Employee Retention Credit and Paycheck Protection Program Update

2021-07-27T20:39:41+00:00

Highlights from the July 27 HBK webinar featuring Ben DiGirolamo, CPA, JD, HBK Principal; Donald Trummer, CPA, HBK Senior Manager and Tax Specialist; Amy Reynallt, MBA, Manager, HBK Manufacturing Solutions

Employee Retention Credits

The Employee Retention Credits (ERC) relief program has been updated twice since it was first introduced as part for the 2020 CARES Act, first by the Consolidated Appropriations Act, then under the American Rescue Plan.

  • The ERC is available to employers for most of 2020 and all of 2021. It can be very valuable to your business.
  • Eligibility: Qualified organizations include businesses or tax-exempt organizations that fully or partially suspended operations during any calendar quarter in 2020 or 2021 due to orders from a government authority limiting commerce, travel, or group meetings due to COVID-19, or experienced a decline in gross receipts during the calendar quarter compared to same quarter in 2019. The IRS has issued FAQs on what it means to be fully or partially shutdown.
  • For 2020, gross receipts must be 50 percent less than in the comparable 2019 quarter and the benefit continues until a return to 80 percent of those receipts. For 2021, gross receipts must only be less than 80 percent of what they were in the 2019 quarter, and credits continue until receipts recover to 80 percent.
  • The declines do not have to be COVID-related, just a qualifying reduction.
  • The 2021 trailing test works to allow your qualification to be based on a prior quarter. If you qualify for one quarter you’re generally going to qualify for at least two.

Qualified Wages

For 2020, the ERC equals half of qualified wages, capped at $10,000 per employee. For 2021 it’s 70% of wages up to $10,000 per employee per quarter—up to $28,000 for the year. Wages paid during the entire quarter qualify.

  • For businesses qualifying due to government shutdown, qualifying wages are those wages paid during the period of the shutdown.
  • For 2020, if more than 100 full-time-equivalent (FTE) employees in 2019, only wages paid to those not working qualify. For 2021, if over 500 FTE employees, only wages paid to those not working qualify.

PPP & ERC

  • Recipients of Paycheck Protection Program (PPP) loans can now also take advantage of the ERC.
  • Organizations with 100 to 500 employees are no longer restricted to wages only of employees not working, but all employees.
  • Wages and healthcare costs substantiating ERC can now be used to support PPP loan forgiveness.
  • Employers can elect not to include wage and healthcare cost in computing ERC in order to maximize PPP forgiveness. You can satisfy your forgiveness requirements then maximize ERC. And if portions of your PPP loan are not forgiven, you can apply related wages to recalculate ERC.
  • For the vast majority of applicants, PPP was the better option over ERC. But that changes due to the Consolidated Appropriations Act. Now you can maximize PPP expenses and free up wages over your loan amount to use with ERC.

Claiming the credit

You can amend your 2020 payroll tax returns to claim ERC or additional ERC for up to the next five years.

  • For 2021, you can reduce your payroll tax deposits by the anticipated credit or wait to claim the credit.
  • By administering the credit through payroll, Congress gave organizations the opportunity to first reduce the anticipated payroll tax deposit and if the anticipated credit exceeds the deposit file for a refund.

Common Issues

How to determine to file for businesses separately or aggregated? Might tie businesses together to maximize ERC, given qualifying via the single employer test. Must ensure there is no double dipping on wages and how the qualification rules apply for aggregating businesses.
  • Must use the same accounting method used for your tax returns.
  • Can include employer and spouse in qualifying wages but not other family members.
  • Maximize non-payroll expenses and non-qualifying ERC payroll when applying for PPP loan forgiveness.
  • The quickest way to get an ERC refund is by reducing payroll tax deposits.
  • The ERC interacts with other tax credits. You can’t double dip on wages. Generally the ERC will deliver a better benefit dollar for dollar.

PPP

Round 1 forgiveness: Borrowers have 10 months from the end of their 24-week covered periods to submit their applications or will have to being interest and principal payments to their lenders. If your deadline is passed, you can still apply for forgiveness for the unexpired part of the loan.

  • Some lenders have imposed earlier deadlines, so follow the guidance from your PPP lender. Some lenders are also re-testing originally provided loans to ensure forgiveness only on the amount of loan that accommodates the rules.
  • As of July 9, the Small Business Administration is no longer requiring Loan Necessity Question Forms.
  • Round 2 is governed by generally the same rules as round 1. There are some minor differences in wage calculation, and the cap for owner compensation in terms of a different time period for reference than round 1. Additional eligibility documentation is also required.
  • If you’re coordinating round 2 with your ERC, it may be beneficial to at least wait until end of the 24 week period to apply wages to the program most beneficial to you.

Updates for other relief programs:

  • Economic Injury Disaster Loan – Proof of hazard insurance is being requested or of the approval of the loans by the board of directors. Emails are also being sent regarding targeted EIDL grants, and some regarding loan increases of up to $500,000.
  • The Restaurant Revitalization Fund is closed. More than 100,000 grants were issued and $29 billion in funding was awarded. There was controversy over the program as intended grants were rescinded. Watch for updates or new legislation.
  • Shuttered Venues Operators Grant – Nearly 9000 grants totaling 6.8 billion were awarded. The SBA has been reaching out to organizations suffering 70 percent or more revenue loss in their most recent calendar quarter about supplemental grants. Program has awarded more than 99 percent of its funds.
  • Families First Coronavirus Response Act COVID-19 Sick Leave – Expands eligible leave time to include COVID-19 diagnostic testing and receiving or recovering from the vaccine as of April 1, 2021.

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About the Author(s)
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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