The Employee Retention Credit, or ERC, is a significant tax credit enacted in 2020 under the CARES Act to help businesses keep employees on payroll during the COVID-19 pandemic. Since then, the ERC has been significantly expanded and extended for all of 2021 by the American Rescue Plan Act.
What are the benefits?
For 2020, this provision allows employers to receive a credit of 50% of qualified wages paid to employees, up to a maximum credit of $5,000 per employee for the year. To be eligible for the credit, businesses had to have been fully or partially closed (suspended operations) due to government COVID-19 related orders, OR experienced a reduction of at least 50% in gross receipts in the given quarter in 2020 as compared to the same quarter in the 2019. (Eligibility is determined on a quarterly basis.)
For 2021, the maximum amount of the ERC has been increased to 70% of qualified wages, up to a maximum credit of $7,000 per employee for each quarter.
Thus, a business that has $10,000 in qualified wages per employee in the first two quarters of 2021, would be looking at a maximum ERC of $14,000 per employee. A 20-employee company could potentially receive a $240,000 employee retention tax credit.
Does my business qualify?
Many businesses are not taking advantage of this tax credit, either because they do not understand the benefits, or they assume they are ineligible.
Top ERC misconceptions:
1. I can’t claim ERC if I’ve received PPP loan(s) – or had my PPP loan(s) forgiven.
Many people believe that businesses are not eligible for ERC credits if they have already received Paycheck Protection Program, or PPP, loans. In the Consolidated Appropriation Act of 2021(CAA), Congress removed the prior limitation on claiming both benefits.
IMPORTANT NOTE: You cannot, however, use the same wages both for PPP loan forgiveness and the ERC. As a result, your PPP loan forgiveness strategy should be carefully planned. Even with that consideration, you are likely to have additional payroll expenses that can be used if you are eligible.
2. My business did not have a drop in gross receipts of 50% or more in 2020.
The CAA has changed the qualifications so that a reduction of 20% now qualifies for 2021. So even if you do not qualify for the ERC in 2020, you may in 2021. PLUS remember there is also another way to qualify for the ERC – both in 2020 and 2021. If your business has been subject to a partial or full suspension due to a government order, you may qualify – see the next point.
3. My business was not shut down during the pandemic
Even a partial suspension order by the government (federal, state or local) of your business could potentially qualify. For instance, a partial shutdown, a disruption in your business, inability to access equipment, having limited capacity, shutdowns of your supply chain or vendors, reduction in services offered, reduction of hours to accommodate sanitation, shut down of some locations and not others, and shutdowns of some members of a business are all scenarios that still potentially qualify for the ERC. The key considerations are – due to the government ordered partial (or full) suspension is/was your business not able to continue its activities in a comparable manner, and did that result in a more than nominal impact on business operations. Remember, the partial or full suspension is an alternative way to qualify for the ERC — separate from the reduction in gross receipts test (you do NOT have to meet both tests.)
4. My company was deemed an essential business, so I do not qualify because of business suspension
Even if your business is deemed essential, an impact or change in your business may still qualify you. For example, even if you were open but your vendors were closed down or you can’t go to a client’s job site, you may still qualify. Or alternatively, if part of your business was considered non-essential and was impacted by a government-ordered suspension – you may also qualify. The scenarios discussed above in #3 could apply here as well.
5. My company has grown during quarantine, so my business is not eligible.
If your company has grown during quarantine, but experienced a full or partial suspension, there are expenses that may qualify.
6. Sales have rebounded for us in Q1 of 2021, I can’t qualify for this credit
With the introduction of the CAA and extended through the end of 2021 by the ARPA, you have an alternative option to determine eligibility. You can either:
- Compare your current quarter’s gross receipts to gross receipts from the same quarter in 2019; OR
- Look at one quarter prior to determine eligibility. This means you can determine if your business qualifies for the ERC in the 1st quarter of 2021 by looking at the 4th quarter of 2020 compared to 4th quarter of 2019. In addition, the ARPA extended the election to use the prior quarter’s gross receipts for determining eligibility to the third and fourth quarters of 2021. So, for example, you could use 2nd quarter of 2021’s gross receipts compared to 2nd quarter of 2019’s gross receipts to determine 3rd quarter 2021 eligibility. The same option applies to the 4th quarter.
Also, if you were subject to a full or partial suspension, you may qualify regardless.
7. We were operating at a loss, or do not have any tax liability
This is a refundable credit. In practice, this means that any credit overage above tax liability is sent to the taxpayer/business owner as a refund.
8. My company has grown to over 500 employees, so we are not eligible for the ERC
For purposes of the ERC, the number of full-time equivalent employees you had in 2019 determines what counts as qualified wages for the ERC. In 2020, for a company that had more than 100 full-time equivalent employees in 2019, no credit is available for wages paid to an employee performing services for the employer (either teleworking, or working at the workplace, even though at reduced capacity due to reduction in business). But you may be able to claim the credit on wages paid to employees that were not working. Effective Jan. 1, 2021, this threshold was raised to a company that had more than 500 employees in 2019. Now for 2021, a company that had 500 or fewer employees in 2019 can claim the credit on all qualified wages, even if its employees are working.
9. I’m a not-for-profit and the ERC is only for businesses
The ERC also may provide significant benefit to charities – churches, nonprofit hospitals, museums, etc. Charities can be particularly good candidates for the ERC.
10. If I claim the ERC credit, I don’t have to worry about being audited.
While the ERC is certainly a taxpayer-friendly relief provision – proper documentation is needed to pass IRS scrutiny as they will be looking at taxpayer submissions both on the front-end and potentially conducting audits down the road.
How do I claim the ERC?
For 2020 and 1st quarter of 2021, you may claim the credit by filing amended quarterly payroll tax returns (Form 941.)
Employers can access the ERC for the second calendar quarter of 2021 before filing their employment tax returns by reducing employment tax deposits. Small eligible employers can request advance payment of the credit (subject to limits) on Form 7200, Advance Payment of Employer Credits Due to COVID-19, after first reducing their employment tax deposits. After the change in the law, advances are not available for employers with 500 or more employees in 2021. The IRS indicated that it will provide additional guidance for the 3rd and 4th quarters of 2021.
Steps to Take Now
This is a complex credit, so be sure to consult with your advisors both regarding eligibility and documentation that will satisfy the IRS. The new rules surrounding the ERC are very beneficial and could provide your business with cash flow at a time when PPP grants may have been spent. Contact us to discuss whether or not you may qualify and next steps.
Questions
Please contact your Warady & Davis LLP advisor with your questions at 847-267-9600;info@waradydavis.com. You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more. This information is updated regularly.
SOURCES: The alliantgroup and the IRS