When the original COVID-19 stimulus relief package was passed last spring, organizations with Paycheck Protection Program funding (PPP) were not allowed to utilize the Employee Retention Credit (ERC). Therefore, many organizations (and consultants) simply “forgot” about the credit. However, fast forward to just before the New Year when the most recent relief package was signed into law.
The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (“the Act”) creates a potential opportunity for organizations to utilize the ERC even if a PPP loan was received. It also expands the possibility for many organizations to qualify for the ERC in the first two quarters of 2021. THIS IS GREAT NEWS!
Organizations need to determine several things. First, you need to ask yourself “Am I an Eligible Employer under the ERC?” Eligible Employers are organizations that operate a trade or business and meet either of the following:
- The operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19.
- The organization experiences a significant decline in gross receipts when comparing quarters between 2019 and 2020.
Am I an Eligible Employer Under the ERC?
Test 1 – For both 2020 and 2021, whether a business is considered fully or partially suspended can vary depending on each business’s facts and circumstances. Even if your programs were only suspended for part of the quarter, you may qualify for the ERC under the test for that quarter. Keep in mind if an organization's workplace is closed by a governmental order, but the organization is able to continue operations by requiring its employees to work remotely, the organization’s operations are not considered to have been fully or partially suspended.
Test 2 - For 2020, a significant decline in gross receipts is met when an organization’s gross receipts in the 2020 calendar quarter are less than 50% of gross receipts for the same calendar quarter in 2019. The organization retains eligibility for the ERC until on the last day of the 2020 calendar quarter in which the organization experiences a decline of gross receipts between the 2020 and 2019 same calendar quarters of less than 20%.
Test 3 – For 2021, a significant decline in gross receipts will be met if there was a 20% decline (as opposed to 50% noted in 2020) in comparative quarters. Organizations should compare 2021 gross receipts to the same quarter in 2019. This most likely will allow far more organizations to be able to qualify using the gross receipts test. Please note that at the time of release of this article, the ERC is in play for only the first 2 quarters of 2021.
YES!! I’m an Eligible Employer – Now What?
The next step is to determine which wages are allowed to be counted towards the credit. Qualifying wages can only be counted for each calendar quarter in which the employer qualifies. Qualified wages not only include wages and compensation, but also an allocable portion of qualified health plan expenses paid by an eligible employer. It is important to note that employers must ensure that the wages utilized for PPP debt forgiveness are not the same wages utilized for the ERC. NO “DOUBLE DIPPING”!
In addition, the amount of wages a business can include is based on the number of employees that were employed during 2019.
- Small Employers: For an eligible employer that averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during the eligibility period, whether providing services or not.
- Large Employers: For an eligible employer that averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services during the eligibility period in 2020. Note that for 2021, the definition of Large Employers increases to more than 500 full-time employees.
For 2020, the maximum amount of qualified wages for each employee for all quarters is capped at $10,000. The ERC is limited to 50% of those qualified wages, creating a maximum credit of $5,000 per employee available in 2020.
For 2021, each employees’ eligible wages include $10,000 per quarter and the percentage that can be applied to eligible wages has increased from 50% to 70%. This allows a maximum credit per employee of $7,000 per quarter, for up to a total of $14,000 per employee in 2021.
Think about it this way – each eligible employee is walking around with a potential tax credit of $5,000 in 2020 and $14,000 in 2021! That could add up to a substantial amount of money. Now you’re asking yourself, “I’m a tax-exempt organization. What am I going to do with a tax credit? I don’t pay taxes.”
How Do I Claim the Credit?
Eligible employers will report their total qualified wages for purposes of the ERC for each calendar quarter on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return. An eligible employer may reduce its federal employment tax deposit by the qualified wages that it has paid. In addition, if a Form 941 has already been filed and it is now determined that the ERC is available, an amended Form 941 can be filed.
In summary, the credit allows you to free up cash flow to utilize in other areas of the organization.
What Should I Do Now?
We mentioned above that you can’t utilize the same wages and benefits under both the PPP and the ERC. If you haven’t already applied for PPP loan forgiveness – STOP. You should take time to analyze what costs you’ll be using for PPP. Keep in mind, PPP costs are not limited to payroll and benefits – things like utilities, interest, rent can be utilized. Most organizations chose the 24 week period to use the PPP funds. This allows great flexibility in using both the PPP and the ERC in 2020. If you have already received PPP forgiveness, review what you submitted as allowable costs and determine if the ERC is still available.
Let’s say you qualify for the ERC in only quarter 2 of 2020. Claiming the credit for that quarter and “delaying” the use of PPP dollars to quarters 3 and 4 of 2020 may be beneficial for your organization. We know PPP Round 2 is starting up. Analyzing the use of the ERC in 2021 in conjunction with the use of PPP Round 2 is something you will also need to consider.
There is a lot to think about and you may be wondering why you started reading this article in the first place. It is worth your time, since maximizing the use of relief funds is in the best interest of your organization and the people you serve. As always, reach out to your Bonadio service team if you have any questions.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.