Created at the same time as the Paycheck Protection Program (PPP), the Employee Retention Credit (ERC) might be able to help your business manage through the ongoing COVID-19 pandemic. While this provision of the Coronavirus Aid, Relief, and Economic Security Act (CARES) did not receive as much coverage in the media as the PPP, it can help many businesses manage their finances. Keep reading to learn more about the program and see if it will apply to your business.
Fourth Quarter COVID Challenges
As we enter the fourth quarter of 2020, we are all still struggling to adjust to the new normal of the COVID-19 world. In central and southeast PA, the trajectory of the virus appears to be trending downward, but while most businesses have been able to reopen, many are still operating at a reduced capacity. And those that aren’t limited by capacity rules put in place by the Governor to limit the spread of the coronavirus are still seeing a drop in business as customers stay home and modify their lifestyles.
Continued telework is being strongly encouraged, keeping employees who would normally stop by the local deli or restaurant for coffee in the morning or a sandwich at lunch, out of the day-to-day customer pool. Others continue to skip their normal haircuts and manicures, waiting for a vaccine or stronger signs that the virus has run its course in the community.
For businesses, the question of what to do next to keep the doors open is all too real. Congress is once again in talks, negotiating additional relief measures to help individual Americans and business owners weather this unprecedented storm. Unfortunately, so far, no additional programs have been announced.
This means that businesses need to look back to the The Coronavirus Aid, Relief, and Economic Security Act (CARES) passed in March. While the CARES Act encompassed many options to help individuals, businesses, and state, local and tribal governments, the Paycheck Protection Program (PPP) was arguably the most prominent measure put in place for small businesses.
For businesses that were not able to take advantage of the PPP, there was another measure included in the CARES Act that may be a good option to explore, the Employee Retention Credit (ERC). To determine whether you can benefit from the ERC, you first need to understand what it does, and then consider whether or not your business situation fits the rules of the program.
What is the Employee Retention Credit?
To encourage businesses to retain employees on staff rather than letting them go, the federal government included the ERC provision in the CARES Act. This provision gives businesses a refundable payroll tax credit for wages paid to employees. This applies to businesses that had to fully or partially suspend operations due to government orders related to COVID-19. It also applies to businesses that have seen a greater than 50% reduction in gross income.
The credit is computed as 50% of the wages paid between March 12, 2020 and January 1, 2021 to each employee up to $10,000 each. Which means that employers can receive a tax credit of up to $5,000 for each qualified employee. These credits are claimed on quarterly federal employment tax returns. If employers have already paid the taxes, they can request a refund by filing Form 7200 with the IRS.
Qualifying wages are based on the average number of employees in 2019, and for employers with 100 or fewer employees, it applies to all wages paid. For employers with more than 100 employees, the credit only applies to the wages of individuals that are receiving wages but that are not actively working. Regardless of the number of employees, wages do include appropriate health plan expenses.
Who is eligible?
Businesses of any size may utilize the ERC. However, businesses that received a loan under the PPP may not receive the ERC, even if the loan is ultimately forgiven. The only exception to this is in those cases where an employer repaid a PPP loan in full by May 14, 2020.
Tax-exempt organizations covered in Section 501(c) may be eligible for the credit. The same rules related to organization size apply to these organizations. Local, state and federal governments are not eligible for this credit. Self-employed individuals are not eligible for their own income, but any income paid to others in their employ would be included.
To claim the credit, businesses must either be able to show that they were forced top operate under government imposed restrictions or that gross receipts are less than 50% of what was earned in the same quarter of the year in 2019. Generally, businesses that were classified as essential and remained open, will not be eligible for the credit unless they can show the necessary decline in business revenue. For other businesses working under reduced hours by mandate, even if receipts are not 50% lower than in 2019, a credit may still be available.
What are my next steps?
The ERC is a fairly complicated program with many details and nuances. In fact, the IRS released a 95 question FAQ in May to help clarify the details. But working through all the elements can be fairly daunting. Because of this, if you have not participated in the PPP, our advice is to seek guidance of a professional. If you are experiencing a decline in business in 2020 compared to 2019, contact Gift CPAs to find out if the Employee Retention Credit can help you. And be sure to check out our COVID-19 Resources page for additional guidance and ideas for how to manage your business through these challenges.