Changes to eligibility criteria for the Employee Retention Credit (ERC) resulting from the recently passed Consolidated Appropriations Act 2021 (CAA) increased eligibility and benefits for technology companies while also providing potential synergies for those seeking the Research and Development (R&D) Tax Credit.
Consolidated Appropriations Act 2021 (CAA/COVID Relief Bill)
On Dec. 27, 2020, the President signed into law the Consolidated Appropriations Act 2021 (CAA), which provided enhancements to the ERC originally introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. The CAA includes several amendments to the ERC regarding eligibility, maximum potential credit, impact on Payroll Protection Program (PPP) loans and a more expansive definition of what constitutes qualified wages. Additionally, the CAA also allowed companies the chance to retroactively take advantage of both the ERC and the PPP, a provision that was previously unallowable under the CARES Act. Obtain additional information about enhancements to the ERC and synergies with the R&D tax credit in DHG's recent publication here.
Efficiencies in Seeking Both the ERC and R&D Tax Credits
Technology companies seeking to claim the ERC may also leverage the same data and similar touchpoints in an R&D tax credit study; therefore, DHG recommends pursuing both credits simultaneously, if applicable. The R&D tax credit is a tax incentive for companies that incur R&D costs in the United States and allows a company to offset its U.S. tax liability in two ways:
- Credit Carryforward - The R&D tax credit can be carried forward for up to 20 years, until utilized to offset income tax.
- Offset Payroll Taxes - The R&D tax credit also allows "qualified small businesses" to offset up to $250,000 of the employer portion of FICA per tax year.
Activities in the areas of engineering, technology, biological sciences, or physical sciences performed to establish or improve functionality, performance, reliability or quality are likely to qualify as R&D. For technology companies, this is especially true when the activities are meant to address technical uncertainties by means of design, development and testing/experimentation.
In addition to the data being similar for ERC and R&D, both projects involve communication and alignment with the same department heads, such as legal, engineering, tax, finance, etc. Addressing the two projects as one can potentially result in greater efficiencies while being less invasive for technology companies.
To learn more about the R&D tax credit, refer to qualifying activities in the technology industry or to discuss your eligibility for the Employee Retention Credit and/or the R&D Tax Credit, reach out to us at firstname.lastname@example.org.