PPP Borrowers No Longer Prohibited From Receiving Employee Retention Credits

One of the major provisions of the Consolidated Appropriation Act, 2021 has been the extension and modification of the existing Employee Retention Credit (ERC) program which was authorized under the CARES Act.  While not receiving as much attention as renewed funding for second-draw Paycheck Protection Program loans, changes to the eligibility criteria for Employee Retention Credits will provide significant relief for entities still struggling with the effects of the COVID-19 pandemic.  Listed below are key changes to the Employee Retention Credit program of which businesses should be aware:

  • Program Extension – Originally, the CARES Act established that qualifying wages were those paid from March 13, 2020 through December 31, 2020.  Under the new rules, this timeline has been extended to include wages paid through June 30, 2021.
  • Program Eligibility – Originally, the CARES Act established a two-part test to determine eligibility for the Employee Retention Credit.  To qualify, a business must meet one of the following criteria:
    • Have gross receipts in any quarter in 2020 that were less than 50% of gross receipts for the same quarter in 2019; or
    • Have operations that were either fully or partially suspended by a COVID-19 shutdown order.

The requirement for reduction in gross receipts losses was eased for 2021.  Under the new rules, a business may qualify if gross receipts in the first or second quarter during 2021 are less than 80% of gross receipts for the same quarter in 2019.  For 2021, the second part of the two-part test remains the unchanged.

  • Qualifying Wages – For 2021, qualifying wages are capped at $10,000 per employee per quarter.  Since the Employee Retention Credit was extended for the first two quarters of 2021, this results in a maximum of $20,000 per employee in qualifying wages.  For 2020, qualifying wages remain capped at a maximum of $10,000 per employee for all quarters combined.   
  • Credit Amount – For 2021, the maximum credit has been increased to 70% of qualifying wages, or a maximum of $14,000 per employee.  For 2020, the maximum credit remains 50% of qualifying wages, for a maximum of $5,000 per employee.
  • Interaction with the Paycheck Protection Program (PPP) – Under the original rules, entities which received a PPP loan were not eligible to receive an Employee Retention Credit.  The Consolidated Appropriation Act, 2021 eased this major restriction by allowing PPP loan holders to receive an Employee Retention Credit, as long as qualifying wages do not include any wages paid with forgiven PPP proceeds.  Because this change is retroactive, entities which were previously prohibited in 2020, may now seek an Employee Retention Credit on their 4th Quarter Form 941 for non-PPP wages which would have otherwise qualified in 2020.  Additionally, these entities may also seek to qualify for the increased Credits which were authorized for the first two quarters of 2021.

To aid in determining eligibility, the IRS website has well thought out examples of what constitutes fully or partially suspended operations.  These examples are particularly helpful for restaurants and other entities which had significant changes in operations and capacity restrictions as a result of public health and safety orders.  If you have questions on whether your business will qualify for the Employee Retention Credit, please contact Karl Belka.