Businesses large and small have an opportunity to obtain more tax relief thanks to the Consolidated Appropriations Act, which has expanded the benefits available to employers through the Employee Retention Credit.
The ERC was first introduced last year as part of the package of benefits, known as the CARES Act, designed to help businesses stay afloat during the COVID-19 pandemic and keep workers employed. In 2020, it allowed certain businesses to obtain up to $5,000 in federal tax credit per eligible employee for the year, but the CAA now allows employers who meet specific criteria to claim up to $7,000 per eligible employee per quarter for the first and second quarters of 2021. It also retroactively allows businesses that received Paycheck Protection Program loans in 2020 to claim the ERC, which previously had not been permitted.
“These changes … present an opportunity for employers meeting certain eligibility criteria to obtain refundable payroll tax credits of potentially significant dollar value,” said Nicole Szczepanek, partner at Baker Tilly, a tax advisory firm.
One of the other significant changes for 2021 was the increase in the threshold for eligibility as a “small employer” under the ERC. Businesses can now qualify as small employers if they employ 500 or fewer full-time workers, versus the previous cutoff at 100 workers. Small employers have the opportunity to qualify for the ERC for all of their full-time workers, while large employers have more restrictions on the employees that qualify.
In addition, the CAA has made it easier for businesses to qualify for relief by allowing businesses to qualify for the credit if they experienced a 20 percent decline in gross receipts, quarter over quarter, versus the previous threshold of a 50 percent decline.
“Based on these changes to the credit for 2021, a remarkable opportunity is presented to employers that can show they meet these criteria,” said Szczepanek.
Employers that have had a partial or total suspension of their business operations because of a governmental order that restricts them still remain eligible for the ERC as well.
Jeffrey Tate, partner at Washington, D.C.-based law firm Arent Fox, said employers can approach the ERC as a multi-step process. Employers first should determine whether or not they are eligible as a business, either because of a decline in their gross receipts or because of government-mandated restrictions on their businesses. Then they need to determine whether they are a small business or a large business—there are also criteria covering businesses that are affiliated with larger entities. Then, they need to determine which employees are eligible to be covered by the ERC, and then calculate the credit they are eligible to receive.
Small employers might be readily able to calculate which employees would be eligible to qualify for the ERC, but for larger employers, the calculation could be trickier, he said.
“You may have to go back and talk to managers and do a survey to try to figure out who was working and how were they working so that you can know which employees were eligible for the credit,” said Tate. “I think there will be an exercise either with the accounting and the HR staff, or with assistance from advisors, on how to get this information. You can’t just guess—that's not going to work for the credit. You're going to need some type of substantiation … for what you're claiming.”
Szczepanek of Baker Tilly recommended that with respect to the 2020 tax year, businesses benefiting from the PPP should delay filing for loan forgiveness until guidance about how the ERC and loan forgiveness interact is available. Businesses should also delay filing adjusted quarterly returns (Form 941-X) “to perfect their right to the ERC,” she said.
“As it relates to the 2021 tax year, based on the time necessary to properly assess qualification for the credit, we are expecting many businesses … to timely file their Form 941 and then amend at a later date by filing Form 941-X to claim their credit,” she said. “Form 941 is due within 30 days of the quarter close, which may not leave much time for business to properly assess eligibility, gather the necessary information to compute the credit, compute the credit, and file the amended form.”
Szczepanek also noted that the test for employer eligibility that depends upon government suspension of the business “leaves room for some subjectivity.”
Some businesses may be eligible under the Suspended Supplier Exception, whereby an employer’s business operations are fully or partially suspended as a result of the inability to obtain critical goods or materials from its suppliers that were necessary for the continuation of its own operations, she explained. Other businesses may be able to establish eligibility for the credit because of government-ordered social distancing.
“Within the food and beverage industry, an employer able to demonstrate a partial suspension of operations due to social distancing requirements may be eligible for this credit, even if the Gross Receipts Test is not met,” Szczepanek said.
Jennifer Kerrigan, sales manager at HR Screening Services, which works with partner FMS Solutions to provide services to small businesses in the food industry, said other types of tax relief may also be available, including the Work Opportunity Tax Credit.
“The WOTC can provide a nice tax credit for simply hiring the people you normally would hire,” she said. “When the candidate falls into one of the designated WOTC categories, especially now in the midst of the COVID-19 pandemic, we are seeing more and more people qualifying for this bottom-line tax credit.”
A qualified candidate can bring in a credit of about $2,400 on average, Kerrigan said.
“The WOTC is proving to be very lucrative right now as people are returning to work after being laid off in 2020 and are now returning to the work force,” she said.
“Those companies that suffered the most and had to shut their doors or showed a significant decrease in gross receipts, are the ones that will benefit from the ERC portion of the CARES Act the most,” Kerrigan said. “Those companies that were considered essential, and operated throughout the pandemic, may not see the benefit as much, because they did not experience a swift decrease in gross receipts or have to close.”
In fact, she pointed out, some businesses saw an increase in gross receipts during the peak of the pandemic because so many other businesses were forced to close, but they still may qualify for WOTC benefits, she said.
Related: Small Business Loans Further Prioritized; IRS: Companies Can Get Tax Credit Despite Not Getting PPP Loan Forgiveness.