Employee Retention Credit Update: IRS Guidance on 2020 and First Half of 2021
During the COVID-19 pandemic, many New Jersey and Pennsylvania businesses faced significant operational, financial, and working capital challenges. Due to government regulations, the almost overnight changes often left companies with no way to generate income or pay expenses. These challenging circumstances forced some to close while others sought to take advantage of new federal relief opportunities available through the Small Business Administration (SBA). The most popular option, the Paycheck Protection Program (PPP), provided an immediate lifeline. Despite the success, it officially ended on May 31, 2021, with little hope of Congressional renewal.
While it is apparent that recovery is in process, many businesses could still benefit from extra assistance. Although there are still SBA programs available, it is important not to forget about the Employee Retention Credit (ERC). Recent changes made as part of the American Rescue Plan have expanded eligibility, increased the credit maximum, and made other favorable changes previously unavailable. Summarized below is guidance issued by the IRS for the 2020 ERC and the first two quarters of 2021.
Eligible Employers
An eligible employer is any company in business during 2020 that experienced a full or partial suspension due to government orders or suffered a significant decline in gross receipts. The guidance features a Question & Answer section that walks through whether or not a business was suspended due to government orders. In addition, for 2021, the definition was expanded to include nonprofit organizations classified as 501(c)(1) (i.e., federal credit unions), 501(a) organizations, specific governmental entities including colleges, universities, and those providing medical or hospital care. Finally, the federal government, state governments, and political subdivisions, except as outlined above, are not deemed, eligible employers.
A Decline in Gross Receipts
For 2020, a business was determined as having a decline in gross receipts by identifying the first calendar quarter in which receipts were less than 50% of the gross receipts for the same time in 2019. For 2021, a business is determined to have a decline in gross receipts when the gross receipts in any 2021 calendar quarter are less than 80% for the same calendar quarter in 2019. Thus, determining whether an employer is eligible is made separately for each quarter.
Under the new rules, there is also the option to use an alternative quarter to calculate gross receipts. A business may elect to demonstrate a significant decline by comparing gross receipts from the immediately preceding quarter with those for the same period in 2019.
Maximum Credit Amount
Under the new rules, for the first and second quarters of 2021, the ERC equals 70% of qualified wages (including related healthcare expenses) paid. The maximum credit amount which can be taken is $7,000 per employee with a maximum of $14,000 per employee for the first half of the year. This means that an eligible employer with 10 employees can claim a $140,000 tax credit for the first and second quarters if eligible. Under the 2020 rules, the credit is limited to $5,000 per employee for the year.
Qualified Wages
In 2020, a large employer with an average number of full-time employees greater than 100 during 2019, qualified wages were those paid to an employee not providing services. For small employers with less than 100 full-time employees during 2019, qualified wages were those wages paid to any employee during any calendar quarter in which operations were suspended due to government orders or decline in gross receipts.
For 2021, the definition of a large employer changed to include only those businesses with an average of 2019 full-time employees of 500 or greater. Concurrently, the small employer definition changed to include those with less than 500 full-time employees in 2019. It is important to note, the term full-time employee means an employee, in any calendar month in 2019, that had an average of 30 service hours per week or 130 hours in a month. These changes mean more businesses can now claim the wages for employees working during the pandemic as part of the ERC.
Employers: Income and Deduction
The recording of the ERC on an employer’s books is different from how PPP forgiveness was treated. The ERC reduces the amount of wages that the employer reports on their books, essentially lowering the reportable expense.
The recently enacted changes mean more New Jersey and Pennsylvania businesses can qualify for the ERC and potentially receive a higher amount. For those seeking to enhance the financial vitality of their business, the ERC is a significant opportunity that employers should not miss.
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If you have questions about the information outlined above or need assistance claiming the ERC, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.