Breaking Down the Employee Retention Credit in the New COVID Relief Bill

January 6, 2021

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Some significant updates are affecting the Employee Retention Credit, but there are still some important unknowns.

Businesses that were ineligible for the ERC because they applied for PPP funding or who had over 100 full-time employees should reevaluate their eligibility based on the expanded program.

The Consolidated Appropriations Act of 2021 introduced major changes to the Employee Retention Credit (ERC). The first change allows businesses that received funds from a PPP loan to retroactively claim a ERC for 2020. The second change extends the ERC through June 30, 2021, and significantly changes the calculation of the credit for the first two quarters of 2021.

Here is a summary comparison of the Employee Retention Credit rule for 2020 and 2021:

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There are a number of unanswered questions in regards to how to claim the ERC retroactively to 2020 for businesses that received PPP funds. We are awaiting guidance from the IRS on a number of issues, including: Allocation of costs between the PPP and ERC (ordering rules to maximize both programs); Definition of costs to be included in qualified wages for businesses that have already applied for PPP forgiveness; and Procedures for claiming the retroactive credit (amending versus a “catch-up credit in 2021).

While we await additional guidance, we are suggesting that our business clients take the following steps in preparation for analysis and determination of best strategies to take advantage of both programs to their full extent.

Summary of gross revenue by quarter for 2019 and 2020.
Summary of quarterly payroll by employee for 2020.
Calculation of average monthly Full-Time Equivalent Employees for 2019.
If you already applied for PPP forgiveness, the amount of payroll and allocable health care costs used in calculation by quarter.
If you have not applied for PPP forgiveness, hold off applying until further guidance is available.