Before the December 27, 2020, enactment of the new COVID-19 relief law, you may have chosen the Paycheck Protection Program (PPP) loan and given no thought to the employee retention credit.
Remember, under the original law, you had to choose between the retention credit and the PPP loan. Millions chose the PPP loan route.
But now the game has changed. You may, as a PPP recipient, qualify to take the employee retention credit retroactively for tax year 2020 quarters and also going forward in the tax year 2021.
Here are the key changes you as a PPP player need to know:
- PPP loan recipients can retroactively claim the 2020 employee retention credit for wages not paid with forgiven PPP loan proceeds.
- Wages paid from March 13, 2020, through December 31, 2020, qualify for the retroactive credit.
- Wages paid from January 1, 2021, through June 30, 2021, can qualify for the more significant 2021 credit.
- For 2021 quarters only, you qualify for the credit if your business experienced (a) a full or partial suspension of the operation of its trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or (b) a decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80 percent of the gross receipts in the same calendar quarter in 2019.
- For 2021 quarters only, the relaxed requirements for qualifying wages apply to businesses with 500 or fewer full-time employees in 2019.
The Tax Year 2021 Changes
First, and most important, Congress extended the employee retention credit to wages paid through June 30, 2021.
Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80 percent of the gross receipts in the same calendar quarter in 2019.
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts.
In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
New Definition of Qualified Wages
Effective January 1, 2021, the new law changed the definition of qualified wages to provide:
- For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
If you would like my help with the retroactive monies from the employee retention credit, please call me on my direct line at 509-543-7600 or contact me HERE.
March 2021
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