The employee retention credit (ERC) is a valuable tax credit designed to help businesses retain employees during challenging times. It was initially introduced in 2020 as part of the CARES Act in response to the COVID-19 pandemic, and it has continued to evolve in 2021 with new guidelines and eligibility criteria.
As a business owner, it’s essential to understand the changes in ERC guidelines from 2020 to 2021 and determine if your business is eligible to claim this credit. Here are some key points to consider:
1. Eligibility Criteria:
In 2020, the ERC was available to businesses that experienced a significant decline in gross receipts or were subject to a full or partial suspension of operations due to government orders related to the pandemic. The credit was equal to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee.
In 2021, the ERC has been expanded to include more businesses. It is now available to those who experienced a decline in gross receipts of at least 20% in a quarter compared to the same quarter in 2019. Additionally, the maximum credit amount has been increased to 70% of qualified wages, and the cap per employee has been raised to $10,000 per quarter.
2. Payroll Protection Program (PPP) Interaction:
One of the significant changes to the ERC in 2021 is its interaction with the PPP. Previously, businesses that received a PPP loan were ineligible for the ERC. However, the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act have changed this, allowing businesses to claim both the ERC and the PPP loan, as long as they do not use the same wages for both programs.
3. Size of Business:
In 2020, the ERC was generally only available to businesses with 100 or fewer employees. However, in 2021, the threshold has been increased to 500 employees, allowing larger businesses to take advantage of the credit.
4. Start-up Businesses:
Start-up businesses that were not in operation for all or part of 2019 are also eligible for the ERC in 2021. The credit is calculated based on qualified wages paid from March 13, 2020, to December 31, 2021, up to a maximum of $50,000 per quarter.
5. Retroactive Changes:
Businesses that were ineligible for the ERC in 2020 due to receiving a PPP loan can now retroactively claim the credit for qualified wages that were not paid with forgiven PPP funds.
In conclusion, the ERC has been significantly expanded and enhanced in 2021, making it more accessible and beneficial to a broader range of businesses. With the changes in eligibility criteria, interaction with the PPP, and increased credit amounts, it’s crucial for business owners to review the guidelines carefully and determine if they qualify for the credit. Consult with a tax professional or accountant to ensure compliance with the ERC guidelines and maximize the benefits for your business.