The newly updated Consolidated Appropriations Act, 2021 brings forth a slew of changes to the existing Employee Retention Credit (ERC) under the CARES Act. The new changes not only help small businesses retain their employees but also continue services during the pandemic. The old rule of 2020 barred businesses from qualifying for ERC and Paycheck Protection Program (PPP) loans at the same time. With the new changes that have come to the programs, businesses can now be eligible for both ERC and PPP loans. But to enjoy the benefits together, certain eligibility requirements must be met.
How to be eligible for Employee Retention Credit (ERC)
In order to be eligible for the ERC, businesses need to fulfill some requirements:
- Employers will be eligible for ERC if they pay employee wages after March 12, 2020, and before July 1, 2021.
- Businesses that were partially or fully closed in any quarter of 2020 due to a lockdown order from the government are eligible. The tax credit will be against the wages paid in that quarter, or:
- Businesses need to show their 2020 gross receipts were less than 50% of the same quarter in 2019 or that their 2021 gross receipts were less than 80% of the same quarter in 2020.
- Companies with 500 or fewer employees stand to benefit from the ERC.
The qualified wage limit for each employee is $10,000 and the per-employee credit rate is 70% of the qualified 2021 wages or 50% of qualifying 2020 wages. This is valid for each of the first two quarters of 2021. By following this, employers can get a maximum credit of $14,000 for each employee they pay in 2021. For 2020 wages, the limit is $10,000 per employee for the year.
How to be eligible for Paycheck Protection Program (PPP) Loan Forgiveness
PPP loans are available to small businesses struggling during COVID-19. Businesses must spend 60% of the loan amount on payroll if they want their PPP loans to be forgiven. Apart from payroll, there are a few other expenses that are eligible.
- Businesses can use the PPP loan amount for rent, covered mortgage interest, and utilities.
- They can also use the funds to provide safety equipment to workers during the pandemic.
- The loan also covers property damage due to unrest in 2020 that was not already covered by insurance companies.
- Costs related to supplier goods deemed essential to run business services are also eligible.
- Business expenditures such as software and cloud computing are also part of the forgivable PPP loan criteria.
Borrowers can select a period between 8 to 24 weeks to use the loan for eligible expenses.
How to get both PPP loans and the ERC
The previous rules didn’t allow businesses to get both PPP loans and the ERC. While this is now possible, business owners should be aware that if PPP funds are used to pay employee wages, they cannot claim a credit against it. Nevertheless, this change opens the door to greater relief for many small businesses. Since the covered period for PPP loan forgiveness is stretched to a maximum of 24 weeks, businesses may elect to spend 100% of their PPP funds just on payroll. However, if there are enough non-payroll expenses available and eligible for PPP loan forgiveness, the payroll cost can be limited to the required 60%. This way, businesses can be eligible for loan forgiveness and claim ERC against the rest of the payroll.
Questions? Ask our team at BradyRenner CPAs today >>
Matt Brady, CPA
Image credit: Piqsels @ Creative Commons