EMPLOYEE RETENTION CREDIT
On March 27, 2020, the CARES Act was signed into law and it contained tons of relief for business owners, most notably the Paycheck Protection Program. Also included in the bill was the Employee Retention Credit. However, there was a major problem with the Employee Retention Credit based on the way the law was written under the CARES ACT because it stipulated that if you received the PPP loan, you were not eligible to qualify for the Employee Retention Credit. The whole premise of the CARES Act was to keep people employed but congress was only willing to give business owners either the PPP or the ERC, but not both. The other issue with the ERC was that the provisions for the ERC were tougher to receive benefits because your operations had to be fully or partially suspended by government order or you had to suffer a greater than 50% reduction in gross receipts in any given quarter during 2020 as compared to 2019.
In early December 2020, Congress realized that no one would qualify for the ERC because of the way the laws were written in the CARES ACT so then comes along the Consolidated Appropriations Act (CAA) signed into law on December 27, 2020. In the CAA they removed the exclusion for those that received the PPP loan, extended the credit through June 30, 2021 and made it even easier to qualify for it. In addition, business owners can receive both the PPP and the ERC. Lastly, the CAA adjusts the 50% reduction in gross receipts in 2021 to 20% and allows you to compare it to 2019 or 2020.
For those businesses that qualify, you are eligible to receive 50% of your employee wages up to $10,000 ($5,000 max credit per employee) during the calendar year 2020. If you continue to qualify in 2021, you are eligible to receive 70% of your employee wages up to $10,000 ($7,000 max credit per employee) per quarter in 2021 limited to the 1st and 2nd quarter. These are HUGE numbers.
Our advice is that every business owner needs to look into this further. You need to determine if you were partially or fully suspended due to a government order. Hundreds of thousands of businesses were closed and/or limited to 50% or 25% capacity. If not, business owners need to run the sales/revenue numbers for each quarter in 2020 and compare it to 2019 and discuss the findings with a tax professional. Or if you feel like sales are down in 2021, project out and see if you will have a 20% or greater reduction in sales as compared to 2019 or 2020. If any of the above apply, you need to work with a tax professional.
The numbers are too large to dismiss this opportunity. To put this in perspective, if you have 10 employees and you qualify for 2020, you potentially could receive an Employee Retention Credit of $50,000. In this same scenario, let’s say you still qualify for 2021, you could then receive $70,000 in quarter one and another $70,000 in quarter two. If this is the case, you would have then received $190,000 from the Employee Retention Credit. I don’t think anyone would pass that up.
This is a complex credit and there is more to it than what has been presented above. Determination of eligibility, determination of qualifying wages, allocation of the PPP funding to maximize the Employee Retention Credit, filing with the IRS to request a refund, all needs to be a priority.
We are happy to help! Please give us a call at 301-340-1550 and ask for Terrance Leary or Doug Arkin. We can help you navigate through this.
Employee Retention Credit Flow Chart
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