The employee retention credit (ERC) has been a valuable resource for businesses struggling to stay afloat during the COVID-19 pandemic. This refundable tax credit is designed to help employers keep their employees on the payroll, even during periods of economic uncertainty. The ERC was initially included in the CARES Act but has been extended and expanded in subsequent legislation, including the most recent American Rescue Plan Act (ARPA), signed into law by President Biden on March 11, 2021.
The latest employee retention credit update brings several important changes that businesses need to be aware of. These changes aim to provide additional relief to employers who have been severely impacted by the pandemic and encourage them to retain their employees. Here are some key updates you need to know:
1. Extended eligibility period: The initial ERC was available to eligible employers with operations that were fully or partially suspended due to government orders or those that experienced a significant decline in revenue. The ARPA extends the eligibility period for wages paid from July 1, 2021, to December 31, 2021, allowing more businesses to qualify for the credit.
2. Increase in credit amount: The credit amount has been significantly increased for the third and fourth quarters of 2021. Under the ARPA, eligible employers can claim a refundable tax credit of up to 70% of qualified wages, with a maximum credit of $7,000 per employee per quarter. This means that businesses can potentially receive a credit of up to $28,000 per employee over the course of 2021.
3. Expanded eligibility for startups: Startups that were not previously eligible for the ERC due to the requirement of a decline in gross receipts can now qualify based on a decline in quarterly gross receipts. This change opens up the opportunity for more businesses, including newly established ones, to benefit from the credit.
4. Interaction with PPP loans: Previously, employers who received a Paycheck Protection Program (PPP) loan were not eligible to claim the ERC. However, the ARPA now allows businesses that received a PPP loan to also claim the ERC for qualified wages that were not used to receive forgiveness for the PPP loan. This change eliminates the previous limitation and provides an additional lifeline for struggling businesses.
5. Advance payment of the credit: The ARPA also introduced a provision allowing certain small employers to request an advance payment of the ERC. This can provide immediate cash flow relief to businesses that have been facing financial difficulties.
These important changes to the employee retention credit provide much-needed support to businesses as they navigate the ongoing effects of the pandemic. Employers now have a longer eligibility period, increased credit amounts, and expanded opportunities for qualifying without being disqualified due to PPP loan receipt. The advance payment provision further eases the burden on struggling businesses.
It is essential for employers to be aware of these updates and consult with tax professionals or accountants to ensure they are taking full advantage of the credit‘s benefits. The ERC can significantly alleviate the financial strain faced by businesses and help them retain their valuable workforce during these challenging times.