The Employee Retention Credit - Can Your Business Benefit From It?
I am currently amending returns to get the Employee Retention Credit and I have seen a lot of conflicting information out there. What you need to know is if your business qualifies, how much of a credit you can get, how to get it, when you might receive it, and what other tax consequences come with this credit. It is complicated, but complicated is what the CPA Superhero does. One reason it is complicated is the language of the legislation, another is the amount of legislation, requirements, and the calculation of the credit has changed and is also different for different time periods. To complicate it further there are a lot of articles on the internet that were written before legislation was passed that changed the credit. I have also heard people be confused by a couple of concepts that led them to incorrectly conclude that the they don't qualify for the credit. Finally, there are some areas where you need to be really careful. There are aspects of the credit that are confusing and lead people to the wrong conclusion, which happened to me but I kept reading and was surprised to learn what is really in the legislation now and what it means.
When I first read about the credit it was during the busy tax season and I concluded that payroll people should do this. But upon further review, after the busy tax season, I realize that many payroll people would probably be overwhelmed by this. In fact I think most people won't want to deal with this because it is a lot of work just to figure out how this works. I say that knowing that it is likely there will be further changes to this credit and the resulting income tax implications. (As of today 7/29/22 those changes have materialized and many in this field are not expecting any more changes.)
Yes, this credit does have "income tax implications" in addition to the credit which is filed for using a payroll tax form. In other words this credit, the Employee Retention Credit, is not an income tax credit but the income tax piece involves increasing income on the business income tax returns equal to the amount of the credit.
This is not simple. In this post I will limit it to covering who qualifies, how the credit is calculated, and how to claim the credit.
First, since it is credit against payroll taxes, a business must have payroll to qualify. For those businesses they must have been impacted by the COVID-19 pandemic in one of two ways. A business may qualify based on being impacted by a government mandate for COVID-19 that restricted business. In some cases that was a shutdown or restricting capacity utilization, or limiting the number of people able to attend business meetings. The second way a business may qualify is a reduction in Gross Receipts compared to Gross Receipts received in 2019.
Government order, proclamation, or decree
First, the business must have been impacted by a government order, proclamation, or decree that limited commerce, travel, or group meetings due to the pandemic. The impact must have resulted in shutting down operations, or suspending at least a portion of normal operations. A business might even qualify if the business was affected by interruptions in the supply chain caused by a government order, proclamation, or decree that affected a supplier. If a business qualifies in this way it may qualify for the credit for the period of time it was under the restriction based on a government order, proclamation, or decree.
Significant Decline in Gross Receipts
Other than a government order, proclamation, or decree that impacted a business a business may qualify if it had a significant decline in gross receipts due to the pandemic. There are different rules for the reduction in gross receipts for both 2020 and 2021.
To qualify in 2020 based on a reduction in gross receipts there had to be a reduction of at least 50% of gross receipts in a quarter over the same quarter from 2019. Once the business qualifies they qualify until first quarter after which the 2020 quarterly gross receipts are greater than 80% of the same quarter from 2019.
To qualify in 2021 based on a reduction in gross receipts there had to be a reduction of at least 20% of gross receipts in a quarter over the same quarter from 2019. Or a business can use the previous quarter's gross receipts compared to the same quarter in 2019. You mean if my business qualifies this way for the first quarter of 2021 then it automatically qualifies for the second quarter too? That is correct. It also appears that if gross receipts in the fourth quarter of 2020 were at least 20% below the fourth quarter of 2019 then the business could use that to qualify for the first quarter of 2021.
Calculation of the Credit
For a small employer all employees can be used in the credit. For a large employer, over 100 full time employees for 2020 and over 500 for 2021, only employees "not providing services" can be used (and the specifics of that could be another blog post).
For 2020 a business can obtain a credit for 50% of qualified wages on up to $10,000 of eligible wages per employee for the year (3/13/2020 - 12/31/2020). Health insurance paid by the employer can be added on a prorated basis to each employee but the credit is still capped at $5,000 per employee for the year.
For 2021 a business can obtain a credit for 70% of qualified wages on up to $10,000 of eligible wages per employee per quarter. There is legislation being considered which might impact which quarters a business may be able to receive the credit. The same thing applies in 2021 for health insurance as was mentioned above for 2020.
Initially a business that had received a PPP loan could not also get an Employee Retention Credit. However, that changed. But if a business had a PPP loan forgiven or expected to be forgiven the wages used for the covered period for loan forgiveness cannot also be used for the Employee Retention Credit. You can probably see this likely creates a complicated calculation for the credit.
Claiming the Credit
The credit is claimed by amending federal payroll form 941-X.
Not addressed here, but know that the following are relevant to the Employee Retention Credit:
Differences between qualifying wages for a small employer and a large employer
How Did I Get Into This?
My first client asked me about the ERC insisted I help him because he thought it could mean a lot of money for him and his business and he was right. But at first they did not qualify because they had taken out a PPP loan. But then the legislation changed and the client qualified even though they had PPP loans. I still did not want to do it because I don't do payroll and the ERC is really complicated. His payroll person did not want to do it either so he continued to pester me about it until I relented but I told him he would pay me handsomely. It was complicated but after taking some classes, reading the legislation, and figuring out how to file the amended payroll tax returns I figured it out. He now has his money, over a quarter of a million dollars, plus interest and he has told others about it. Not surprisingly most CPAs don't want to touch this.
I did not want to do the ERC either because it is enough just to keep up with the income tax code and the changes recently have been significant. Additionally, the work life balance for CPAs that prepare income tax returns seems to have been changed permanently and not for the better. However, the ERC has enabled me to help clients actually make money rather than just filing out tax forms and as a result I am no longer taking any new income tax clients and now I am focusing on the ERC. So far most of the clients for which I have helped to get the ERC use other CPAs for their income taxes and I keep them informed about what is being done for their client with the ERC.
If you are a CPA with clients that may qualify but you don't want to mess with the ERC then you should use my contact information below to setup an appointment. Since I am getting out of the income tax business and not taking on anymore income tax clients there is no concern that I might try to poach your client. The only work I will take on from here on out is work doing the Employee Retention Credit.
This credit can be a substantial game changer for businesses. Restaurants especially need the help this credit can provide. If you would like help in obtaining the credit why not ask someone who both has experience with it and also understands these various related issues. For my assistance to help you claim the Employee Retention Tax Credit use my email address below to contact me and make an appointment to discuss your situation.
Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns