In response to the devastating effects of the COVID-19 pandemic, the U.S. Congress has passed a barrage of tax-relief legislation. Already overwhelmed business owners now have the complicated task of determining which of these benefits apply to them and how to go about effectively reaping the full benefits of what is available. Currently business owners financially impacted by the pandemic seem to be focused on a forgivable PPP loan, all the while overlooking the value of the fully refundable Employee Retention Credit (ERC). The ERC is a refundable tax credit that most businesses are generally eligible to claim and in fact may even end up being more beneficial than another PPP loan. Below is a brief overview of what employers need to know and how to start evaluating eligibility.
What is the Employee Retention Credit?
The ERC is a refundable tax credit that was established to benefit businesses who kept employees on payroll during the pandemic. A tax credit is a direct offset against a tax liability. Unlike the PPP, this is not a loan and you will not need to worry about paying this back or tracking how you use it. This credit is calculated based on qualified wages, which includes certain healthcare costs, paid to retained employees.
How much is the maximum credit that can be claimed?
2020: Credit can be claimed for 50% of qualified wages, up to $10,000 per employee paid between March 13 and December 31, 2020, which equates to a maximum credit of $5,000 per employee.
2021: Credit can be claimed for 70% of qualified wages, up to $10,000 per employee paid per quarter of 2021 which equates to a maximum credit of $28,000 per employee.
Does my business qualify for the Employee Retention Credit?
To claim the ERC, employers must meet one of two factors below:
- You are a trade or business, or a tax-exempt organization that had a partial or a full suspension of operation due to government ordered COVID-19 lockdowns.
- You are a trade or business, or a tax-exempt organization that experienced a “significant decline” in gross receipts. Which is defined as follows:
For 2020: If gross receipts in a calendar quarter dropped below 50% versus the same calendar quarter in 2019
For 2021: If gross receipts in a calendar quarter have dropped more than 20% versus the same calendar quarter in 2019 or 2020
Employers with a PPP Loan
Employers who received a loan under the Paycheck Protection Program are also eligible to claim the ERC. However, wages used as payroll costs to obtain forgiveness of a PPP loan cannot be used as qualified wages to claim the ERC. Any wages that could count towards eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.
For employers who received PPP loans and have NOT applied for forgiveness, you may want to rethink what is included in your forgiveness application. While the forgiveness may be covered solely by payroll, reducing the payroll amount, and substituting rent and other eligible expenses could possibly increase the allowed ERC amount.
How can we help?
Calculating your maximum ERC and navigating other cost-saving coronavirus tax credits can be complex. With the ERC, at best, employers can benefit from a $5,000 credit per employee for 2020 and a $28,000 credit per employee for 2021, which is significant. We encourage you to reach out to your trusted Schulman Lobel tax advisor for guidance on how the above may impact your tax situation.