In late December, Congress passed the Consolidated Appropriations Act, 2021, (CAA) which provided a second round of long-awaited pandemic relief. There were a number of changes included for businesses navigating the second wave of infections. This includes an extension of the Paycheck Protection Program (PPP), renewed Economic Injury Disaster Loan (EIDL) advances, and modifications to the popular Employee Retention Tax Credit. The credit, which was extended through July 1, 2021, features increased employee thresholds, a new maximum cap, expanded eligibility for PPP recipients, and inclusion of healthcare costs as part of qualified wages. To help clients, prospects, and others, Hanson & Co has provided a summary of the key changes below.
- Gross Receipts Test – Under the prior rules an employer would become eligible when gross receipts were less than 50% when compared against the same calendar quarter in 2019. The CAA changed this to allow a business to qualify beginning in the period when gross receipts are less than 80% when compared against the same calendar quarter in 2019.
- Credit Cap Increase – Under the prior rules a business could only claim the credit against $10,000 of qualified wages for all quarters capped at $5,000 per employee (50% of up to $10,000 in qualifying wages). The cap has been increased to $7,000 per employee (70% of up to $10,000 in qualifying wages) for the first two quarters of 2021. This means the maximum amount of the credit in 2021 will increase from $5,000 to $14,000 per employee.
- Qualified Wages – Starting on January 1, 2021, the definition of qualified wages has been expanded to include healthcare costs for those with 100 or fewer employees. For those with more than 100 employees, wages for furloughed employees now include the continuing pay and health care premiums.
- Employee Threshold Changes – Under the CAA, the employee threshold will be increased to 500 employees disallowing larger businesses from claiming the credit for wages paid to working employees, regardless of whether the work is performed remotely or at a reduced capacity. The change opens the door to broader access for small businesses previously excluded.
- Eligibility for PPP Borrowers – For those Denver businesses which received a PPP loan in 2020, claiming the credit was not allowed. Under the CAA, a loan recipient may claim the credit but not for wages paid with forgiven loan proceeds. Since the changes are retroactive to March 2020 the door is open to additional savings. Denver businesses that did not claim the credit due to a PPP loan should carefully review requirements to determine if they qualify to claim the credit for 2020 wages.
- Governmental Organizations – Previously excluded organizations such as state or local colleges, universities, and organizations providing medical or hospital care were not permitted to claim the credit. Effective January 1, 2021, these organizations and those chartered by Congress such as banks and credit unions can also participate.
- Pay Increases – Under the prior law, employers were not able to claim pay increases when calculating the credit amount. However, the CAA changes this and now permits regular pay increases or hazardous duty pay to be included in the credit calculation.
The new changes to the Employee Retention Tax Credit mean opportunity for Denver businesses. Although additional guidance is expected to be issued, it is important to consult with your tax advisor now to determine the potential savings for your business. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.