An Often Overlooked Source of Business Relief
The employee retention tax credit (ERTC or ERC) was initially a part of the 2020 CARES legislation. Several limitations in eligibility made this benefit an unlikely evaluated source of economic relief in the COVID crisis. Significant amendments in the Consolidated Appropriations Act make this benefit an excellent consideration for many practices.
ERTC is a tax credit to employers for gross wages and some health care benefits paid to employees. It is not a loan – it is a tax credit against income taxes owed by the employer. With the new amendment, there are two ways employers can access this credit.
2020 ERTC Guidelines
Employers can go back in time and, if they qualify, consider claiming ERTC for 2020. The rules are as follows.
Eligibility for 2020 ERTC
Eligibility for ERTC under the 2020 guidelines is defined as follows.
- The business experienced a full or partial mandated suspension of operation. Per IRS guidelines, employers in essential businesses (includes healthcare practices) may be considered to have a partial suspension of business if more than a nominal portion of its business operations are suspended by a government order (during any time in 2020).
- The business experienced a significant decline in gross receipts. Defined as a decline beginning on the first day of the first calendar quarter in 2020 where gross receipts are less than 50% of the gross receipts for the same quarter in 2019 – and ends on the first day of the first calendar quarter in which gross receipts were more than 80% of the gross receipts for the same quarter in 2019 (see example below).
While this sounds complicated, most practices would qualify based on the first criteria.
SPECIAL NOTE: In the original CARES criteria, employers were NOT allowed to utilize ERTC if they had applied for and received a PPP loan. This restriction was eliminated in the Consolidated Appropriations Act amendments and why some employers might consider looking back at a 2020 ERTC.
Calculation of Credit for 2020 ERTC
Employee “wages” that may be counted toward ERTC include gross employee wages and health care costs. They do not include any wages paid under a FFCRA benefit or wages and health care costs counted in any PPP forgiveness period.
Eligible wages are defined as follows:
- All employee gross wages plus employer contributions to health care programs
- Total per employee capped at $10,000 annually
- Tax credit equals 50% of the eligible wages
This means the maximum tax credit for 2020 is $5,000 per employee.
Let’s look at a simplified example (you will definitely need to work with your accountant and applicable payroll company on this!).
Your State ordered a mandated shut down on non-essential healthcare practices for a month in 2020 (you are automatically eligible). You took out a PPP where the loan use period started on July 1, 2020. For the second quarter of 2020, your gross receipts declined by 55% (eligibility started March 13, 2020) and for the second quarter declined by 15% (eligibility ended June 30, 2020). You are eligible to apply for ERTC for wages paid during the period March 13, 2020 through June 30, 2020. You have ten employees and paid five of them each $8,000 during the eligible period and five of them each $12,000 during the eligible period.
- $8,000 x 5 = $40,000. You can claim 50% of this or $20,000
- $12,000 x 5 = $60,000 but cap would be $10,000 x 5 = $50,000. You can claim 50% of this or $25,000
- Total eligible credit is $45,000
Claiming the ERTC for 2020
The tax credit (refund) is applied against employer taxes paid after March 12, 2020 through December 31, 2020. If you are applying in 2021 for 2020 ERTC retroactively, most employers would use Form 941-X (amended Form 941). It can take 6-8 weeks for the refund to occur and credits in excess of taxes you owe for that period is refundable under normal situations.
2021 ERTC Guidelines
Employees considering ERTC for 2021 need to understand the following differences.
Eligibility for 2021 ERTC
Eligibility for ERTC under the 2021 guidelines is defined as follows.
- The business experienced a full or partial mandated suspension of operation by a COVID-19 lockdown (not defined…but proceed to next criteria).
- During the first or second quarter of 2021, gross receipts were less than 80% of the gross receipts for the same quarter in 2019.
Turned around, this means you could apply if you experienced a 20% or more reduction in gross receipts for the first or second quarter of 2021 compared to the same quarter in 2019.
Calculation of Credit for 2021 ERTC
Eligible wages are defined as follows:
- Any applicable full quarter where 2021 gross receipts were reduced by 20% or more compared to the same quarter in 2019
- Total per employee capped at $10,000 per quarter
- Tax credit equals 70% of the eligible wages
This means the maximum tax credit for 2021 is $7,000 per applicable quarter. It is obvious that most employers will not qualify for the 2021 ERTC.
Let’s look at an example (simplified for example – you will definitely need to work with your accountant and applicable payroll company on this!).
For the first quarter of 2021, your gross declined by 30% compared to the first quarter of 2019 and for the second quarter of 2021 by 22% compared to the second quarter of 2019. You are eligible to apply for ERTC for wages paid during both quarters with applicable caps. You have ten employees and paid five of them each $8,000 during the first two quarters of 2021 and five of them each $12,000 during the same period.
- $8,000 x 5 = $40,000 x 2 quarters = $80,000 – but the cap is $10,000 per employee per quarter so you can claim 70% of $10,000 x 5 or $35,000
- $12,000 x 5 = $60,000 x 2 quarters = $120,000 but cap per employee is $10,000 per quarter so you can claim 70% of $10,000 x 5 or $35,000
- Total eligible credit is $70,000
Claiming the ERTC for 2021
Most employers will report using Form 941. You can wait until the end of the first or second quarter to apply or you can “project” the loss and ask for a credit in advance of it actually happening. The details on how this would happen are still not totally clear. Although not totally defined, it appears your tax credit will be issued as a refund or applied as a credit when you file your 2021 tax return. There is no guidance at this time to specify what would happen if your “projection” of decreased revenues in 2021 did not occur but it is likely this would simply mean you will have to pay back the excess based on the projected reduction in 2021.