of International Certified Professional Accountants