The Employee Retention Credit (ERC) has been a significant tax break for employers, distributing over $1 billion to more than 30,000 small businesses. According to a recent White House fact sheet, the refundable, advanceable credit now covers up to $28,000 for each employee in 2021.
This COVID-related policy helped boost business cash flow and reduce unemployment during the pandemic’s economic downturn. Encouraged by the results, the federal government now wants to increase business participation. The American Rescue Plan Act extends the ERC until December 31, 2021. Following the extension, the IRS issued new guidance, expanding eligibility for the third and fourth quarters of 2021.
Key Takeaways from the New Guidance
Notice 2021-49 has several important clarifications, responding to business owner questions about the ERC:
- ERC doesn’t have a full-time equivalent calculation, like the Paycheck Protection Program (PPP). This led many business owners to ask if they should use that calculation. New guidance clarifies that they do not.
- The ERC is available to businesses with 100-plus employees in 2020 and 500-plus employees in 2021; however, the credit is limited to wages paid to employees who did not work but still received compensation (wages and/or health insurance coverage). Businesses must count the number of full-time employees as those working over 30 hours a week or 130 hours a month. This differs from PPP eligibility, where the IRS required the full-time equivalent calculation.
- Tips count as ERC wages. Employers with tipped employees can still take the tip credit, using the same tips they claim for the ERC.
- Wages for shareholders owning more than 50 percent of the company don’t count for the ERC. This is new guidance, as the ERC previously mentioned relatives but had no definitive statement for shareholders. Guidance now exempts shareholders who hold more than 50 percent of the company, unless they have no living relatives.
- COVID relief grants, such as PPP, Shuttered Venue Operators Grant (SVOG) and Restaurant Revitalization, aren’t included in gross receipt tests.
- Recovery startup businesses must have less than $1 million in gross receipts, capped at $50,000 in any given quarter.
- Businesses must take their ERC salary reduction on the income tax return in the year of credit. The 2020 ERC credit must reduce the 2020 C-corp salary deduction, not in 2021, even if the 2020 ERC is filed in 2021.
Eligible Businesses Should Claim the Credit
The IRS has set no size limit on companies applying for the ERC, although it treats small and large businesses differently. Based on the average number of full-time employees in 2019, employers with fewer than 100 average full-time employees (or fewer than 500 in 2021) are allowed to claim ERC for all employees. For those employers with more than 100 average full-time employees (or more than 500 in 2021), only the costs paid for employees who did not work but still received wages and/or health insurance are eligible for ERC. The tax credit sunsets at the end of 2021. You can file retroactive claims on amended payroll tax returns, as long as the statute of limitations hasn’t expired. You have five years from the date of filing.
The Opportunity is in Your Hands
Having made this assistance available, the federal government leaves the opportunity to you. If quarterly gross receipts fell by more than 20 percent this year compared to the same quarter in 2019, your business is eligible. You should consider filing for a retroactive ERC refund on qualified wages for past quarters. It’s worth noting that the IRS is working its way through a backlog of amended returns.
The federal government also offers other resources for small businesses, such as paid-leave tax credits and various SBA programs. These changes offer significant assistance to operations recovering from the pandemic. As always, there are specific documentation requirements and you have to weigh cash flow benefits against future tax obligations.
To evaluate these business opportunities while minimizing your tax exposure, contact Tomika Bullet or your Windham Brannon advisor.
