Obtaining the Maximum Benefits from the Employee Retention Credit

2020 was a year of both great challenges and opportunities. If your business was somehow tied to tourism and travel, as so many are in the Flagstaff area, you are to be congratulated for surviving these last 12 months. On the other hand, some businesses, e.g., homebuilding and real estate sales, probably had a great year. My objective in writing this article is give you, the business owner, just enough information to enable you to ask questions of your tax pro on how to obtain the maximum benefits from the Employee Retention Credit (ERC).

I’ve spent many hours over the last year digesting the rules related to this program. In the last three months, two major stimulus bills have made significant changes to the program, most of which have been business-friendly. During most of 2020, you could take advantage of one or the other, and most opted for the Payroll Protection Plan (PPP), since it received, by far, the most amount of press, with the ERC mostly ignored.

Since the CARES Act was passed, there have been continual changes to these programs, some good and others not so favorable. The PPP is administered by SBA, and the ERC is administered by IRS.

As of March 25, Congress has passed a bill extending the application filing date to May 31. The president is expected to sign the bill.

It is recommended that business owners postpone their PPP loan forgiveness application until it is determined which quarters in 2020 and 2021 the company is eligible to participate in the ERC program. By plotting the wages and allowable expenses for 2020 and 2021, the business will be able to optimize the total funds received from these programs. Proper planning will provide the maximum benefits to the company and its owners.

Below is a summary of the basic rules in determining whether a business is eligible to participate in the ERC.

For 2020, there would need to be a drop in revenue of least 50%, comparing similar quarters to 2019, or the business would have had to have suffered a partial or total shutdown as the result of a governmental order to close all or part of business operations. If eligible, the credit is a maximum of $5,000 per employee, per year: the first $10,000 in wages x 50% = $5,000, for a maximum of $5,000 per employee.

For 2021, there would need to be a drop in revenue of least 20% in any quarter of 2021 when compared to either 2020 or 2019, whichever year works in your favor. The amount of credit is based upon the first $10,000 x 70% credit = $7,000, per quarter, per employee. The same as the 2020 program, if you experienced a partial or complete shutdown, you do not need to meet the revenue decline requirement.

As you can see, the 2021 program is much more generous than 2020. If an employee earns $40,000 per year, the maximum credit for 2020 is $5,000. That same scenario in 2021 has a maximum benefit of $28,000 if the company passes the test for all four quarters. That’s a 460% increase for 2021.

The owner and his/her spouse’s wages are taken into account for the ERC. All other related parties to the 50% owner are not part of the ERC qualified wages.  The IRS has published a table of those related parties whose wages are not eligible for the credit. The owner and his/her spouse was not on the list, meaning those wages are eligible for the ERC.

Finally, with proper planning and integration of the PPP forgiveness and Employee Retention Credit, it is possible to obtain the maximum ERC credit and, at the same time, obtain PPP forgiveness. By knowing the numbers for 2019, 2020 and 2021, the business owner will be able to obtain the largest benefit from these two programs. Accurate and timely business accounting records have never been more important. FBN

By John Burke, CPA

Born and raised in the Chicago area, John Burke, CPA, has worked for 40 years to help individuals and businesses position themselves to take advantage of tax benefits and access capital now being offered by the IRS and SBA.