The Employee Retention Credit (“ERC”) was launched as part of the CARES Act to incentivize employers to retain employees during the pandemic by offering a refundable tax credit that can be applied against employment taxes. As part of the Consolidated Appropriations Act that was signed into law in December 2020, there were some significant changes to rules around ERC. Previously, an employer who received a PPP loan could not qualify for ERC. However, the CAA expanded ERC to permit employers who had received a PPP loan to qualify for ERC, and also extended the credit through June 30, 2021 and increased the credit amount available for each employee.
It is important to understand how the credit could benefit your business.
How do I qualify for the credit?
To qualify, a business must either:
- be shutdown by government order and have a full or partial suspension of operations due to the shutdown order
- have a significant decline in gross receipts when compared to 2019
What is a government shutdown?
A government shutdown for purposes of the Employee Retention Credit constitutes a restriction on trade, travel, or gatherings that has a negative effect on your business. The order from the government must restrict a business’ ability to operate in a normal manner, including hours of operation, service offerings, and capacity in such a way that it causes a reduction in the operations of the business. If there are orders in place from a government entity that do not result in your business being negatively impacted, this does not rise to the level of a full or partial suspension of operations.
In addition, a voluntary suspension of business activities without an order from a relevant government authority does not constitute a government shutdown.
What is a significant decline in gross receipts?
The gross receipts test differs depending on the year. For 2020, the decline in gross receipts had to be at least 50% when compared with the corresponding quarter in 2019. To claim the credit in 2021, the decline in gross receipts must be at least 20% when comparing the 2021 quarter with the corresponding 2019 quarter.
If you meet the gross receipts test, all wages paid during that quarter are potentially eligible wages for ERC (depending on interplay between PPP forgiveness and other payroll tax credits). In addition, each quarter is an eligible quarter until the quarter in which your gross receipts exceeds 80% of the corresponding quarter in the prior year.
What are eligible wages?
It depends on how you qualify. If you qualify due to a government shutdown, only the wages paid during the shutdown are qualified wages. If you qualify based on a reduction in gross receipts, then all wages paid during the qualifying quarter are eligible wages (subject to additional restrictions discussed later).
What is the maximum amount of the credit I can claim?
For 2020, the maximum credit you qualify for is $5,000 per employee, per year. For 2021, the maximum credit is $7,000 per quarter, per employee.
I got a PPP loan and will be applying for forgiveness – do I still qualify?
There is some interplay between ERC and PPP. Wages counted toward PPP loan forgiveness are not eligible to be counted for ERC purposes.
Is there a cap on how many employees a business can have?
Unlike PPP, there is no size limit for ERC. However, your employee count can change how the credit is calculated. For 2020, a business with a monthly average of 100 FTEs or less during 2019 can count all wages paid during the qualifying quarters as qualified wages for ERC purposes.
If a business averaged over 100 monthly FTEs during 2019, then the only wages that count for ERC are wages paid to employees not to work.
For 2021, the average monthly FTEs are adjusted to 500. Any business that has less than 500 FTEs can count all wages paid during the qualifying quarter(s) for ERC purposes.
How do we claim the credits?
At the moment, we are waiting on IRS guidance on how to claim the credits for 2020 and final rules on exactly how PPP loan forgiveness and ERC work in tandem. As soon as the relevant guidance is received from the IRS, Frazier & Deeter professionals can guide you through the process.
Are there any other traps for the unwary?
There may be. An employer may be required to group their employees together with other companies based on their ownership structure. ERC requires employers to follow attribution rules in IRC Section 52(a), 52(b), 414(m), and 414(o). These rules can be confusing but Frazier & Deeter professionals can assist with working through the aggregation rules if they apply to your situation.
How Frazier & Deeter Can Help
Our team of professionals at Frazier & Deeter can help you understand the credit, advise you on your options and help you pursue this valuable tax credit. We are dedicated to helping you with all parts of the process, including:
- Assessment of employer eligibility
- Review of documentation required to be submitted to tax authorities
- Assistance with filing of tax forms to claim credit
Have questions? Contact the tax credits professionals at Frazier & Deeter today.
Tommy Zavieh | Tax Partner
Jason Nelson | Tax Partner
Donald Jack | Tax Senior Manager