When the Coronavirus Aid, Relief, and Economic Stimulus Act (CARES Act), was signed into law on March 27, 2020, the Employee Retention Tax Credit (ERC) was created. The CARES act stipulated that if you received a Paycheck Protection Loan (PPP) that you could not also receive the ERC. However, when the Consolidated Appropriations Act, 2021 was passed on December 21, 2020, this provision retroactively changed and the ERC was made available to employers who also received a PPP.
In addition, the December 21, 2020 Act extended the availability of the ERC through June 30, 2021. Then, the American Rescue Plan Act (ARPA) dated March 11, 2021 further extended the ERC availability through the end of 2021. This credit may provide significant opportunity to employers who have struggled and continue to struggle from the long term impacts of covid. For example, an employer who has 20 employees who each earn $40,000 per year or more could be eligible for a credit of $660,000! Restaurants may find this tax credit extremely beneficial as more than likely they will be able to take advantage of the credit!
PPP Forgiveness and ERC
If you received a PPP loan and have not filed for loan forgiveness yet, it is critical to target as much as possible of the 40% on eligible expenses outside of payroll costs to maximize potential ERC credits. If you applied for PPP forgiveness and didn’t utilize or show the other eligible expenses, but had incurred them, those additional payroll costs may not be eligible for the ERC.
ERC Qualifications and Eligibility
ERC eligibility, qualifications and maximum tax credits differ slightly from 2020 to 2021, with 2021 being more advantageous for the employer. The potential tax credit per employee is significant, with up to $33,000 per employee available throughout 2020 & 2021.
Employer aggregation rules exist for both years and must be taken into consideration when calculating employer size, using the decline in gross receipts test and when calculating the maximum credit per employee. If the aggregation meets the eligible employer rules under either a governmental suspension or a reduction in gross receipts, all employers under the aggregation are eligible.
2020 ERC Summary
Maximum Tax Credit Available
Qualified wages and employer paid group health insurance expenses are capped at 50% of $10,000 per employee for the entire year (a potential credit of $5,000 per employee). Wages used in PPP forgiveness, that were paid under the Families First Coronavirus Response Act (FFCRA), certain other SBA grants, or wages for which other payroll credits were applied towards (such as the research and development credit) aren’t eligible (no double dipping).
Eligible Employers
The ERC is available to eligible employers for qualified wages paid between March 12, 2020 and December 31, 2020, and can be retroactively claimed by filing a 941x, 943x, or 944x. Employers that are eligible to claim the credit are private-sector businesses and tax-exempt organizations that conducted a trade or business in 2020. The employer is eligible if they experienced a full or partial suspension due to a governmental order or had a 50% decline of gross receipts in a calendar quarter in 2020 compared to the same calendar quarter in 2019.
Partial Suspension
While the decline in gross receipts and full governmental suspension eligibility tests are relatively cut and dry, a partial governmental suspension order requires further thought. An employer is considered to be under a partial governmental suspension order if the suspension has more than a nominal effect on a business. A nominal portion of a business is an area of a business that in 2019 made up at least 10% of the business’ gross receipts, or whose employees’ hours for that portion of the business made up at least 10% of all employee hours in 2019. Consideration must also be made if the suspension order was more than just a modification to the business. This becomes important as it relates to the restaurant and hospitality industry.
For example: a restaurant may have been able to provide take-out but could not provide any dine-in services in 2020. In 2019, dine-in accounted for more than 10% of the business’ gross receipts. The restaurant was under a partial suspension while they weren’t able to provide dine-in. Later, the restaurant was able to provide take-out and was limited to 25% maximum occupancy (both indoors and out). Provided that the remaining 75% of in-house dining made up more than 10% of the business’ gross receipts in 2019, the restaurant is still deemed to be under a partial suspension order.
Qualified Wages
If the employer averaged fewer than 100 full-time employees in 2019, all wages and qualified health care costs paid in 2020 could be considered for the ERC. However, if the employer averaged 100 or more full-time employees in 2019, only wages and qualified health care costs paid to employees that didn’t provide services due to the decline in gross receipts or a suspension order may be eligible (with further stipulations).Wages paid to relatives or dependents of an owner who has 50% or more of a company aren’t eligible.
2021 Summary
2021 generally follows similar rules as 2020, with a few key exceptions (highlighted below)
Maximum Tax Credit Available
Qualified wages and employer paid group health insurance expenses are capped at 70% of $10,000 per employee per quarter. Wages used in PPP forgiveness, that were paid under the Families First Coronavirus Response Act (FFCRA), that were used to obtain a restaurant revitalization grant, certain other SBA grants, or wages for which other payroll credits were applied towards (such as the research and development credit) aren’t eligible (no double dipping).
Eligible Employers
The ERC is available to eligible employers for qualified wages paid between January 1, 2021 and December 31, 2021, and can be retroactively claimed by filing a 941x, 943x, or 944x, or are claimed in the timely filing of a 941, 943, or 944. Employers that are eligible to claim the credit are private-sector businesses, tax-exempt organizations, and state and local governments that conducted a trade or business in 2021.
The employer is eligible if they experienced a full or partial suspension due to a governmental order or had a 20% decline of gross receipts in a calendar quarter in 2021 compared to the same calendar quarter in 2019. Employers that weren’t in business in 2019 can use the corresponding quarter in 2020 to measure the decline in gross receipts. For the first quarter of 2021 employers may also use the fourth quarter 2020 vs. fourth quarter 2019 to determine a decline of gross receipts.
Businesses that started after February 15, 2020 and had less than $1 million in annual average gross receipts are considered a recovery startup business and are eligible for up to a maximum of $50,000 per quarter without proving a decline in gross receipts or governmental suspension for Q3 & Q4 2021 only.
Partial Suspension
The partial suspension rules in 2021 are applied the same as in 2020.
Qualified Wages
If the employer averaged fewer than 500 full-time employees in 2019, all wages and qualified health care costs paid in 2021 could be considered for the ERC. However, if the employer averaged 500 or more full-time employees in 2019, only wages and qualified health care costs paid to employees that didn’t provide services due to the decline in gross receipts or a suspension order may be eligible (with further stipulations). Wages paid to relatives or dependents of an owner who has 50% or more of a company aren’t eligible.
Businesses that experienced a 90% decline in gross receipts for 2021 compared to the same quarter in 2019 are considered severely distressed employers for Q3 & Q4 2021 only, and regardless of employer size all wages are qualified.
Please contact your trusted advisor at Reese Henry for further clarification on when ERC eligibility starts and stops based on the eligibility requirements.