New Law Expands Eligibility for Employee Retention Credit & PPP Loans

Thoughtware Alert Published: Mar 12, 2021 | Updated: Mar 25, 2021
Pillars on a Government building

UPDATE: On March 25, a bill extending the Paycheck Protection Program (PPP) application deadline from March 31, 2021, to May 31, 2021, was passed by the Senate and expected to be quickly signed into law.

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (ARPA), a $1.9 trillion stimulus package to help organizations and individuals affected by the COVID-19 pandemic. You can find an overview of the bill in this BKD Thoughtware® article.

In December, the Consolidated Appropriations Act, 2021 (CAA) opened the door for PPP loan recipients to also apply for the Employee Retention Credit (ERC). As a result, businesses and nonprofit organizations should explore the best way to take advantage of the benefits under the two programs based on an organization’s cash flow needs.

ERC Expansion & Extension

In general, employers whose operations were fully or partially suspended due to government orders or who experienced a significant decline in gross receipts due to the COVID-19 pandemic are eligible for a refundable payroll tax credit up to 50 percent of qualified wages for 2020 and 70 percent of qualified wages paid in 2021. The ARPA extends the availability of the ERC through December 31, 2021 (previously, the ERC was set to expire on June 30, 2021). This means an employer eligible for the ERC in all four quarters could receive up to $28,000 in credits per employee in 2021 ($10,000 quarterly wage cap times 70 percent times four quarters).

The ARPA also expands eligibility for the ERC to a “recovery startup business,” which is defined as an employer who began carrying on a trade or business after February 15, 2020, with annual gross receipts of up to $1 million, and otherwise does not meet the ERC eligibility tests. The gross receipts test looks at a three-taxable-year period ending with the taxable year that precedes the calendar quarter for which the company is applying for the ERC. The startup ERC is capped at $50,000 per quarter, per employer.

Another new category of eligibility is “severely financially distressed employers,” which the ARPA defines as companies experiencing a gross receipts reduction of more than 90 percent as compared to the same quarter in 2019. Similar to current ERC rules, an election is available to use the immediately preceding calendar quarter for purposes of the gross receipts test. For example, for purposes of determining eligibility for the second quarter of 2021 under the gross receipts decline test, an employer may elect to compare the first quarter of 2021 to the first quarter of 2019. A severely financially distressed employer who meets this test would be able to treat all wages paid to employees during the applicable quarter as qualified wages, even if it exceeds the 500 full-time employee threshold.

The ARPA also extends the statute of limitations from three to five years for the IRS to assess amounts attributable to the ERC. The statute of limitations begins to toll on the later of the filing date of the original return that includes the calendar quarter with respect to which the credit is determined, or April 15 of the succeeding calendar year.

The changes to the ERC made by the ARPA are effective for calendar quarters after June 30, 2021.

PPP Changes

In December 2020, the CAA added $284 billion in funding for PPP loans through March 31, 2021. Now, the ARPA provides an additional $7.25 billion in PPP funding for both initial and second draw loans and expands the program to include more nonprofits and digital media companies.

Large nonprofits with multiple locations may now apply for PPP loans if each location employs no more than 500 employees per physical location. Under the ARPA, Sections 501(c)(5) labor organizations, 501(c)(7) social and recreational clubs, and 501(c)(8) fraternal benefit societies also are now eligible for the PPP. The ARPA also adds a new category of nonprofit entities eligible for PPP loans called an “additional covered nonprofit entity,” which is defined as a nonprofit entity (other than 501(c)(3), (4), (6), and (19) organizations) (1) that does not receive more than 15 percent of its gross receipts from lobbying activities, (2) whose lobbying activities are not more than 15 percent of the total activities of the organization and the cost of lobbying activities does not exceed $1 million during the most recent tax year that ended prior to February 15, 2020, and (3) that does not employ more than 300 employees.

A digital media company that employs not more than 500 people per physical location and is able to certify in good faith that it is an internet-only news publisher or internet-only periodical publisher engaged in the collection and distribution of local or regional and national news and information also is now eligible to apply for a PPP loan. Such applicants also will need to include a good-faith certification that the proceeds of the PPP loan will be used to cover expenses related to the organization’s component that supports local or regional news.

The effective date for these changes is March 11, 2021. As of the date of this publication, the PPP is still scheduled to close March 31, 2021. However, there is currently bipartisan support in Congress to extend the PPP loan application deadline to May 31, 2021, and provide an additional 30 days for the U.S. Small Business Administration to process loans submitted by the May 31 deadline. As such, consult your BKD tax advisor to help evaluate your eligibility for the ERC and/or a PPP loan.

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