Many small businesses and nonprofit organizations that received a PPP loan were unable to take advantage of the Employee Retention Tax Credit (ERTC) in 2020 due to the CARES Act disallowing taxpayers to take both. The Consolidated Appropriations Act (CAA) eased that rule by allowing PPP loan receipts to take the credit as long as PPP loan wages are not included in the ERTC wages. While the CAA lifted this restriction, it also expanded and increased the ERTC for 2021 allowing more business to qualify for the credit. The IRS recently issued Notice 2021-20 clarifying and describing retroactive changes made under the new law as it applies to the 2020 tax credit. No authoritative guidance has been issued for the 2021 ERTC but employers should start planning now to see if they qualify for a credit potentially worth $14,000 per employee for 2021.
For 2020, eligible employers can claim the refundable ERTC on qualifying wages paid after March 12, 2020 and before January 1, 2021. The credit is equal to 50% of qualified wages paid, including qualified health plan expenses, up to $10,000 of wages per employee. For 2021, the credit is equal to 70% of qualified wages paid for the first two quarters of 2021, up to $10,000 of wages per employee, per quarter. Potentially, a qualifying employer could receive a max credit of $19,000 per employee if eligible for both periods. The credit is calculated on the quarterly 941 filings. Based on the number of employees a business had in 2019, the eligibility requirements are different for each credit year.
Qualifying for the ERTC in 2021
In order to claim the credit, businesses must first meet one of the following conditions.
- Full or Partial Suspension of Business
- A full suspension occurs if the employer cannot continue its operations. A partial suspension occurs if an appropriate governmental authority imposes restrictions on the employer’s operation by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can continue some, but not all of its typical operations.
- Significant decline in gross receipts.
- A significant decline in gross receipts begins on the first day of the first calendar quarter of 2021 for which an employer’s gross receipts are less than 20% of its gross receipts for the same calendar quarter in 2019. For 2021, the CAA allows a company to elect to use the gross receipts from the immediately preceding quarter, and compare these prior quarter gross receipts to the same quarter in 2019, rather than the current quarter. For 2020, there must be a 50% decline in gross receipts in one quarter as compared to the same 2019 quarter.
In 2020, employers with over 100 employees (based on 2019 full time equivalents) could only claim the credit on wages paid to employees that were not performing services for the company during that period. Employers with less than 100 employees (small employer) could use all wages paid whether the employees were working or not. The CCA increased the employee limitation for the 2021 credit to 500 in determining small employer status. Aggregation rules do apply in determining the size of the employer.
After a business has determined their eligibly, the next step is to determine the amount of qualifying wages. As noted, large employers will need to determine the amount of wages paid to employee while they were not working. Small employers will generally take quarterly compensation paid, including the amounts paid for qualified health plan expenses for the credit period. Now that PPP loan recipients are eligible to take the credit, they need to determine the amount of wages that can be used for ERTC as they cannot double dip. The IRS notice provides seven different examples showing how the wages and expenses reported on the forgiveness application determine the amount of wages that can be used for the credit. Generally, the minimum required amount of payroll costs that are needed for forgiveness cannot be used for the ERTC. It is important to include the other allowable expenses on the loan application to decrease the amount of wages used for forgiveness. The last example provided by the IRS states that wages used in an application that was denied for forgiveness are eligible for the ERTC. Taxpayers also need to be wary of how the ERTC will affect other payroll related tax credits they are currently taking to ensure there is no double dipping. Also, wages paid to an employee who is related to the employer do not qualify. It is unclear if the wages of the owner of an S-Corp are allowed.
Once the amount of wages is determined, the credit will be calculated and taken on the employers quarterly 941. In order to claim the credit for 2020, employers will most likely need amend their 2020 payroll tax returns. For 2021, employers have the option to file form 7200 to request an advance payment of the credit or claim it on the upcoming 941.
The ERTC can be a major benefit to businesses struggling during the pandemic by proving essential cash flow to maintain operations. Although the qualifications seem cut and dry, there are many intricacies involved with this credit. The IRS originally issued over 90 FAQs as informal guidance on the credit and the recently issue notice is over 100 pages. The notice and FAQs provide good examples but each situation is different and it is important that all the details are laid out and accounted for before claiming this credit.
On March 11, 2021 the American Rescue Plan Act of 2021 was signed into law by the President Biden. This new law includes a provision to extend the ERTC for wages paid between July 1, 2021 and December 31, 2021. Additional details on the extension will be provided as more information becomes available.
If you have any questions, would like assistance in determining if your business qualifies for the ERTC or need help in applying for the Credits, please reach out to your Strothman and Company representative or contact Neil Zinser, Tax Partner at firstname.lastname@example.org.