The employee retention credit (ERC) has been a critical lifeline for businesses during the COVID-19 pandemic, providing a valuable source of financial relief to help retain employees and keep doors open. As the economic landscape continues to evolve, the ERC has undergone several key changes to maximize benefits for eligible employers.
Originally introduced as part of the CARES Act in 2020, the ERC has been extended and expanded through various legislative measures, including the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA). These changes have made the credit more accessible and generous for businesses, making it a vital tool for employee retention and financial stability. Here are some key updates to the ERC that employers should be aware of:
1. Increased credit Amounts: Under the original CARES Act, the ERC provided a credit of up to $5,000 per employee for the entire year. However, the CAA and ARPA have increased the credit amount, allowing employers to claim up to $28,000 per employee for 2021. This significant increase in the credit amount can have a substantial impact on a business’s bottom line, making it a valuable source of financial support.
2. Expanded Eligibility Criteria: Initially, the ERC was only available to businesses that experienced a significant decline in gross receipts or were subject to a government-mandated shutdown. However, the CAA and ARPA have expanded the eligibility criteria to include new businesses that were not in existence during the comparison periods and severely financially distressed employers. This expansion has broadened the scope of businesses that can take advantage of the credit, allowing more employers to benefit from the ERC.
3. Coordination with PPP Loans: Initially, businesses that received Paycheck Protection Program (PPP) loans were prohibited from claiming the ERC. However, the CAA and ARPA have changed this provision, allowing employers to retroactively claim the ERC for 2020, even if they received PPP loans. Additionally, for 2021, employers can now claim the ERC for wages that were not paid for by forgiven PPP loans, providing an additional avenue for financial relief.
4. Increased Retroactive Benefits: The ARPA has extended the availability of retroactive ERC benefits for 2020, allowing businesses to claim the credit for wages paid in 2020. This retroactive provision can provide a significant infusion of cash for businesses that were unable to claim the ERC earlier, allowing them to retroactively apply for the credit and receive much-needed financial support.
5. Enhanced Cashflow Benefits: The CAA and ARPA have also provided several cashflow benefits for businesses claiming the ERC, including the ability to immediately access the credit by reducing payroll tax deposits. Additionally, businesses can now elect to receive an advance payment of the credit instead of waiting until the end of the quarter to claim it on their quarterly payroll tax returns.
Overall, the updated ERC provides significant benefits for eligible employers, with increased credit amounts, expanded eligibility criteria, and enhanced cashflow benefits. Businesses should review these changes carefully and work with tax advisors to ensure they are maximizing their benefits under the ERC. As the economic recovery continues, the ERC remains a critical tool for businesses seeking to retain employees and navigate the uncertain road ahead.