The Consolidated Appropriations Act, 2021 signed into law on December 27, 2020 (the “CAA Act”) expanded and approved the Employee Retention Tax Credit created by the CARES Act in March 2020.
The Employee Retention Tax Credit, contained within in the CARES Act, provided a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021, with an annual cap of $5,000 per employee. Eligible employers could immediately access the credit by reducing otherwise required employment tax deposits. Eligible employers included: (1) businesses with operations partially or fully suspended due to governmental orders caused by COVID-19, or (2) businesses that experienced 50% decline in gross receipts compared to 2019.
Importantly, however, two of the CARES Act benefits were mutually exclusive––the Paycheck Protection Program (PPP) loan and the Employee Retention Tax Credit––forcing business owners to either take a PPP loan or claim the tax credit.
The CAA Act’s biggest changes to the Employee Retention Tax Credit included: the dates of availability, the caps on credit, the “gross receipts” reduction, the “qualified wages” calculations, and the eligibility of PPP borrowers.
Availability Dates: Under the CARES Act, the Employee Retention Tax Credit was available only for wages paid through December 31, 2020. The CAA Act extends the Employee Retention Tax Credit to wages paid through June 30, 2021 and expands the ability of employers to claim the credit for 2021 wages.
Credit Cap: The CARES Act allowed an employer to claim a credit of 50% of qualified wages. Under the CAA Act, this credit percentage is increased from 50% to 70% of qualified wages; and the $5,000 annual cap of credit available for each employee will be $28,000 in 2021.
Gross Receipts: While the CARES Act required a business to see a reduction of 50% in their gross receipts to be eligible for the credit, the CAA Act decreases the required reduction from 50% to 20% and provides for an election to use the immediately preceding quarter’s gross receipts.
Qualifying Wages: Section 2301(c)(3)(B) of the CARES Act capped qualified wages paid to any one employee to certain prior wages paid and prevented an employer from inflating the Employee Retention Tax Credit by increasing pay to an employee during an eligible quarter. The CAA Act repealed section 2301(c)(3)(B); now an employer may pay bonuses to an employee and increase the credit, subject to the $10,000 per quarter cap.
PPP Borrowers: Under the CCA Act, businesses receiving a PPP loan (whether in 2020 or 2021) can now also claim the Employee Retention Tax Credit, provided wages are not “double counted.” The additional flexibility makes the credit more valuable to affected businesses.
Contact Rosenblatt Law Firm or your CPA to determine if you qualify to maximize the benefit.