When the CARES Act was first passed in March 2020, one of the forms of aid it offered businesses, besides the Paycheck Protection Program loans, was the less-buzzed-about ERTC (employee retention tax credit). The ERTC allows businesses to receive up to $5,000 per employee in their tax refund if they are able to prove they had a revenue reduction in 2020 (or other types of qualification).
We spoke with Cole Marr, a tax credit specialist at a California accounting firm, Sensiba San Filippo, who broke down the complex qualifications for eligibility and details surrounding who gets this tax credit come April and why.
First of all, what is the employee retention tax credit?
Marr: This is the refundable payroll tax credit put into place in the original CARES Act meant to incentivize businesses to keep employees on their payroll. From there it gets complex about who/what/when [when it comes to eligibility]. It was effective March 12, 2020 through Dec 31, 2020 and was now changed a bit and extended through the first two quarters of 2021.
Does it have anything to do with the PPP loan?
It is completely separate from the PPP loan. The only interplay is you cannot use your forgiven PPP funds to calculate the ERTC. This employee retention tax credit has a maximum that, depending on the industry, you get to the maximum credit amount relatively quickly. You can get to it after PPP loan funds are removed.
Originally, you could not get both your PPP loan forgiven and take this tax credit but now you are allowed, which makes the world of businesses that can benefit from this credit larger.
How much money are business owners eligible for?
It depends on facts and circumstances. Accountants will look at how business owners allocated PPP expenses, what they filed for when they filed for forgiveness. You can include up to $10,000 in qualified wages the tax credit. That’s why there’s a possibility of getting a PPP loan forgiven and still maxing out the employee retention credit, especially if you have highly compensated employees. […] The credit for 2020 is 50% of $10,000 in qualified wages and employer plan health expenses. Other expenses are not included, like PPE.
Who is eligible and how do you know if you are?
There are three main categories of ways to qualify. If you satisfy at least one, then you are eligible. The first is at least a 50% decline in gross receipts relative to the same quarter the year prior.
The second is if you can demonstrate that you were fully or partially impacted by a government order that restricted your operation. This second one is much more complex: we look at various state and local orders, what businesses were deemed essential and when. You can be considered partially impacted if a portion of your business is shut down and you could not operate. You also qualify if you have multiple locations and only one of your locations falls into that second designation, then your whole business qualifies.
The third category is much more ambiguous: If you were impacted by a supplier disruption and it impacted your business. But if your business is selling burgers and you can’t sell burgers because of a beef shortage than presumably you meet the gross receipts qualification.
There is also a 100 full-time employee threshold that delineates a large vs. small business. The guidelines are substantially the same regardless of size, but the requirements to quantify it are substantially more restrictive for large businesses.
It’s up to you to make sure you fit one of these qualifications; the IRS won’t do it for you’re your qualification is based solely on what you do as a business. If you decide you can’t have your doors open because of safety reasons, etc. but local government did not mandate you to shut down, that does not count.
What is the timeframe for these qualifiers?
You continue to maintain your eligibility in 2020 until you get to a quarter where you recover at least 80%.
What has changed from the CARES Act to the second round of stimulus?
The 2020 tax credit is actually a 50% credit up of to $10,000 in wages per employee. In 2021 for [the new stimulus package] in Q1 and Q2 all the qualification requirements are the same categories as before. But now the gross receipts reduction is 20% instead of 50% and the credit instead of 50% of $10,000 is up to 70% of $10,000 (so $7,000) per quarter. You would also be comparing Q1 2021 to Q1 2019, or you can elect to compare Q4 2020 instead. Also, in 2021, the threshold that delineates a small vs. large business moves up from 100 to 500 employees.
How do you claim it?
You calculate it by going back and amending your quarterly payroll tax filing and get a refund for the amounts you paid for that quarter, and if you generate credit over and above that you also receive that amount to you. […] Basically, talk to your accountant because there’s a big learning curve with these things.
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