How the Expanded Employee Retention Credit Will Save Small Businesses

When Congress passed the CARES Act last March, the media scope was narrowly focused on the program to provide stimulus funds to qualifying individual taxpayers. The attention was justifiable. According to the IRS, up to 80% of Americans were eligible for payments—but the collective transfixation upon the stimulus allowed other monumental items to slip under the public’s radar, including programs aimed at saving small businesses from pandemic shock.

One such item was the employee retention credit (ERC), a tax credit for business owners that incentivized keeping employees on their payroll. The program, initially passed as part of the CARES Act, incentivized small business owners to retain employees on payroll during the pandemic with a tax credit. The original credit, only available to businesses with fewer than 100 employees, was worth up to $5,000 per employee, but wasn’t available to any business that had received a Paycheck Protection Program (PPP) forgivable loan. As such, it was largely ignored.

While we won’t have an accurate figure until the dust has settled, the damage to small businesses is nothing short of unprecedented. In September, review aggregator Yelp conducted a study to assess the damage to America’s small businesses. The results were staggering: 163,735 businesses shuttered between March 1 and August 31—almost 895 per day. The situation continued to deteriorate in the coming months as it became increasingly clear that lawmakers needed to take robust action to save America’s small businesses.

In December 2020, Congress passed the Consolidated Appropriations Act, 2021. This act accelerated many provisions from the CARES Act. One such provision served to aggressively expand the Employee Retention Credit program’s size and scope.

How did the employee retention credit change?

Some of the early inefficacy of the CARES Act’s attempt to save small businesses resulted from an attempt to prevent double dipping. Initially, companies that received a PPP loan were ineligible for an ERC, forcing many business owners into an either/or dilemma. The Consolidated Appropriations Act, 2021 rectified this by repealing this provision; PPP loans and ERCs are no longer mutually exclusive. This change is effective retroactive to the CARES Act’s original date, March 12, 2020. Eligible businesses that received a PPP loan in 2020 can claim the credit retroactively.

The new Employee Retention Credit has a higher potential payout; the initial program provided a credit of up to $5,000 per qualifying employee. Since Jan. 1, 2021, the cap increased to $7,000 per qualifying employee for the first two quarters of 2021. Small businesses that hit the $5,000 cap during 2020 are still eligible for the increased cap in 2021.

The CARES Act failed to provide the ERC to businesses as an advance before they paid their wages; the credit would often come too late to make a difference. In the coming weeks, the IRS is expected to draft guidelines on providing credit advances to qualifying businesses with 500 or fewer employees.

For 2021, the ERC eligibility requirements have been loosened to accommodate more businesses. For 2020, eligibility extended only to businesses experiencing a reduction in income of at least 50% compared to the same quarter in 2019. The expanded program now only requires an income reduction of 20% compared to the same quarter in 2020. Also, the original ERC was only available to businesses with no more than 100 active, non-furloughed workers in 2020. As of Jan.f 1, 2021, the threshold stands at 500 workers.

What this means for small businesses

Many of the most affected industries, such as food service, retail, and hospitality, operate on razor-thin margins. The expanded Employee Retention Credit can easily add up to six figures to help make up these margins. Thanks to the repeal of the ERC/PPP mutual exclusivity provision, business owners no longer have to crunch the numbers to decide which program has a better chance of saving their business.

Due to the unprecedented nature of the Covid-19 pandemic, Congress will likely continue to adjust small business relief as they gauge the efficacy of their relief programs. The expansion of the ERC and repeal of its mutual exclusivity with PPP loans are just several examples of this. As the pandemic rages on, Congress will likely continue to provide aid to ailing small businesses facing a decrease in revenue due to the pandemic.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jacob Dayan, Esq. is the founder and CEO of FinancePal Business Services LLC (www.financepal.com) and Community Tax LLC (www.communitytax.com). Jacob has spent more than a decade assisting individual taxpayers and businesses nationwide with a variety of tax and accounting needs. Community Tax is a national leader and IRS defense services, and FinancePal provides affordable bookkeeping and accounting solutions to small and medium sized businesses across the U.S.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.