The original CARES Act also included the Earned Retention Credit (ERC) for business that were not eligible for the Payroll Protection Program (PPP). The new stimulus package now allows business to utilize both the PPP and the ERC and this is retroactive to March 2020 through the first half of 2021.
Below is a brief summary of the ERC and how it may apply to you:
Qualification for ERC for 2020 Tax Year
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
Qualification for ERC for 2021 Tax Year
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2021 and experience either:
The amount of the ERC is based upon qualified wages and you can NOT include the same wages in the ERC calculation that you will include in your PPP forgiveness application. Wages should always be applied to PPP forgiveness first and, to the extent there are excess wages not needed for PPP forgiveness, the remaining can be applied to the ERC. Below is a brief summary of the calculation, which is different for 2020 and 2021:
2020 ERC Calculation:
2021 ERC Calculation:
Applying for the ERC
The ERC is a credit that is taken on Form 941 against payroll taxes that must be remitted. It appears that the entire 2020 ERC can be claimed on the Q4 941 rather than having to amend previous quarters. To the extent that the ERC exceeds payroll taxes due, a Form 7200 can be filed to receive a refund for the excess. Additionally, for 2021, there is an option to receive an advance payment of your estimated ERC for the entire first half of 2021. At this point, we are awaiting additional guidance as to how to demonstrate the allocation of payroll costs between PPP and ERC, how to amend PPP forgiveness applications that have already been submitted, and several other topics. If you have not yet submitted your PPP forgiveness application, we would recommend holding off until additional guidance has been provided.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.