On-Demand | The Enhanced ERC
This timely presentation analyzed the ERC and gave participants an understanding of how this transformative credit could benefit your organization.
Jeff Kelson:Good morning, everyone. We're all here to get informed about the Employee Retention Credit, ERC, as we mentioned it. So, just quickly, what's the reason for its existence? Well, it's to encourage employers to keep employees on the payroll during the pandemic and COVID-19. So, it came out in 2020 during the time and it didn't really get a lot of notoriety for a couple of reasons we'll go through, but mostly because it couldn't coexist with the PPP at the time. And secondly, it was not a gigantic benefit when you look at absolute numbers. But times have changed. More laws have come down and let's go over this.
So, first of all, it's important to appreciate that the Employee Retention Credit is fully refundable. And it works against your payroll taxes, so under Form 941, and so it goes against your payroll withholdings. It could be 50% or 70% of qualified wages, depending what year we're talking about, 2020 or 2021. But in both instances it's limited to the first $10,000 in wages. For 2020, it's not as magnificent. It's limited to half of $10,000 in wages per employee for the entire year, beginning after March 13th, 2020. That's the pandemic demarcation date. So, the most you can claim is 5,000 per employee. For 2021, it's been put on steroids. It's been exponentially better, so much so that you can claim 70% of 10,000 per employee per quarter.
So, whereas in 2020, you're limited to $5,000 per employee if you qualify, in 2021 it could be up to 28,000 per employee. So, it's over five times as beneficial as the 2020 credit. That's why it's become much more newsworthy, because now it's very, very meaningful. And note, the only proviso is that if you do get this credit, you don't get a deduction equal to the credit. So, it will reduce your payroll tax deduction. So, I'm sure most people would deal with that, knowing that they're getting the money, which is fine. So, it's almost like it's taxable in that sense, right?
So, the evolution, as I mentioned, it originally came out in the CARES Act in 2020. And again, it didn't get as much notoriety because it couldn't coexist with the PPP and 5,000 per employee up to a maximum of 100, it had its limitations. But the Consolidated Appropriations Act of 2021 changed everything. Made it much more beneficial. And then the American Rescue Plan Act of 2021, ARPA, really put it into overdrive, saying it can coexist with the PPP. So, now this is in play and it's become very important and very valuable to many employers throughout the country. It's getting a tremendous amount of attention, maybe still not as much as it should, however. So, the ERC is now available to recipients of PPP loans. So, eligible employers can claim it on any wages that the PPP recipients did not use for loan forgiveness.
So, as you know, when you receive a PPP loan, you can apply for forgiveness and there's a formula you can use between payroll and overhead. You cannot double dip. So, if you're asking for forgiveness on payroll in your PPP process, you cannot also claim an ERC deduction on it. But if you manage your allocation of payroll and overhead so much so that there's a lot of payroll that then can be claimed for forgiveness, which could go 60% wages or payroll and 40% overhead, a minimum 60% payroll in your PPP forgiveness, you can claim the ERC and all the rest of the wages that you did not use. So, people making over $100,000, you can't use all their wages for the PPP forgiveness if you limit it to 60%. Maybe you had a lot more than 60% in payroll then you're using for your forgiveness. That would also qualify.
So, you can even bifurcate within an individual's payroll. And some of it may qualify for PPP loan forgiveness, and the rest would be eligible for the Employee Retention Credit. The IRS came out with rules on this pretty much showing how that can be done. One of the more important things they did is they made it retroactive to March 12th, 2020. So, before we were always under the impression that if you had a PPP loan outstanding, forget about the ERC. Now you can go back to those quarterly payroll returns for the second, third and fourth quarter of 2020 and amend them if you can prove that, even though you had a PPP loan, that there was wages that you paid that were not part of the forgiveness. You can go back and file them in the return and get refunds of payroll taxes for the second, third and fourth quarter of 2020.
For 2021, it's a big change. Well, it's many changes, actually. 2021, this is like a different beast. This is so much more valuable for 2021 payroll returns. First of all, to qualify you had to have a 50% decline in 2020 in those quarters versus the 2019 quarters. And that was a significant amount and not everybody, not every entity, qualified. That was one of the tests to qualify. For 2021, they reduced the 50% decline to only a 20% decline. And again, you're comparing it to 2019. Now, don't worry. We're going to go into examples later on, with an optional look back period as well. So, pretty impressive that you only had to experience a 20%. So, your first quarter of 2021 would be compared to your first quarter of 2019. Everything goes against 2019. And if you experienced more than a 20% decline, you're in. Which is big difference in the 50% from 2020.
And also the credit percentage increased. We showed that in a previous slide. Where 50% of $10,000 in wages in 2020 is now 70% of $10,000 in wages per quarter per employee for 2021. So, that's why I mentioned before, the benefit's gone up over five times between the two years. And the ERC is now extended. So, all of these Acts kept extending it. Now, it's for the whole year of 2021. So, we're right in the middle of this. We have plenty of more quarters to qualify. So, as I mentioned before, the maximum credit for 2021 can be up to 28,000 if you're qualified for each quarter. Remember, you'd have to qualify. Each quarter is looked at discretely, whereby in 2020, we're limited to half of 10,000 per employee per year. So, the most was 5,000.
Some other changes. We haven't even hit quarter three and four yet of 2021 and there's two things buried in these Acts that hasn't been getting any attention. Let's talk about the Recovery Start-up Business one. This one hasn't started yet. It will start on July 1st when the third quarter begins. But listen to this. If you began carrying on a trade or business after February 15th, 2020, your annualized gross receipts have been $1 million or less, you can get a credit. You don't have to look at revenues. You don't have to look at whether you were shut down by a governmental authority. Nothing. You would be eligible for credit up to $50,000 for each of the third and fourth quarter. So, the max is $100,000.
