Nearly all taxpayers are looking for legitimate tools to reduce taxes. The Employee Retention Credit (ERC) is one such tool. The ERC was already a strong potential tax-saver and the passage of the Consolidated Appropriations Act of 2021 took a good thing and made it better. This article will explain what the ERC is, how the 2021 law made it better and how you can take advantage of it.
The Employee Retention Credit (ERC) was originally passed as part of the CARES Act to encourage employers to retain employees through a shutdown and/or business downturn due to COVID. It was a way to reward employers for keeping employees off the unemployment rolls. Originally, it allowed an employer to take a refundable credit of 50% of eligible wages of up to $10,000 per employee. Wages paid from March 12, 2020 through December 31, 2020 were eligible.
Therefore, if a medical practice or business had a full or partial government shutdown due to COVID OR the gross receipts for any quarter in 2020 decreased 50% as compared to the same quarter in 2019, the business would qualify for the credit. The maximum credit per employee was $5,000 (50% of the $10,000 maximum).
If either a shutdown or a decrease in gross receipts occurred, then the business owner needed to first determine its average full time equivalent (FTE) employees for 2019 in order to determine qualifying wages. If the average number of employees is less than 100, all wages paid to employees (up to the $10,000 per employee max) qualify for the credit. If there were more than 100 employees, only those wages paid to employees for non-working periods are eligible, i.e. wages paid for employees not to work.
For both the number of employees and the gross receipts tests, aggregation rules apply. Therefore, employers with greater than 50% common ownership will need to look at all companies in the group in determining if they have greater than 100 employees or a greater than 50% revenue decline.
For 2020, a company with a 50% decline in gross receipts is eligible until the quarter after their receipts exceed 80% of the base level. For example, if Q2 2020 gross receipts are $48,000 as compared to $100,000 in Q2 2019, the company qualified beginning in Q2 2020. If receipts are $81,000 (81% of $100,000) in Q3 2020, the company will still qualify in Q3 but will be ineligible in Q4 2020.
Under the CARES Act, the ERC could not be claimed if the business or medical practice received a PPP loan, even if the business had qualifying wages that were not paid for with PPP loan proceeds. This provision prevented many employers from claiming the ERC in 2020.
Along came the Consolidated Appropriations Act of 2021 (CAA), which was passed on December 21, 2020. The CAA lifted the PPP restriction so that a business or professional practice can claim the ERC even if it participated in a PPP loan. In fact, in March the IRS issued Notice 2021-20 to clarify how recipients of PPP loans can benefit from the ERC. Ahe business cannot double dip. Wages paid which qualify for PPP forgiveness cannot be used in claiming the ERC. However, if the PPP is not forgiven, or if a portion is not forgiven, or if there are wages paid above the forgiveness amount, wages paid with unforgiven PPP proceeds can be used for the ERC.
The CAA also extended the period that eligible wages can be paid so that wages paid from January 1, 2021 to June 30, 2021 qualify. That period has now been extended to include all of 2021 under the American Rescue Plan Act of 2021. Under the CAA, the credit is increased to 70% of wages paid, and wages per employee is increased from $10,000 total to $10,000 per quarter. Thus, in 2021, an employer could receive a credit of up to $28,000 per employee (70% of $40,000 wages). In addition, the gross receipts threshold changed from a 50% decline in a quarter to a 20% quarterly decline. The 100 FTE employee threshold also increased to 500 employees under the CAA.
For 2021, a business can use gross receipts for the current quarter compared to the corresponding quarter in 2019 (Q1 2021 receipts < 80% of Q1 2019 receipts) OR it can compare the prior calendar quarter’s receipts to the corresponding quarter of 2019. So, in Q1 2021, the business can choose to use Q4 2020 receipts compared to Q4 2019 receipts to qualify.
The CARES Act prevented an employer from claiming the ERC on wages paid to an employee that were greater than wages the employee would have received during an equivalent period in the 30 days prior to the shutdown or receipts decline. The CAA removed this provision, so bonuses or raises paid to employees are also eligible for the credit.
In addition to the revenue test, employers can now qualify for the ERC if their business was more than nominally impacted by government orders, including full or partial shutdowns. Thus, even if your business did not suffer the requisite revenue loss, you may still qualify under the “more than nominal impact” test.
Qualified health plan expenses paid by the employer are eligible wages for the ERC, even those paid for furloughed employees. Generally gross wages subject to Social Security tax plus allocable group health benefits are considered wages. Employer contributions to employee HSA plans are not includible. In determining gross receipts, a business must include gross revenue from sales and services, less returns, refunds and allowances plus investment income.
In order to claim the credit, an employer can reduce the quarterly 941 deposit. This will generally be the fastest way to collect. An employer can also file Form 7200 to request an advance payment, although for 2021 it appears that employers with greater than 500 FTE employees cannot take advantage of this option. Alternatively, a refund can be requested on Form 941.
Employers that did not claim the credit previously, particularly those who were not eligible due to PPP loan participation, can amend previous 941’s to claim the credit.
For certain businesses and professional practices, the ERC may be a significant tax-saver, especially now that new laws have expanded its benefits in 2021. It will be important for business/practice owners to consult with their advisors when determining how to best claim the credit vs. utilizing wages for PPP loan forgiveness or for paid sick leave credits. Calculations can be done with the assistance of tax advisors to determine what will be most advantageous for the business.