On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA) was signed into law. The CAA’s purpose is to further assist businesses suffering from the coronavirus pandemic. While many of the provisions contained in the CAA may be helpful to businesses, changes to the Employee Retention Credit (ERC) are particularly intriguing. Designed to help employers with maintaining their workforces, the ERC provides tax relief through payroll tax credits for qualified wages. To qualify for such tax credits, employers must meet several requirements.

Employers are considered eligible for the ERC if their business or trade operations were at least partially suspended due to a government order limiting commerce, travel, or group meetings due to COVID-19 or if they suffered a significant decline in gross receipts. The IRS provides clear guidelines to determine whether a business is considered partially or fully suspended. The IRS also defines a significant decline in gross receipts, and specifically defines when these periods begin and end. A significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 in which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. Further, it’s provided that the period of significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.

Finally, the IRS also provides guidance on what is considered qualified wages for purposes of the ERC. This definition depends on the number of employees employed by an employer. If an employer averaged more than 100 employees in 2019, qualified wages are “generally those wages, including health care costs, up to $10,000 per employee, paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts.”1 For employers who averaged 100 or fewer employees in 2019, qualified wages are “those wages, including health care costs, up to $10,000 per employee, paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.”2

CAA provisions, which enhance the ERC benefits include an extension of the period of time in which a business can earn the tax credit (to be available from January 1, 2021 through June 30, 2021), and an increase in the amount of the tax credit from 50% in 2020 to 70% in 2021. The wage limitation will increase in 2021($10,000 per year in 2020 to $10,000 per quarter in 2021). The gross receipt decline requirement is also impacted by the CAA, as the requirement drops from 50% to 20%. Finally, the CAA increases the small employer exception to 500 employees up from 100 employees under the ERC.

While there are some exemptions to eligibility for employers based on past relief from the CARES Act, or past tax credits, the CAA includes a provision which allows employers that obtained Paycheck Protection Program (PPP) loans from the CARES Act, who may have been previously ineligible for the ERC to now become eligible for the ERC. This benefit applies retroactively for 2020. Employers however cannot claim a tax credit for the same wages included in their application for PPP loan forgiveness. Lastly, under the CAA, health care coverage is considered employee wages, regardless of whether other wages are paid.