Michelle Thornburg, Koski Professional Group, P.C.
You may have heard about the Employee Retention Credit (ERC) but thought it wouldn’t apply to your business. The ERC was extended through December 31, 2021 and the qualifying requirements to claim the credits were reduced. As a result, you may be eligible for sizable tax credits.
You previously could take either the PPP loan or the ERC, but not both. This was changed so you can take both the PPP and the ERC, but you must use different wages for claiming each. There are two ways your business can qualify for the ERC. Either you had to (1) fully or partially suspend operations due to a governmental order, or (2) have a decline in gross receipts.
Decline in Gross Receipts
The qualifying decline in gross receipts is evaluated by quarter. The gross receipts amount to use in your comparison is based on your tax accounting method (cash or accrual).
*If you qualify in one quarter in 2020, then you automatically qualify for each of the next calendar quarters in 2020, until the quarter after your gross receipts exceed 80% of the same 2019 quarter.
Note: If you have affiliates (one or more people have control over multiple entities), then all affiliates must be added together in order to determine whether you qualify for the ERC.
Maximum Credit
*2020 credits are only eligible on wages paid between March 13, 2020 and December 31, 2020.
The wages of a majority owner, spouse, children, siblings, and other relatives of the business owner are not eligible for the credit.
The 2021 credits are more generous than the credits for 2020 and can provide a big boost to your cash flow. For example, if you have 25 employees, paid each of them $10,000 or more during Q1 2021 and qualify, your credit would be $175,000 ($10,000 x 70% x 25) plus 70% of the employer share of health coverage paid in the quarter. Additionally, you would then also qualify for the credit in Q2 2021.
For credits on 2020 wages, if your business (and affiliates) had more than 100 full-time employees in 2019, the business (and affiliates) is considered to be a large employer and only wages being paid where the employee is not actually working are eligible. For 2021, this large employer threshold changed to 500 full-time employees in 2019. So, many small businesses will be eligible for credits on employees, whether the employees were actually working or not.
Wages for which you received paid family and sick leave credits or employees for which you receive Work Opportunity Tax Credits are not eligible for this credit.
How to claim the credits
The credits must be claimed on your Federal Form 941 payroll tax return for the specific quarter(s) in which you qualify. If you have already filed a quarter for which you qualify, you can amend the return to get the credit. You have three years from the original due date of the quarterly return to file an amended return and claim the credit.
Documentation
You must retain documentation of your calculation for at least 5 years from the date on which you file claiming the ERC.
Tax Implications
You will have to reduce your eligible payroll expenses on your income tax return by the credit that will be claimed. The cash received will outweigh the income tax resulting from the reduced expense deduction.
Planning Opportunities
Planning is extremely important for the remainder of 2021 to help ensure qualification for the ERC, to maximize the ERC in conjunction with your PPP loan forgiveness application, and to maximize the amount of credit the employer can receive. Evaluation of timing on revenue, payment of wages/bonuses to employees, and employee wages to claim for PPP forgiveness must be considered.
If you have questions or would like to talk about whether your business may qualify, please contact Matt McNary or Michelle Thornburg at Koski Professional Group (402-445-4040).
Disclaimer: The above information is intended to be current as of the date published but may or may not reflect the most current tax law. This information is intended to be general tax information and is not intended to be tax advice. If you would like to discuss how it may relate specifically to your business, please contact Koski Professional Group.