The end of 2020 and start of 2021 have seen a whirlwind of COVID-19-related legislation to address the economic impacts of the COVID-19 crisis to individuals and businesses. The following is another installment in an on-going overview of some of the broadly tailored programs to assist businesses and individuals affected by the COVID-19 crisis. Please keep in mind that there are industry-specific relief programs that may or may not be discussed in future installments, and the details of any of the programs discussed requires close analysis with your accountants, bankers, and legal counsel to ensure the programs are right for you and your business. Also, many of these programs are time-sensitive and subject to change after the posting of this blog, so please pay close attention to dates throughout.
Employee Retention Tax Credit
[Drafter’s note: Please make it to the end of this article. The article attempts to simplify tax rules and legislative language, but even still, some of this may read as overly technical. That said, getting to the end of the article may have a significant impact on your business.]
There Is still a tremendous amount of confusion or simple lack of knowledge about Employee Retention Tax Credits. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) created new tax credits called “Employee Retention Tax Credits,” or ERTCS, that employers could claim for payroll expenses incurred during 2020, so long as a few conditions were satisfied. The credits could be claimed on employers quarterly Form 941 payroll tax forms and applied against federal payroll taxes owed to the IRS. Alternatively, employers could claim their ERTCs as cash payments by submitting IRS Form 7200.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (“Relief Act”), as part of the Consolidated Appropriations Act of 2020 (the “CAA”) expanded the ERTC program, making new payroll expenses eligible for ERTCs and extended the applicability period during which ERTCs could be claimed into 2021. Even more importantly, the Relief Act and CAA clarified that employers who received Payroll Protection Plan (“PPP”) loans were no longer ineligible for ERTCs.
Recently, the American Rescue Plan Act (the “ARP Act”), enacted March 12, 2021, further extended the ERTC applicability period to the end of 2021. Given the amount of confusion, the following attempts to significantly simplify the current state of ERTCs as a resource:
1. Who is eligible?
a. All employers, regardless of size*, including non-profits, that were in business in 2020, and that:
- i. Fully or partially suspended operation during any calendar quarter in 2020 or 2021 due to orders from an applicable governmental authority due to COVID-19; or
- ii. Experience a “significant decline in gross receipts” during any given calendar quarter in 2020 or 2021.
*Only employers with fewer than 100 employees are eligible for ERTCs relating to 2020 applicable payroll; For 2021 payroll, the threshold was expanded to 500 employees, but even employers with more than 500 employees are eligible with some additional caveats.
2. What is a “significant decline in gross receipts?”
a. An employer is considered to have a significant decline in gross receipts if, during any quarter in calendar year 2020, the employer saw a 50% drop in revenues compared to the same quarter in 2019. So, if an employer compares its gross revenue in Q3 of 2020 with its gross receipts from Q3 of 2019 and sees a 50% decrease in revenue, the employer becomes eligible to claim ERTCs for payroll paid in that Q3 of 2020 (and future quarters as well . . . more on that below).
b. An employer is considered to have a significant decline in gross receipts if, during any quarter in calendar year 2021, the employer saw a 20% drop in revenues compared to the same quarter in 2019. So, if an employer compares its gross revenue in Q2 of 2021 with its gross receipts from Q2 of 2019 and sees a 50% decrease in revenue, the employer becomes eligible to claim ERTCs for payroll paid in that Q2 of 2021.
c. Once eligible, the employer will remain eligible to claim ERTCs until either January 1, 2022 or the first calendar quarter after the quarter for which gross receipts are greater than 80% of gross receipts for the same calendar quarter in 2019.
d. See also IRS FAQs on Calculating “Significant Decline”.
3. Great, my business is eligible, now what credit can be claimed?
a. For 2020 payroll, ERTCs can be claimed for 50% of the “qualified wages” in a 2020 calendar quarter.
- i. The maximum amount of qualified wages per employee in 2020 is $10,000, so that the maximum ERTC per employee is $5,000 total in for 2020 payroll.
b. For 2021 payroll, ERTCs can be claimed for 70% of the “qualified wages” PER CALENDAR QUARTER.
- i. Therefore, the maximum ERTC per employee is $7,000 per quarter, or $28,000!
- ii. Moreover, under this law, certain startup businesses — those started after Feb. 15, 2020 that were forced to shut down due to government order — may be allowed a credit of up to $50,000 per quarter.
4. What are “Qualified Wages”?
- a. Qualified wages means cash compensation paid to an employee, as well as “qualified health plan expenses” (both the employer and employee portions of premiums paid for group medical coverage).
5. What about the PPP money that I used to pay my employees?
a. Employers are not permitted to claim a tax credit for “qualified wages” paid with PPP proceeds.
b. However, receiving a PPP loan, whether forgiven or not, does not make an employer ineligible to claim ERTCs! The ERTCs can be claimed on payroll expenses that were not covered by a PPP loan. Moreover, if the employer had other eligible expenses that the PPP funds could have been applied against, the employer is permitted to shift the accounting of PPP proceeds to other PPP-forgivable expenses in order to free up additional qualified wages that can be covered by ERTCs.
Hopefully you can see that it is crucial that employers who have seen a significant drop in business, even a 20% drop in business, reanalyze their payroll and expense records, and work with their legal and accounting professionals to verify that they are maximizing their utilization of resources available to them. Failing to do so could be the difference between surviving the economic downturn caused by the COVID-19 crisis or going out of business.
The guidance provided above is general in nature and readers are encouraged to reach out to Neider & Boucher, S.C., or to their own legal counsel to determine the applicability of these issues to their own personal and/or business needs.