B: Aimee Reavling, CPA, Director & Justin Gubser, JD, CPA, Manager
With the expansion of the Employee Retention Credit (ERC) under the Taxpayer Certainty and Disaster Relief Act of 2020 and the additional extension granted under The American Rescue Plan Act, enacted in March 2021, the ERC now has the potential to provide relief to qualifying taxpayers for each calendar quarter of 2021.
The IRS recently released guidance on the ERC in the form of IRS Notice 2021-49 that clarifies some of the uncertainty taxpayers have been experiencing in applying the rules for 2021. The IRS also recently issued Rev. Proc. 2021-33, which provides a safe harbor allowing employers to exclude amounts received from other relief programs in the calculation of gross receipts to determine their eligibility for the ERC. Amounts received from the Paycheck Protection Program (PPP), Shuttered Venue Operators Grants and Restaurant Revitalization Fund grants are eligible for this exclusion.
- Note: The new Infrastructure Investment and Jobs Act, approved by the Senate on Tuesday, August 10 (H.R. 3684) would eliminate the availability of the ERC for otherwise qualified wages paid after September 30, 2021, and before January 1, 2022. Effectively eliminating the ERC beginning in the fourth quarter of 2021. Blue & Co. will be closely monitoring this and continuing to provide guidance as the situation unfolds.
As a reminder, the ERC is a fully refundable tax credit available to eligible employers who paid qualified wages to employees during the quarter. For 2021, the ERC provides a credit of up to $7,000 per employee, per quarter.
Below is a summary of the most important questions in determining your company’s eligibility for calendar quarters in 2021 and the amount of the tax credit.
Is my business an Eligible Employer?
- Was your business subject to a full or partial shutdown of operations due to a governmental order relating to COVID-19?
- Whether or not your business was subject to a full or partial shutdown is not as clear-cut as it may seem and is beyond the scope of this article. The IRS has released extensive guidance on this potential qualification in the form of Notices.
- Did your business experience a 20% or more decline in gross receipts in the fourth quarter of 2020 as compared to the fourth quarter of 2019?
- Did your business experience a 20% or more decline in gross receipts in any quarter of 2021 as compared to the same quarter in 2019?
- Note: If your business was not in existence during a particular calendar quarter of 2019 for the purposes of the “gross receipts test” described above, you may substitute the gross receipts from the comparable quarter in 2020 instead.
- Note: In addition, if your business began existence in the third quarter of 2020, you may compare your gross receipts for each of the first three quarters of 2021 to the third quarter of 2020 but would still compare the fourth quarter of 2021 to the fourth quarter of 2020.
- Did your business begin after February 15 of 2020 and have average annual gross receipts of less than $1,000,000?
- If so, you may be eligible for the ERC as a newly defined Recovery Startup Business and subject to special rules in determining the potential amount of your ERC.
If the answer to any of these questions could be yes, it is important to take a closer look to determine whether your business is qualified to take advantage of the Employee Retention Credit.
How much is the Employee Retention Credit for an Eligible Employer?
For 2021, the credit is equal to 70% of qualified wages (limited to $10,000 per employee, per quarter) paid to employees.
- Note: If your business qualifies for the ERC as a Recovery Startup Business, the total credit is limited to $50,000 per quarter.
What are Qualified Wages?
Qualified Wages are certain wages paid to employees, including healthcare costs, during the applicable period. The amounts that may be included as qualified wages depend on whether a business is considered a small employer or large employer for that period.
For large employers, qualified wages only include those wages and healthcare costs paid to employees while they are not working. For small employers, any wages can qualify, whether the employee was working or not.
- Note: For large employers that have had a decline in gross receipts of 90% or more for the third or fourth quarter of 2021 as compared to those same quarters in 2019, they are considered Severely Financially Distressed Employers and will follow the same rules for qualified wages as small employers mentioned above.
- Note: Special rules apply to wages that are paid to Majority Owners of businesses and their related employees. Contact your Blue & Co. advisor to discuss the application of these rules.
Is my business considered a small or large employer?
The size of the employer is determined by the average number of a business’ full-time employees during 2019. For 2021, a business is considered a large employer if it had over an average of 500 full-time employees. All others could qualify as small employers.
What if my business received a PPP loan or other relief grants in 2021?
While there is no longer a restriction on the availability of the ERC for otherwise eligible employers who received a PPP loan, it is important to note that the same wages cannot be used for both PPP forgiveness and the ERC. If you think that you may qualify for the ERC and have not applied for PPP forgiveness yet, it is important to first consult your Blue & Co. advisor to properly plan for and maximize the relief available under each of these programs.
If you have already applied for PPP forgiveness, there may still be an opportunity to use certain excess wages from your forgiveness application to the extent that you did not need the full amount reported to receive forgiveness. Again, consulting your Blue & Co. advisor will be important in this determination.
- Note: If your business is a restaurant that is an eligible employer for the purposes of the ERC, you may be qualified to include the cash tips received by your employees in determining the amount of your ERC. Contact your Blue & Co. advisor for guidance on these special rules.
How do I claim the credit?
Credits may be claimed in several ways. They can be claimed on an original or amended Form 941. For those employers who know in advance that they will qualify for their current quarter, they can choose to reduce their federal payroll tax deposits by the anticipated credit amount. Alternatively, small employers have the option to receive an advance refund for a certain amount of their anticipated ERC by filing form 7200.
- Note: Due to rules regarding the income tax deduction available for wages that are also utilized in claiming an ERC, the taxpayer must reduce the wage deduction for the same amount in the tax year to which the credit relates, rather than the tax year in which the credit is claimed. For example, if a taxpayer retroactively claimed a 2021 ERC credit on an amended 941-X filed in 2022, then they would need to reduce the wage deduction on their 2021 income tax return. Contact your Blue & Co. advisor for guidance on the income tax consequences of the ERC.
The calculations relating to the Employee Retention Credit can be complicated. However, the ERC can be impactful to many businesses still struggling through the pandemic. It’s important to contact your Blue & Co. advisor to make sure that you are claiming the credits appropriately.
If you have any questions, please contact your Blue & Co. advisor.