Employee Retention Credit - RECENT CHANGES

Retroactive retention credit changes
The CAA makes three modifications to the retention credit that are retroactive to the effective date of the CARES Act. The most significant change removes the restriction that prevents employers that obtained PPP loans from claiming retention credits. Under the modified rule, employers can claim the employee retention credit on any eligible wages not used to support PPP loan forgiveness and any wages that could count toward both provisions can be applied to either, but not both, at the election of the employer. By doing this, employers can maximize both their PPP loan forgiveness and employee retention credit.
Another change clarifies that the gross receipts of a tax-exempt entity include all amounts treated as gross receipts under Section 6033 of the Tax Code. The final retroactive change modifies the determination of qualified wages with respect to health plan expenses. Specifically, group health plan expense not included in gross income of an employee may be allocated and included in qualified wages.
Key takeaway: The retroactive changes to the retention credit, particularly with respect to PPP loan recipients, creates an immediate refund opportunity for these employers. Impacted employers with PPP loans should begin to review how their payroll costs might be covered by both provisions in order to determine which provision to apply. Consideration should also be given to which expenditures are needed to support PPP loan forgiveness to determine how the payroll costs factor into that determination. As noted above, the modifications to the PPP program may retroactively result in certain nonpayroll expenditures being treated as expenses eligible to support loan forgiveness. Where applicable this may expand opportunities to claim retention credits.
Extension and expansion of retention credit
The retention credit has been extended into the first half of 2021, so it will now expire on June 30, 2021, instead of Dec. 31, 2020. The credit has also been increased to 70% of up to $10,0000 of qualified wages paid per quarter in 2021. This will allow employers to claim a maximum of up to $14,000 per employee in 2021 if they are eligible in both of the first two quarters of 2021. The test to determine qualified wages remains largely the same, but the threshold separating the two tests has been increased to 500 employees. Thus, eligible employers with up to 500 employees will be able to claim all wages paid to employees during an eligible quarter irrespective of whether the employees provided services. The gross receipts test for determining employer eligibility has also been reduced from a 50% decline to a 20% decline.
These changes together result in a substantially more lucrative credit for many employers, especially those with between 100 and 500 employees. For example, if an employer with 400 employees satisfies the 20% decline in gross receipts for each of its first two quarters of 2021 and each of its employees have at least $10,000 of compensation in each quarter, including allocable healthcare expenses, then it would generate the maximum credit of $7,000 per quarter for each employee. This would create $5,600,000 of refundable credits over the first six months of 2021. Alternatively, if an employer with 200 employees does not satisfy the gross receipts test but is partially shutdown as a result of a government order during January 2021, it would also be eligible for the retention credit but only for qualified wages paid to its employees during the period it was partially shut down. If its employees averaged $3,500 of compensation and health benefits in January, it would be eligible a credit of $490,000.
The CAA also removes the prohibition that employers receiving PPP loans are ineligible for the retention credit in the same manner as discussed above.
Key takeaway: The retention credit has provided helpful support for businesses during 2020 but was limited in its availability for businesses that met the $5,000 per employee limit and for businesses with more than 100 employees who were not paying employees that were not working. By substantially enhancing the amount of the retention credit and opening up the more favorable rules to employers with up to 500 employees, it will become a significant source of cash flow for many more businesses in 2021.
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