The Consolidated Appropriations Act (CAA) was signed by President Trump on December 27, 2020. The expansion of the Payroll Protection Program (PPP) loans and tax-deductibility of expenses paid with the first PPP loan received the most fanfare.
Also included in the CAA was the expansion of the Employee Retention Tax Credit (ERTC). If the eligibility requirements are met, businesses could be entitled to significant credit amounts. There are separate eligibility requirements for 2020 and 2021.
Prior to the signing of the CAA, if a company received a PPP loan they were ineligible for the ERTC. The CAA allows taxpayers that received a PPP loan to be eligible for ERTC.
Eligibility requirements for 2020 ERTC:
- Business operations were fully or partially suspended by government order due to COVID-19 or the business experienced a year over year reduction in gross receipts of greater than 50% for the same quarter when compared to 2019
- Credit may not be taken for wages paid with the proceeds of a PPP loan that have been forgiven
- Companies with greater than 100 employees can only take the credit on employees that were being paid by the company but were not performing services for the company
For 2021, the ERTC is available for the first two quarters of the year and the following eligibility requirements are different:
- The business experienced a year over year reduction in gross receipts of greater than 20% for the same quarter when compared to 2019; there is an option to test gross receipts by looking back at the immediately preceding calendar quarter and comparing that quarter to the same quarter of 2019
- Credit may not be taken for wages paid with the proceeds of a PPP loan that has been forgiven
- Companies with greater than 500 employees can only take the credit on employees that were being paid by the company but were not performing services for the company
The maximum credit amounts are $5,000 and $14,000 per employee for 2020 and 2021, respectively.
Any credits for 2020 are claimed by amending the company’s respective quarterly payroll tax returns (Form 941), however, qualified wages from the first quarter of 2020 should be reported on the second quarter Form 941.
The IRS is expected to issue additional guidance related to the 2021 credit.