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As the COVID-19 pandemic intensifies, many businesses in Los Angeles and Orange County have been impacted by restrictive government orders. This has left many operating at reduced capacity and forced to modify the business model in order to accommodate new requirements. It seems the challenges of the early weeks of the pandemic continue to persist. It is against this backdrop that Congress and the White House negotiated and passed the second round of economic stimulus and relief legislation. The Consolidated Appropriations Act, 2021 (the Act) provides over $900B in economic relief through new funding programs, economic stimulus payments, expanded unemployment, changes to the Paycheck Protection Program (PPP2), and additional tax incentives. While there are literally dozens of updates impacting businesses, the expansion and extension of the Employee Retention Tax Credit are compelling. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.
Employee Retention Tax Credit (ERTC)
The ERTC was implemented as part of the CARES Act passed in March 2020 and provides tax savings to businesses experiencing a shutdown or reduction in business activity due to the pandemic. It is a refundable credit taken against employment taxes equal to 50% of qualified wages paid to employees between March 12, 2020, and January 1, 2021. Qualifying businesses receive immediate access to the credit because it is claimed by reducing quarterly employment tax deposits. It is important to note the credit is limited to 50% of an employee’s wages, including certain health plan costs with a limit of $10,000. Finally, businesses with more than 100 employees are not eligible to participate.
The Act extended the credit to include eligible wages paid through July 1, 2021, and has expanded the credit to include more benefits.
- Gross Receipts Test – Under the prior rules, an employer would become eligible when gross receipts were less than 50% compared against the calendar quarter in 2019. The Act 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. There were also changes to make the credit available to those not in business in 2019 by permitting the application of the gross receipts test based on 2020 receipts.
- 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 any calendar quarter. This means the maximum amount of credit in 2021 will increase from $5,000 to $28,000 per employee.
- Large Employer Threshold – The Act expanded eligibility by allowing companies with 500 full-time or fewer employees to claim the credit. This provides an important expansion as it will now permit those with 500 full-time or fewer employees to claim the credit for eligible wages paid.
- Eligibility for PPP Borrowers – Under the prior rules, businesses that received a PPP loan were not eligible to claim the ERTC. The Act changed this to allow borrowers to qualify only for wages not paid with forgiven PPP loan proceeds. It is important to note that this change applies retroactively to the effective date of the CARES Act.
- Health Plan Expenses – The Act has included health plan expenses in the definition of qualified wages and now covers these expenses for employees that have been furloughed but continue to receive health benefits.
The changes made to the Employee Retention Tax Credit provide an additional dimension of relief for Los Angeles, Orange County, and Dallas businesses. If you have questions about the information outlined above or need assistance with a tax planning or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon