Wealthy clients who own businesses can claim an important federal tax credit even if they received a Covid-relief Paycheck Protection Program (PPP) loan.

The Employee Retention Credit (ERC), a refundable payroll tax credit, is available for businesses who experienced a decline in gross receipts or were fully or partially suspended by government order. Formerly, companies couldn’t claim this credit if they’d received a PPP loan. Now they can.

Originally under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a business was not allowed to claim both PPP funds and the Employee Retention Credit. The PPP was once more favorable for businesses since the version of the ERC was limited to $5,000 per employee for all of 2020. This has been expanded.

The Consolidated Appropriations Act retroactively allowed loan recipients to claim the ERC to the extent the same wages aren’t used for PPP forgiveness. For the first two quarters of 2021, taxpayers have a greater chance to use the maximum credit from $5,000 per employee for the year to $7,000 per employee per quarter.

The ERC employee limit for this year has also increased from 100 to 500.

Business with more than 500 employees can still claim the ERC, but only for employees paid not to work or for employer funded health insurance premiums for furloughed employees, said Benjamin Aspir, senior manager and member of EisnerAmper’s National Tax Group in Iselin, N.J.

“We have targeted clients whom we helped with their PPP loans in 2020 to make sure they know about the credit,” added Bill Smith, Bethesda, Md.-based managing director for CBIZ MHM’s National Tax Office. “Because you cannot use the same wages for both PPP loan forgiveness and the ERC, and because when applying for PPP loan forgiveness the amount required to be spent on wages dropped from 75% to 60%, it’s also important to use as much of other qualifying expenses as possible to get the wage number down to or as close as possible to 60%. This frees up, in a way, more wages to use for the ERC.”

He said other significant changes in the Consolidated Appropriations Act included allowing a 20% decline, instead of the previously required 50%, in gross receipts compared to the corresponding quarter in 2019; allowing the option to elect the prior quarter’s gross receipts to qualify; increasing the amount of qualified wages per employee from $10,000 per year (2020) to $10,000 per quarter; and increasing the credit from 50% to 70% of qualified wages.

Among other conditions, “the IRS made it clear that no part of the ERC (there is a non-refundable and a refundable portion) should be included in taxable income,” Smith said, unlike the Families First Coronavirus Response Act credit for paid sick and family leave, which is specifically included in gross income.

The American Rescue Plan Act also expanded the ERC through the end of this year. Under the Rescue Plan, Aspir said, a business eligible for the ERC in all four quarters of this year could potentially claim a maximum $28,000 credit per employee.

The Rescue Plan also opened the ERC to recovery start-up businesses, those established after Feb. 15, 2020, and with annual gross receipts of $1 million or less. The ERC is limited to $50,000 per quarter for such companies.

These combinations of relief can give business-owning clients hope after a year of pandemic.

“Most of our clients are pleasantly surprised by the [federal relief] help available. Every one of our business clients who received the PPP loan had, or will have, their loan forgiven. Clients were then happy again to learn of the tax deduction they received for the expenses paid with the PPP funds, which in effect gave them a tax loss they didn’t count on,” said Gail Rosen, a CPA in Martinsville, N.J. “This is a huge help to businesses.”

“I have not seen a tax credit that has been as wide-ranging and far-reaching,” Aspir added.