Don’t Forget About Employee Retention Credit Advances
Last week the Small Business Administration (SBA) announced the launch of its Paycheck Protection Program (PPP) loan forgiveness portal, which opens August 4, 2021, to streamline applications for PPP loans of $150K or less. Concurrently, the new COVID Delta variant is now a cause for concern as cases in New Jersey have quadrupled since last month. The combination of these events has many business owners concerned since it appears that the PPP will not be replenished with additional funding. They’re left wondering, what will happen if restrictive government orders are reimposed and how will businesses be able to survive yet another COVID wave?
Given the trauma of the last 18 months, it is not surprising these changes are causing anxiety, especially as many businesses are just returning to pre-pandemic levels. However, the good news is many companies can qualify for an Employee Retention Credit (ERC) Advance. It allows those experiencing qualifying conditions to receive an advance on expected payroll tax savings available through the ERC. The only difference is that businesses receive the money immediately rather than wait to claim it at the end of the quarter. So, let’s take a closer look at this handy tool for those needing an additional working capital infusion.
Key Program Details
For calendar quarters in 2020, there were no restrictions on the type of eligible employers that could claim the advance and no maximum credit amount as long as the credit was for qualifying wages up to $5,000 credit maximum per employee. The only requirement was that an employer reduces payroll tax deposits in anticipation of the credit before requesting an advance.
New in 2021
The rules for 2021 were changed when the Consolidated Appropriations Act, 2021 (CAA) was passed late last December. Under the CAA, eligibility was tightened only to allow advance payments to eligible small businesses. An eligible small business is defined as a company with 500 employees or less in 2019. Under these rules, a business can elect to receive an advance equal to 70% of the average quarterly wages paid in 2019, also known as the 70% advance rule. There is another 70% limitation for the advance credit, and that is the credit is limited to 70% of the amount of the qualified wages you paid to employees so far in the current quarter. The only requirement is that quarterly payroll tax deposits must be reduced before an advance can be requested.
Average Quarterly Wages
For the 70% advance rule purposes, the term “average quarterly wages” refers to the average of wages, or compensation, determined without regard to the social security wage base, paid in each calendar quarter in 2019.
For businesses that file a quarterly payroll tax return (IRS Form 941), wages are determined by averaging the amount listed on Line 5c on all forms filed for 2019. For those filing an annual payroll tax return, wages are calculated by dividing the amounts reported on Line 4 on the 2019 Form 943, Line 4c on Form 944, and the sum of the amounts in the compensation column for Line 2 and Line 9 on Form CT-1, and then divide the total by 4.
It is important to note that a small eligible employer who opens for business in 2021 cannot receive an advance. However, these businesses can reduce the number of payroll deposits in anticipation of claiming the credit.
Taxpayers need to be aware that the wages used to qualify for PPP forgiveness cannot also be used for the ERC. Since PPP wages are forgiven dollar for dollar versus a credit equal to only 70% of the ERC wages, the two incentives should be thoroughly reviewed and analyzed to ensure the maximum tax benefit.
While the PPP appears to have reached its end, that does not mean New Jersey and Pennsylvania-area businesses don’t have other options. The ERC and available advances can result in substantial savings. An amended 941 can be filed to claim the employee retention credit if you missed taking advantage of the advance credit.
Contact Us
If you are interested in learning more about ERC advances or applying for one, 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 should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.