Employee retention tax credits could create significant cash flow for businesses
by Garrett Ofenloch and Benjamin Bostic
As part of the effort to provide additional help to businesses struggling amid the pandemic, the recently passed Consolidated Appropriations Act (the Act) expands and extends Employee Retention Tax Credits.
Importantly, businesses may be eligible to claim the Employee Retention Tax Credit (ERTC), a refundable credit worth up to $5,000 per employee during 2020 and worth up to $7,000 per employee, per standard calendar quarter (Jan-Mar; Apr-Jun; Jul-Sept; Oct-Dec), through June 30, 2021. This could create significant cash flow for businesses that qualify.
The Act extended the time for claiming credits between Jan. 1 and June 30, 2021, and allows businesses that received PPP loans to claim the credits on wages paid between March 12 and Dec. 31, 2020. (Wages that have already qualified for PPP loan forgiveness are not eligible for ERTC.)
Employers are eligible to claim ERTC credits if they meet one of the followings tests:
- Business disruption test: Had to fully or partially suspend trade or business due to government order resulting from the COVID-19 emergency.
- Gross receipts test 2020: Experienced a 50% decline in gross receipts during a calendar quarter in 2020 when compared to the same calendar quarter in 2019.
- Gross receipts test 2021: Experienced a 20% decline in gross receipts during the current or the immediately preceding calendar quarter compared to the same calendar quarter in 2019. For example, a business is eligible in Q1 of 2021 if they experience a 20 percent decrease in revenue during Q4 of 2020 compared to Q4 of 2019 or Q1 of 2021 compared to Q1 of 2019.
Businesses will need to calculate the average number of full-time employees in 2019 (including all commonly controlled affiliates) to determine the wages that qualify for the credit.
In order to qualify in 2020, businesses with 100 or fewer full-time employees can use payroll costs associated with all employees paid during the period the business qualified for the employer retention credit. Businesses with more than 100 full-time employees may only claim the credit for payroll costs paid to employees not providing services.
In 2021, businesses with up to 500 full-time workers in 2019 can claim ERTC credits for all qualified payroll costs. Additionally, bonuses paid to a worker are now deductible as well. The total deduction cap per employee, however, is still $10,000.
Average full-time employees: Full-time workers are employees who, in any calendar month, had an average of at least 30 hours of service per week or 130 hours of service in the month.
Payroll costs: Payroll costs include wages paid to employees. Health care expenses are includable to the extent that they are excluded from the employees' gross income. This allows businesses to use healthcare costs paid on behalf of employees who are/were furloughed.
Calculating eligible wages for your ERTC deduction
In 2020, the credit allow employers to claim a 50 percent refundable credit on qualified wages up to $10,000 per worker per year.
In 2021, the credit allow employers to claim a 70 percent refundable credit on qualified wages up to $10,000 per worker per calendar quarter.
Below are more details about how to claim ERTC credits for wages paid in 2020 or 2021.
2020 and ERTC
Businesses claim ERTC credits through quarterly 941 payroll tax filings. If you believe your company will meet one of the two eligibility requirements mentioned above during the 4th quarter of 2020, we advise consulting your tax expert before you file.
Businesses can amend Form 941 for the 2nd and 3rd quarter of 2020 to claim this credit. However we are anticipating guidance from the IRS regarding the amendments to the 2020 ERTC.
Obtaining ERTC credits and PPP forgiveness for 2020
Companies can claim a 50 percent ERTC credit, capped at $10,000 per year, per employee.
For example, say a service business was partially shut down on March 15 by state order and was unable to restore their business operations until May 15, when state orders relaxed. On April 15, this business received a PPP loan and began its covered period.
As a result of the Act, the business can claim the employee retention credit and obtain PPP forgiveness. The wages paid to employees between March 15 and April 15 are eligible for the retention credit. Further, depending on the IRS/SBA's interpretation of the Act, wages employees received between April 15 and May 15 may also be eligible for ERTC.
Let us look at how a company can take advantage of employee retention credits and PPP forgiveness after experiencing coronavirus-related losses in 2020.
For this example, we’ll look at an event planning company with 10 employees that received a PPP loan on April 15 and spent the funds on payroll expenses by August 15.
As a result of the pandemic, the company gross receipts are 60 percent less in Q4 of 2020 compared to Q4 of 2019. As a result, the wages paid to employees between Oct. 1 and Dec. 31 are eligible for the retention credit (50 percent of payroll expenses, capped at $10,000 per employee/year). The business would be eligible for an employee retention tax credit of $50,000 in Q4 2020 (10 X $10,000 X 50 percent).
2021 and ERTC
Now, let us look at how the Act affects businesses' ability to take advantage of ERTC for wages paid between Jan. 1 to June 30, 2021.
- Business A has an average of 100 full-time employees, earning an average of $10,000 per quarter, $40,000 annually.
- The business received a PPP loan and used it all during a period that ended before the Q4 of 2020. For Q4 2020, the business’s revenue is less than 50 percent of what it was in Q4 2019.
- The business meets the criteria for an employee retention credit of approximately $500,000 in 2020 (100 X $10,000 X 50 percent). In Q1 2021, the company can use the immediately preceding calendar quarter (Q4 2020) to meet the gross receipts test.
- The business would be eligible for an additional $700,000 in Q1 2021 (100 X $10,000 X 70 percent). Further, if revenue in Q1 or Q2 2021 does not exceed 80 percent of the same quarter in 2019, the business would be eligible for an additional $700,000 attributable to Q2 2021.
- The potential total ERTC deduction for this business is $1.9 million.
- Business B had a very strong 2019, and while 2020 was not a great year, the business was still profitable.
- Like many, the business saw at least a 25 percent decrease in Q2 2020 but ended 2020 in the black.
- The business understands they are eligible for PPP2 loan based on Q2 2020 but cannot certify that “current economic uncertainty” makes this loan necessary to support ongoing operations of the business.
- If gross revenue in Q4 2020 were less than 80 percent of Q4 of 2019 (or Q1 of 2021 vs. Q1 of 2019), the business would be eligible to claim the ERTC for Q1 2021, worth up to $7,000 per employee.
Calculating ERTC credits can be complicated, and we suggest talking with your tax advisor to ensure you are getting the maximum benefit. Dealing with economic upheaval wrought by COVID-19 continues to be an issue, but at least the new ERTC guidelines provide additional relief for employers and employees.
Boyer & Ritter’s Business Relief Services Team can help.
Boyer & Ritter understands there are many difficult decisions businesses must make during these stressful times. Our team is here to assist you throughout this process: from understanding complex rules to helping identify opportunities and strategies to minimize the COVID-19 impact. To learn more about engaging us for Business Relief Services, please contact us HERE. Companies that believe they are eligible for the ERTC should talk to their tax professional immediately to see if they can take advantage of 2020 and 2021 credits.
Related Article: Quick Reference Guide for ERTC Relief