Employment Tax Credit for COVID-impacted Businesses Expanded for 2020 and into 2021

The Employee Retention Credit originally established under the CARES Act in March 2020 allows businesses who have been financially impacted by COVID to claim a credit on certain employment taxes, and any excess credit is subject to a refund. Under the Consolidated Appropriations Act, passed on December 20, 2020, this credit and its limitations have been expanded for both 2020 and into 2021.

To qualify for the credit in 2020, gross receipts will have to have decreased by 50% or more during at least one quarter (compared to the same quarter of 2019) or the businesses must have been shut down partially or fully due to a government mandate in response to COVID. The IRS has updated the eligible period retroactively to March 12^th, 2020, to correspond with the date of the CARES Act and any wages paid after this date will be eligible for the credit. Business may use up to $10,000 of wages per year, per employee. The maximum credit is 50% of allowable employee wages, or $5,000 per employee in 2020.

For 2021, if gross receipts decreased by 20% during any quarter or the businesses is shut down partially or fully due to a government mandate in response to COVID, there will be credit eligibility. Businesses will have the option to compare any quarter of 2021 to the corresponding 2019 quarter (e.g., 1^st quarter 2021 vs. 1^st quarter 2019). In 2021, the credit amount limitations are increased to 70% of wages, with $10,000 being allowed per employee, per quarter. This equals a max credit of $7,000 credit per employee, per quarter in 2021.

Under the new rules, businesses appear to be able to claim the credit, even if they received PPP Loan funds. Claiming the credit happens by the business filing their quarterly payroll tax forms or Form 7200. However, payroll costs used for PPP Loan forgiveness cannot be counted again to claim the credit. There will be an election available for businesses to elect to not use a portion of their wages for the credit so to leave these available for PPP forgiveness.  We are awaiting further guidance on the election and how to appropriately calculate wages between PPP Loan forgiveness and the retention credit.

Please feel free to contact us if you have any questions.  We are happy to help determine if you qualify for this credit.