Employee Retention Credit – An Alternative to the Paycheck Protection Program

In the search for assistance in managing the COVID-19 crisis, many businesses have turned to the Paycheck Protection Program (PPP). Borrowers can receive a low-interest loan and have a portion, or all, of the loan forgiven if proceeds are spent on certain expenses. This has made the program incredibly popular and an important option for financing and cash flow assistance. The SBA reported that between April 27, 2020, and June 6, 2020, 135,203 loans totaling $16.9B had been issued to New Jersey businesses. In Pennsylvania, similar numbers were reported with 157,491 loans totaling $20.5B. These numbers are staggering and reflect the economic damage caused by the pandemic.

While the PPP loan is the most popular, there are other options for businesses to choose from when they need to enhance cash flow. The Employee Retention Credit (ERC) is a good choice that delivers for those who have not taken or are not eligible for a PPP loan. The following is a summary of key details.

What is the Employee Retention Credit?

The ERC is a refundable tax credit against the employer’s share of certain employment taxes. The amount of the credit is equal to 50% of the qualified wages an employer pays to employees between March 12, 2020, and January 1, 2021. The credit was designed to help businesses increase cash flow by reducing taxes owed on employee compensation. Businesses can get immediate access to the credit by reporting the qualified wages on their quarterly Form 941 and decreasing the employer share of Social Security taxes. If tax deposits are not sufficient to cover the credit, the company will be eligible to receive an advance payment from the IRS.

Who is Eligible?

Businesses and tax-exempt organizations that were in operation at the start of the year are eligible to apply. It is important to note that those who received a loan from the Paycheck Protection Program are ineligible to participate. Also, a business must meet one of the requirements outlined below:

• The company must have experienced a partial or full business suspension due to government orders limiting operations, travel, and other restrictions; or,
• They must have experienced a significant decline in gross receipts, to be determined by the Gross Receipts Decline (GRD) test.

For those businesses that started in 2020, the GRD test will not apply because of the lack of historical financial data available. This means they will need to wait for directions from the Treasury on how to make the calculation.

What is a Significant Decline in Gross Receipts?
A significant decline begins with the first calendar quarter in 2020 in which gross receipts are 50% less when compared to the same period in 2019. The gross receipts test is considered to end in the 2020 calendar quarter when gross receipts are greater than 80% when compared to the same period in 2019, or in the first quarter of 2021.

What are Qualified Wages?

Qualified wages are determined by the total number of employees retained by the company. When a business averaged more than 100 full-time employees during 2019, qualified wages typically are compensation, including certain healthcare costs (up to $10,000 per employee), paid to employees not providing services because operations were reduced or suspended. In this situation, businesses can only count wages up to the amount an employee would have been paid during the 30 days before the hardship.

When a business averaged less than 100 full-time employees in 2019, qualified wages include compensation and healthcare costs (up to $10,000 per employee) paid to any employee when operations were reduced or the period of decline in gross receipts, regardless of whether employees are providing services.

Calculating Full Time Employees
According to the ERC, a full-time employee is one that averaged 30 hours per week or 130 hours per month in 2019. For businesses that operated for the entire 2019 calendar year, the number of full-time employees is determined by taking the sum of full-time employees each month and dividing that by 12 months. For those who started operations in 2020, take the sum of full-time employees each full month of operations and then divide it by that number of months.

Contact Us
Many businesses that have not received a PPP loan are eligible to take advantage of the ERC, which can help generate a much-needed cash flow infusion. Since the eligibility and determination criteria are fairly involved, it is important to consult with a tax advisor. If you have questions about the information outlined above or need assistance with another COVID-19-related business issue, Klatzkin can help. For more information or to see if your business qualifies, click here to contact us. We look forward to speaking with you soon.

The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.