One of the complexities of ERC processing is that there are actually multiple laws that govern the credit, each with its own enabling rules and regulations. And because the situation has evolved so quickly, most of those rules are contained in IRS Notes — like this one, Note 2021-20, which sets out most of the rules.
It’s worth taking a step back to appreciate what was going through Congress’s mind here. Originally, the CARES Act created the Employee Retention Credit (ERC) as part of the government’s relief package to mitigate the economic impact of COVID-19 in 2020. However, as the pandemic continued to drag on, Congress realized that the original provisions were inadequate to the task. Basically, it blew up the ERC like a gigantic balloon, expanding eligibility, the amount of recovery, and the ways businesses could recover. Eventually, it passed three subsequent laws that affected the ERC: the Relief Act of 2021 (passed in December 2020), plus the American Rescue Plan Act of 2021 and the Infrastructure Investment and Jobs Act (IIJA).
The IRS has published a handy chart explaining the provisions of each of these four laws, though it’s a bit too complex for most purposes. Here’s a short summary of what changed.
1. Amount and Time of Recovery
Overall, the Relief Act greatly expanded the ERC. In the CARES act, the maximum credit was $5,000 per employee for all of 2020. But the Relief Act made it $7,000 per quarter of 2021. In other words, the first quarter of 2021 is worth more than the entirety of 2020. So is the second quarter. And the third. This is why you see the number $26,000 thrown around: $5,000 for 2020, and $21,000 for 2021.
This is why some companies may apply for the ERC twice. If they received the ERC for 2020, they may still be eligible for 2021.
2. Eligibility Requirements
There are two main triggers for eligibility. The first applies in all instances, with the credit available to any business whose operations were partially or totally suspended by a governmental COVID-19 order during the time the order is in effect.
The second option to become eligible was revised by the Relief Act. Previously if a business had seen a decline in their gross receipts of more than 50% in any quarter of 2020 (as compared to the same quarter in 2019), they were eligible. This eligibility held until the gross receipts recovered to a decline of less than 20%. That is a huge difference that has enabled many of our clients to recover ERC for 2021 even if they couldn’t for 2020.
For example, if your Q1 2021 gross receipts are $79,000 and your Q1 2019 gross receipts were $100,000, that 21% decline makes you eligible for the credit in Q1 2021. Under the old rules, you wouldn’t be eligible because the decline was not greater than 50%. (Note: If your business didn’t begin operations until 2020, you can use a comparison to 2020 instead of 2019.)
3. Percentage of Wages and Maximum Credit
The percentage of wages qualified for the credit increased from 50% to 70% — that’s why it’s $7,000 per quarter maximum, not $5,000. The cost of providing healthcare benefits to employees remains deductible as before. This change is applicable with the first quarter of 2021.
4. Employer Size for Whether an Employee is Working
The employer size threshold is another notable change. The original act prevented companies with more than 100 employees from taking the ERC for any employee still performing services (even if the company is at reduced capacity). Starting in 2021, this increases to 500 employees.
5. PPP Loans Versus ERC
Previously, companies who participated in the PPP loan program were not eligible for the ERC, including affiliated companies. The Relief Act retroactively changed this requirement. Companies that received PPP loans are now eligible for the ERC as well, but there are restrictions. No wages may be used for both the PPP and ERC. In our calculations, we carefully allocate wages to PPP and ERC separately to ensure compliance.
6. Governmental Entities
Previously, the ERC was not available to governmental agencies at any level. However, starting Jan. 1, 2021, public colleges and universities, agencies that provide medical care, and select other agencies such as federal credit unions are eligible.
These changes can be complex and compliance can be cumbersome. If any of the information outlined above applies to you, reach out to us so we can help you capture the most value from the changes to ERC rules.