Details You Need To Know
Meant to help offset the financial disruption caused by the pandemic, The Employee Retention Credit (ERC) under the CARES Act encouraged businesses to keep employees on their payroll. Under the Consolidation Appropriations Act, 2021, the ERC was substantially modified and extended to June 30, 2021. It’s important that you note that if you do the math, the potential credits are up to $19,000 per Employee.
Here are the highlights of what changed:
The IRS has posted FAQs on their website about the Employee Retention Credit. While these FAQs have not been updated for the modified and extended credit, they still contain valuable information to help businesses determine if they are eligible to take the credit. Below we will walk you through some of the basics.
Are you a qualifying employer?
- Was your business affected by a full or partial suspension of operations due to a government order?
- Did your business experience a significant decline in gross receipts during the calendar quarter?
When are you considered to have a full or partial suspension of operations due to a government order?
If a business had to limit commerce, travel, or group meetings due to orders imposing restrictions from an appropriate government authority due to COVID-19 and these orders caused more than a nominal portion of a business’s operations to be suspended or partially suspended.
Governmental orders include:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period;
- A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location;
- An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period;
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
The following situations would not qualify as a partial suspension of business operations:
- Voluntarily closing or reducing business hours
- Following a recommendation by a local authority to close or reduce hours
- Experiencing a reduction of customers/foot traffic while remaining open
- Ability to telework/perform comparable operations remotely
There are a lot of examples listed in the IRS FAQ section. However, it will depend upon the facts and circumstances whether or not a governmental order had more than a negligible effect on a business’s operations.
If a business cannot claim a partial or full suspension – then the gross receipts test should be considered.
When is a business considered to have experienced a significant decline in gross receipts during the calendar quarter?
A significant decline in gross receipts begins with the first calendar quarter in 2020, in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.
Gross receipts will be income from any source derived and will not include PPP receipts and follow the taxpayer’s tax method of accounting.
An example of a business eligible to claim employee retention credit on qualifying wages in Q2 through Q4 of 2020, as well as Q1 of 2021.
* Gross receipts are greater than 80% of comparable quarter gross receipts for 2019, however, the business is still able to take credit as allowed for the quarter following a business’s increase to greater than 80% of comparable quarter gross receipts.
What are Qualifying Wages?
The first step in considering qualified wages is determining if the business is a small or large employer for the applicable period. A small employer with 100 or fewer employees for 2020 OR 500 or fewer employees for the first half of 2021 would be able to consider all wages paid to employees, including qualified health plan expenses that are properly allocable to the wages. A large employer would only be able to consider non-service wages during the period of suspension or a significant decline in receipts. Non-service wages are wages paid to employees who are not working during the applicable period.
What about wages paid to owner-employees and spouse? – these wages would qualify. However, there are prohibitions on including wages paid to children, parents, other relatives.
- Do you need assistance amending any of your 2020 Form 941s?
- Do you need assistance preparing Form 7200, Advance Payment of Employer Credits for 2021?
- Are there other planning considerations for 2021 if you qualify for both PPP and ERC? Whether or not your business has filed the PPP loan forgiveness application, we can help with a strategy to maximize the ERC by minimizing the wages needed for loan forgiveness.
Time is of the essence claiming the ERC. Please contact your BKM Sowan Horan team member if you require assistance determining your business’ eligibility, identifying qualifying wages, or have any questions about taking the ERC credit.