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Employee Retention Credit Expands Under Consolidated Appropriations Act 2021

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January 13, 2021
Christian Brim
Tax News

Previously, I have written about the new round of PPP Loans and the grants for shuttered venue operators that were in the Consolidated Appropriations Act. The Act also extended and expanded the Employee Retention Credit.

The Employee Retention Credit was an often-overlooked provision of the CARES Act. Overlooked because most business owners were focusing on the PPP Loans, and you could not use both under the original law. The new Act liberalized those rules, and small business owners, whether they took a PPP loan or not, should see if the Employee Retention Credit would help them.

Eligible Business

Originally, a business had to show a reduction of 50% of gross receipts for the quarter from the same quarter of 2019. The new Act changes this to 20% for 2021, so many more small businesses will be eligible this year.

The original limit was employers with fewer than 100 employees. The new law raises this to 500 employees.

Credit Amount

The original maximum credit per employee was 50% of qualified wages for 2020 up to $10k in wages ($5k maximum credit). The Act extended the credit through June 30, 2021, raised the percentage to 70% of qualified wages, AND raised the wage base to $10k per quarter. The maximum credit for an employee for 2021 is now $14k!

The 2021 credit amount is not affected by any credit taken in 2020. In other words, if you took the full $5k credit for any employee in 2020, it does not reduce the amount of the credit you can claim in 2021.

Additionally the new Act provides for advance payments of the credit to employers. You can get the credit amount before you have to pay the wages!

PPP Loans and the Credit

The Cares Act stated that if you received forgiveness of a PPP loan, you were ineligible for the Employee Retention Credit. The new law allows an employer to receive both, with some restrictions.  

You cannot use the same wages for both the PPP forgiveness and the credit. Assuming that most small businesses have already submitted their forgiveness applications based upon 2020 wages, that means that you can use 2021 wages for obtaining the Employee Retention Credit.

The decrease in revenue to be eligible for the second round of PPP loans is 25% while the credit only requires a 20% reduction in revenue. Therefore, in most cases, employers are going to want to look first to the Employee Retention Credit for 2021.

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