For the last several months, the Paycheck Protection Program (PPP) has garnered most of the attention from taxpayers. However, ever since the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law in December, the Employee Retention Credit (ERC) has begun to gather significant focus. This is largely due in part to the fact that a PPP loan no longer precludes a taxpayer from claiming the ERC, although not on the same wages. The other reason is that the ERC has been extended for the first two quarters of 2021 with much easier eligibility criteria and a higher credit amount.
Qualifying for the ERC
As a refresher, there are two ways a business can qualify for the ERC:
- The business was either fully or partially shut down due to a government order
- There was a significant decline of gross receipts (quarter over quarter).
- For 2020 this means more than 50% (looking at Q1-Q4 of 2020 compared to the same quarters in 2019)
- For 2021 this means more than 20% (looking at Q1 and Q2 of 2021 compared to same quarters in 2019. There is a special rule allowing Q4 of 2020 to be compared to Q4 of 2019 if the prior sentence’s qualifications are not met).
According to the IRS, “An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer's operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.” The IRS has identified in their FAQ what it means for a business to be considered fully or partially suspended, that can be accessed here.
Most production agriculture has been deemed essential and so the only way to qualify in that case would be under the gross receipts test. However, many industries were impacted by shutdown orders, such as retail, wineries, certain greenhouses and nurseries that would be able to qualify under the government order test.
A business can use either of the two tests above to qualify, and the duration of the credit is based upon which test is used. For example, if a business qualifies as a result of being fully or partially shut down, then the credit lasts for the full period that the government order is in place. On the other hand, if the business qualifies due to the gross receipts test, then the credit is eligible through the quarter when gross receipts push back up to more than 80% of the previous year’s quarter.
In the example below, you can see how the business begins to qualify for the ERC in Q2. In Q4, the business reaches more than 80% of 2019’s gross receipts, however the ERC is eligible through that quarter. Effectively, this business qualifies for the ERC for Q2-Q4.
It is important for taxpayers with multiple businesses to be aware that ERC eligibility may be calculated by looking at all the entities as a single employer under complex rules located here.
Amount of the ERC
- In 2020, the maximum amount of ERC is $5,000 per employee based on 50% of qualifying wages up to $10,000.
- In 2021, the maximum amount of ERC is 70% of qualifying wages up to $10,000 for quarter 1 and quarter 2. You can see how the 2021 ERC is much more lucrative as there is the potential of receiving a $14,000 credit per employee vs. $5,000 in 2020.
- Qualifying wages are generally wages subject to Social Security and Medicare taxes. Qualified health plan expenses also count, which include the portion of the costs paid by the employer and employee with pre-tax salary contributions (employee after-tax contributions don’t count).
- For employers under 101 full-time employees (501 in 2021), all wages will count. For employers above that amount, only wages paid to employees who are not working qualify.
Note: Generally, wages paid to relatives (excluding spouses) are not eligible for this credit. Furthermore, the wages utilized for the ERC cannot be “double dipped.” In other words, the same wages used for the ERC cannot also count toward a taxpayer’s wages claimed in other benefits such as PPP forgiveness, the Work Opportunity Tax Credit and the FFCRA Sick/Family Medical Leave, to name a few.
Summary of 2020 vs. 2021 ERC
Many taxpayers and their advisors are still wrapping their heads around the interaction between the ERC and PPP. In certain aspects, such as when a taxpayer already received PPP forgiveness, more guidance is needed by the IRS. For those who haven’t received PPP forgiveness yet and who are eligible for the ERC, reviewing the calculations to maximize the ERC becomes important since wages cannot be “double dipped.”
The good news is that these credits, if they have not been claimed by eligible taxpayers thus far, are not lost. Form 941 and 943, where these tax credits are claimed, are eligible to be amended. The key, as with any tax credit, is to be aware of its existence and then determine if you are eligible. If you received this credit in 2020, it is important to let your tax advisor know since the wage expenses permitted on the tax return will have to be reduced by the credit amounts taken. Farm Credit East tax professionals are here to help determine eligibility and ensure you receive the full credits you’re entitled to.