By Catherine Lightfoot, CPA, CHBC, Director of Healthcare, EEPB
The Consolidated Appropriations Act of 2021 held many tax relief breaks to continue supporting businesses as they navigate through the COVID-19 economy. What I want to focus on here is that even though the Act references 2021, a good portion of the potential savings is applicable to 2020. Let us review some history and work through the updates.
The COVID-19 relief packages were based on a similar principle. If you were an “eligible employer,” another phrase for Congress’s rambling definition of “small business,” and you paid your employees, you received a benefit. In other words, keep employees on the payroll and out of the unemployment lines, and you will be rewarded.
The original Cares Act passed in March of 2020 created two exclusive programs to facilitate keeping employees on the payroll. The popular one, the Paycheck Protection Program (PPP), gave millions of businesses with fewer than 500 employees a forgivable loan. If you took this loan, and many did, you were not allowed to use the second program, the Employee Retention Credit (ERC).
As a reminder, in the tax world, a “credit” works just like a gift card to pay your taxes, payroll taxes in this case. What makes this one an even better credit is that it is refundable. So, if your credit is more than your payroll tax liability, instead of stalling out as an overpayment to be applied to future tax obligations, you can actually receive a refund.
The ERC was limited to businesses with less than 500 employees. However, it was only available to taxpayers who either: 1) had their business fully or partially suspended during at least one quarter in 2020 (read government order to close or operate at reduced capacity), or 2) had a drop in gross receipts for a 2020 quarter compared to the same quarter in 2019. This drop had to be 50% for a 2020 quarter compared to 2019.
If eligible businesses met either of these criteria, they could claim a maximum credit of $5,000 per employee who was paid “qualified wages.” The definition of qualified wages changes based on the number of employees. If the business has less than 100 employees, all wages paid to qualify up to $10,000 of wages per employee. The ERC credit for 2020 is 50% of qualified wages. If the business is between 100 and 500 employees, only those wages paid for someone to not be working count.
Let me restate that under the original Cares Act, you could not use both programs (PPP and ERC). The Consolidated Appropriations Act of 2021 lifted that restriction. Now, everyone who borrowed a PPP loan under the first round of PPP funding can go back and claim ERC for 2020. But wait, there is a tiny catch. You cannot use the same payroll dollar for both programs. Okay, that sounds fair. But how do you choose? Well, the tax code actually says the ERC comes first. In other words, qualified payroll dollars paid in a qualified quarter would go first to the ERC and then the PPP.
Fair enough, with one issue. What if you have already applied those dollars on a PPP loan forgiveness application and either: a) have been forgiven, or b) are pending forgiveness approval? Do you have to amend the application? Resubmit? At the writing of this article, that has not yet been addressed. Therefore, all we can do is follow the language of the law, i.e. that the same payroll dollar cannot be used for both programs. So, if you already have those payroll monies on a PPP application, you cannot use the same payroll for the ERC.
The good news is you probably still have ERC dollars available to claim. Consider these options:
- The ERC credit for 2020 applies to eligible wages paid within March 12 – December 31, 2020. Most PPP loans were not funded until late April to early May. The payroll for the PPP forgiveness could not start until after the loan was funded. Therefore, some early wages paid in late Q1 or early Q2 might be eligible for the ERC.
- Wages paid over $100,000 (apportioned to the coverage period of the PPP loan) per employee did not qualify for PPP loan forgiveness. These additional wages over the $100,000 limitation might be eligible for the ERC.
- Healthcare costs are considered eligible wages. Therefore, even if you furloughed all of your employees and still paid their health insurance, this health insurance cost might be eligible for the ERC.
- What if you have not yet completed your PPP forgiveness application? Could you still qualify for full forgiveness by allocating just the right amount of payroll and listing rent and other eligible expenses for the rest of the PPP fund? This could possibly save you some payroll monies that might be eligible for the ERC credit.
There is plenty more opportunity to claim ERC for 2021 quarters. However, before you press on, double back to be sure you are not leaving 2020 ERC dollars on the table.