More Businesses Stand to Benefit From the ERC — Here’s Why|
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Businesses, you can breathe easy: more relief is on the way, thanks to changes to the Employee Retention Credit (ERC).
When the ERC was first introduced last March as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, many business owners were ineligible to receive it, since they had already accepted funding from the popular Paycheck Protection Program (PPP). That changed on Sunday, December 27, when the Consolidated Appropriations Act of 2021 (the Act), which included several enhancements to the ERC, was signed into law.
Here is a breakdown of what is changing and what is staying the same.
What is staying the same?
By and large, the type of business eligible for the ERC is staying the same. The ERC is available to any private-sector business or tax-exempt organization that carries on a trade or business that was either (a) fully or partially suspended due to orders from the federal or state government limiting commerce, travel or group meetings due to COVID-19, or (b) a business that experienced a significant decline in gross receipts during any quarter compared to that same quarter in 2019.
This rule remains in 2021 — excess ERC funds will be treated as an overpayment that is refundable. In addition, businesses can receive an advance payment of the ERC up to certain limits.
This area of the ERC program is also staying the same. Businesses can claim the ERC if their operations have been affected by orders, proclamations or decrees from the federal government, or a state or local government, limiting commerce, travel or group meetings due to COVID-19.
Suspension of business
A business is deemed to be fully or partially suspended if an appropriate governmental authority imposes restrictions on the business’s operations so that the business (a) must cease all operations (fully suspended), or (b) can still continue to operate with some, but not all, of its normal operations (partially suspended). These businesses are eligible to claim the ERC in 2021.
As a quick reminder (which we initially shared in this article): While a company may not have been required to close due to direct orders, it could be considered “partially suspended” when it may not be operating at “normal capacity,” because of imposed restrictions from a government authority that limit commerce, travel or group meetings.
Furthermore, a government order imposed on a member of a company’s supply chain could have resulted in it failing to operate at normal capacity if it became unable to acquire the materials and supplies necessary to provide full service to customers. Thus, a company may be considered eligible for purposes of the ERC from both direct and indirect causes.
What is changing?
In 2020: Businesses were eligible for the ERC if their gross receipts declined at least 50% for any quarter compared to that same quarter in 2019.
In 2021: Businesses are eligible for the ERC if their gross receipts declined at least 20% for any quarter compared to that same quarter in 2019.
In 2020: Wages eligible for the ERC include compensation paid to an employee(s) from March 13 to December 31. If the business had more than 100 full-time employees in 2019, the qualified wages would only be those paid to employees who were “not providing services”.
In 2021: Wages now eligible for the ERC are extended to compensation paid to an employee(s) from January 1 to June 30. If the business had more than 500 full-time employees in 2019, the qualified wages are only those paid to employees who are “not providing services”.
Maximum credit per employee
In 2020: The maximum credit to businesses was $5,000 per employee per year, or 50% of qualified annual wages up $10,000.
In 2021: The maximum credit to businesses is $7,000 per employee per quarter, or 70% of quarterly qualified wages up $10,000.
To determine how to calculate the ERC based on qualifying wages and how to claim the credit, we encourage you to read our previous article on the ERC changes, linked here.
The relationship between the ERC and PPP loans
Perhaps the biggest change to the ERC is that it is now available to businesses who previously accepted a PPP loan. Initially, businesses who accepted PPP loans were not eligible to claim the ERC. That all changed with the passage of the Act, which retroactively repealed that rule.
Now, for employee wages paid beginning March 13, 2020, businesses with PPP loans can claim the ERC for both 2020 and 2021 (however, businesses can’t claim the ERC for wages used to obtained forgiveness on a PPP loan).
This will have a major, positive impact on businesses going forward. Let’s consider the example of a small marketing agency. The agency, which has 80 employees, accepted a PPP loan in the spring of 2020, which meant that it could not claim the ERC at that time.
Since most of the agency’s employees could do their work from home, half of the staff moved to a remote-work arrangement, while the other client-facing members of the staff worked in the office. Even with this modified work arrangement, many of the agency’s activities were affected by COVID-19 restrictions, such as promoting services at trade shows or hosting client appreciation events. Regardless, the business pays employees $10,000 each quarter in both 2020 and 2021. Here is a sample calculation of the ERC amount the agency could receive:
$10,000 qualified wages per quarter x 80 employees = $800,000 qualified wages
$800,000 qualified wages per quarter x 70% ERC = $560,000 credit — for one quarter!
Using this example, the agency would be eligible for a 2021 ERC of up to $1,120,000.
The agency would also be able to retroactively claim credits for 2020 for which they were previously ineligible prior to the Act. Let’s take a look at a retroactive calculation to quantify the 2020 credits:
$10,000 qualified wages for the year x 80 employees = $800,000 qualified wages
$800,000 qualified wages for the year x 50% ERC = $400,000 credit
Using this example, the agency would be eligible for a 2020 ERC of up to $400,000.
Bringing it all together, that’s a total ERC benefit of up to $1,520,000 in addition to the PPP!
The bottom line
Millions more US-based businesses stand to benefit from these changes to the ERC, but that doesn’t make them any less complex. At Aprio, we are here to help. Our dedicated PPP and ERC teams are well-versed in the nuances of the new rules and can help you maximize the ERC for the best-possible, long-term benefit to your business.
If you would like to discuss your ERC eligibility and how we may be able to help you, contact us today.