Can You Take the Pandemic Employee Retention Tax Credit?

New Rules May Make Your Practice Eligible, Even If You Took a PPP Loan

An additional aspect of federal COVID relief recently became available for the first time to some small businesses, even if they previously took a Paycheck Protection Program (PPP) loan. Find out more about the Employee Retention Credit (ERC) — it might help you manage your practice’s payroll in the first half of 2021.

This tax credit to be claimed for 2020 was originally placed in CARES Act assistance as mutually exclusive from taking a PPP loan. The ERC is a refundable payroll tax credit against an employer’s share of FICA taxes[1] that originally was available only to taxpayers who had their business fully or partially suspended by government order during at least one quarter in 2020, or those that suffered a plunge in gross receipts greater than 50% for quarters in 2020 relative to the same quarters in 2019.[2]

The ERC in its first round offered smaller employers credit for up to 50% of qualified wages for employees paid but not working between March 12, 2020, and Jan. 1, 2021, although qualified wages are capped at $10,000 per employee for the year.

Changes in 2021

	Old ERC (2020)	New ERC (Q1 & Q2 2021)
Eligible even if forgivable PPP loan received ?	Yes	Yes
Applicable period	March 12, 2020 to January 1, 2021	January 1, 2021 to July 1, 2021
Eligibility	Gross receipts dropped > 50% vs 2019 quarter	Gross receipts dropped > 20% vs 2019 quarter
Eligibility 2	Operations partially or fully suspended by government order *Only wages paid during suspended period apply, whether working or not	Operations partially or fully suspended by government order *Only wages paid during suspended period apply, whether working or not
Value of Tax Credit	50% credit of qualified wages ^Capped at $10,000 for the entire year	70% of qualified wages ^Capped at $10,000 per quarter
What are qualified wages?	Wages as defined by IRC	Applies retroactively: Includes health plan expense even if wages were not paid to employees
Do expenses remain deductible?	No, you lose the income tax deduction for credit received	No, you lose the income tax deduction for credit received
How to claim?	Amend Payroll Tax Form 941	Payroll Tax Form 941, qualifying employers can receive an advance of ERC through Form 7200

 

Adjustments at the start of 2021 from the Consolidated Appropriations Act provide for a tax credit of up to 70% of qualified wages paid from Jan. 1 to July 1, 2021. For new applicants, this assistance applies retroactively to March 2020, and it now includes health plan expense, even if wages were not paid to employees during a certain period in the pandemic.

Most other computations for eligibility remain the same as 2020, including a cap at $10,000 of qualified wages per employee, but that now applies by quarter, instead of for a full year.[3]

One key change: The new ERC extension applies to practices and small businesses with less-severe loss of income: If your gross receipts in Q1 and Q2 of 2021 drop more than 20%, rather than more than 50%, versus the same quarter in 2019, you may be eligible. You also can choose the immediately preceding quarter for comparison (for example, 4Q 2020 vs. 1Q 2021).

A business can’t use the same wages paid for both PPP loan forgiveness and ERC. So we’d suggest using wages for PPP forgiveness that meet PPP rules but do not fall in the quarters when you may be eligible for ERC. In addition, maximize inclusion of non-payroll expenses in your PPP loan forgiveness application and consider deferring collections to the end of Q1 2021, if possible and worthwhile, to qualify for ERC during that portion of the year.

More Extensions and Allowances Added

The COVID stimulus bill signed at the end of 2020 also brought several important extensions and changes from the first round of relief. Here’s a brief guide to some of the most critical.

These elements were extended into 2021 from “COVID 1.0” measures last year, and affect both small businesses and individuals:

• Economic Injury Disaster Loans (EIDLs), which offer $10,000 of loan forgiveness ($1,000 per employee) to businesses demonstrating a revenue fall greater than 30% during an eight-week period beginning on March 2, 2020, or later — even if you received PPP
• Unemployment benefits (an additional $300 weekly per person was paid out by some states starting in early January)
• Federal student loan forbearance, which will continue until September by executive order of President Joe Biden
• Above-the-line charitable deduction, now allowed up to $600 for taxpayers who are married, filing jointly during 2021 and $300 for single filers
• 100% adjusted gross income (AGI) applicable for charitable deductions, up from 60% before COVID relief legislation
• Employer tuition or student loan payment benefits of up $5,250 a year remain tax-free for recipients until 2025

And these new allowances were added:

• 100% deduction for business meal expenses for 2021 and 2022
• Ability to roll over unused healthcare and dependent care flexible spending account (FSA) funds into a new year
• Same phaseout range for Lifetime Learning Credit for education expenses as the American Opportunity Tax Credit (AOTC)

However, these benefits ended in the new year:

• Exemption from distribution penalty for retirement accounts
• Suspension for eligible retirees of required minimum distributions (RMDs) from retirement accounts

Naturally, a few loose ends and questions remain for small businesses at the start of our second year confronting the coronavirus. Some could be addressed with future legislation or presidential executive orders.

Regardless, governmental assistance for you and your stretched practice and staff may be available in a variety of ways in the year ahead.

It Can Help to Speak with a Financial Professional

Relief measures related to the pandemic, including ERC and forgivable PPP loans, may be well-suited for your practice. Looking to discuss eligibility for this federal assistance, or another financial topic? Please contact Jesse Frehling at (212) 796-8732 or jfrehling@altfest.com, or book a free consultation online.

[1] https://gbq.com/extension-expansion-employee-retention-tax-credit/

[2] https://www.forbes.com/sites/anthonynitti/2020/12/25/breaking-down-the-employee-retention-credit-part-1/?sh=7da4fabaf3d3

[3] https://gbq.com/extension-expansion-employee-retention-tax-credit/

 

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