The employee retention tax credit (ERC) is a refundable tax credit for employers who had business operations that were either fully or partially suspended by a COVID lockdown order and retained employees. The credit is equal to a certain percentage of wages paid after March 12, 2020. The $900 billion pandemic relief bill that was put into law in December contained a provision that allowed companies with PPP loans to also take part in potentially receiving an ERC. Prior to the passage of this bill, if you had a PPP loan your company was not able to also receive an ERC.
Let’s highlight some of the key aspects of the credit and how you might go about claiming this credit:
- The ERC can only be taken for payroll not paid with PPP loan funds, so if you received a PPP loan then getting the proper allocation of how you spent your PPP loan between 60% payroll costs and 40% non-payroll cost might be important to consider prior to applying for forgiveness of your PPP loan.
- For 2020, your company must have 100 or less employees and a 50% or more reduction in gross receipts for any quarter as compared to the same quarter of 2019 to initially qualify for the ERC. Once meeting the 50% reduction in a quarter, subsequent quarters only need to show a reduction of 20% as compared to the same quarter 2019.
- For 2020, the credit is equal to 50% of qualified wages (including qualified health plan expenses) paid up to a maximum of $10,000 for each employee for all calendar quarters during 2020. This results in a potential maximum credit of $5,000 of qualified wages paid to any employee during 2020.
Now, let’s look at how the ERC changed for 2021:
- The ERC was supposed to expire at the end of 2020 but this credit has been extended to June 30, 2021.
- Instead of having 100 or less employees to qualify, the threshold was increased to 500 or less employees.
- Instead of a reduction in gross receipts of 50% as compared to the same quarter in 2019, the reduction in gross receipts only need to be 20% or more.
- The credit was increased to 70% of qualified wages per employee for the first and second quarters of 2021. So, the maximum credit per employee could be as much as $14,000 ($7,000 per quarter) for the first and second quarters of 2021. BIG CHANGE AND OPPORTUNITY!
How do you claim this credit?
- If you have already filed your 941 for a previous quarter that you know may qualify for the credit due to changes in the law, you can go back and amend your 941. Your credit could be applied forward to a future period or refunded.
- If you are in a current quarter that you will qualify for a credit, you could reduce your current tax deposits for the estimated amount of credit, and when you file your quarterly 941 payroll tax filing if there is any remaining credit it can be applied forward to a future period or refunded.
- You may request an advance payment of employer credits due to COVID by filing Form 7200. The guidance for handling this request is forthcoming from the IRS
There are a lot of options with the ERC available to restaurant owner’s now that the credit can be claimed even if you have received a PPP loan. If you have not applied for forgiveness of your original PPP loan, you may want to hold off for further guidance from the IRS. The guidance is needed so you can plan on how the ERC and the PPP loan interact when determining which payroll period to apply for potential ERCs and which payroll period to apply to PPP loan forgiveness.
Brian Campbell, CPA