So, if you had eight employees in the third quarter of 2021 and you started after February 15th, 2020, and you annualized gross receipts $1 million or less, you would max, because eight employees times 7,000 is 56, so you'd be limited to the $50,000 and you would get it for the third quarter. And again, if you had those same eight employees for the fourth quarter, you'd get it again. So, you can get $100,000 credit without having to qualify your business on a gross receipts test or governmental authority if you began carrying on a trade or business after February 15th, 2020. I haven't seen much news about this. Although, like I said, July 1st it'll be in play and that's when you would be eligible. Because it's only for the third and fourth quarter of 2021.
The other one they put in here is, in my mind, too little, too late. I think this was earmarked to a cruise industry. That's saying that if you had over 90% reduction in your gross receipts, you don't have to worry about how many employees you had because we didn't go into it yet but Ben will, you're limited to 500 employees in 2019 for 2021 credit and you were maxed out at 100 employees for the 2020 credit, this would go above and beyond that, that they don't care how many employees you had. If you had a 90% reduction, you can get the ERC on all your employees.
The problem is, is that it's not taking effect until the third quarter of 2021. And with the United States reopening all its businesses, I don't think there's going to be many employers that qualify. I think this was really earmarked at the cruise industry and even then, as you know, a lot of cruise lines are getting back operations and probably won't see a 90% decrease. But there it is. It's out there. But I think the Recovery Start-up Business is the one that we'll see a lot more traction with. Okay, Ben, you can talk about the eligibility.
Ben Aspir:Thanks, Jeff.
So, we have this great credit. You can take a maximum in 2021 of a $28,000 payroll tax credit, $28,000 per employee, and $7,000 in 2020 per employee. So, a $35,000 credit potentially if you're eligible for the Employee Retention Credit. So, how do you become eligible for the Employee Retention Credit? Other than that the [recovery start a business 00:13:03] and the severely distressed businesses, which we'll talk about later, you qualify for the ERC, you either need a significant decline in gross receipts, which we'll talk about, or you need a partial or fully suspension of operations in any calendar core in 2020 or '21 due to orders from a governmental authority limiting commerce, travel, or group meetings. So, obviously it's a mouthful and we'll walk through a little more detail. It's a lot more nuanced than a decline of gross receipts, which is basically numbers-based. You either have a decline or you don't.
So, let's start with a significant decline of gross receipts. So, as Jeff mentioned, there's several different iterations of the ERC. So, for 2020, the retention grade, you needed to demonstrate from March 12th through December 31st, 2020, in any quarter, a 50% decline in gross receipts compared to the same quarter of 2019. So, the second quarter of 2020 versus the second quarter of 2019, you have a 50% decline in gross receipts, then for purposes of the ERC, you have a significant decline in gross receipts. And the way the retention credit works is for 2020, you basically get the next quarter as well. So, if you're eligible for Q2, you'll get the Q3 of '20 as well. For 2021, the hurdle is significantly lower to clear for this declining gross receipts threshold. It was decreased from 50% to 20%. So, a business would only need to demonstrate a 20% decline year over year.
So, let's say the first quarter of '21 versus the first quarter of 2019, they would only need to demonstrate a 20% decline in gross receipts. And the beauty of the 2021 ERC is that they added this optional election. It only applies to 2021. They let you look back to the prior quarter. And we'll walk through an example to make it a little bit clearer. Well, basically what that election allows you to do is, for purposes of the first quarter of 2021 retention credit, if you don't have that 20% decline of gross receipts, they let you look back one quarter. They give you a mulligan. So, the quarter prior to Q1 '21 is the fourth quarter of '20. If the fourth quarter of '20 has a 20% decline in gross receipts as compared to 2019, then that would make a business potentially eligible for the credit on the first quarter of '21.
So, what are gross receipts when measuring the significant decline of gross receipts? Total sales, less returns and allowances. It includes interest and dividends, rents and royalties. Gross receipts are not reduced by cost of goods sold. It's important to note that the significant decline in gross receipts, it doesn't have to be related to COVID-19. It could be that a business loses a big client or whatever, any other reason. It does not need to specifically be related to COVID-19 to have a decline in gross receipts. Also, tax-exempt organizations, they're eligible for the retention. We're using the word businesses, but it's also nonprofits. They're eligible for the retention credit. We recently assisted a nonprofit client with their retention credit and it was a significant amount, and it basically covered their next payroll, the amount of credit. So, businesses and nonprofits could benefit from the retention credit.
Ben Aspir:So, the correct answer is false. The ERC is also available for the 2021 tax year. As Jeff mentioned at the beginning of our session, the Consolidated Appropriations Act extended the retention credit through the first half of '21 and then the ARPA extended it through the second half of 2021. So, the Employee Retention Credit is available as it stands through the end of 2021. So, we first spoke about the significant decline of gross receipts. You need to demonstrate either that or that the business was fully or partially suspended. It's deemed to be fully or partially suspended if all the following three conditions have been met: an appropriate, governmental authority imposes restrictions on the employer's operations; the order limits commerce, travel, or group meetings due to COVID-19; and the order affects an employer’s typical operations. So, what are some examples? So, it needs to be a governmental order.
It can't be just a suggestion by a town official. It has to be an official order, an order from a city's mayor stating that all non-essential business must closed for a specified period, a state's emergency proclamation that residents must shelter in place for a specified period, an order from a local official imposing a curfew, or lastly, I mean, this is not an all-inclusive list but just some examples, an order from a local health department mandating a workplace closure for cleaning and disinfecting. Keep in mind, right? It's an either/or test. This is the significant decline of receipts or the partial or full suspension of operations. It's better to have a significant decline in gross receipts. Because if you have a significant decline of gross receipts, you get the entire quarter for purposes of the retention credit. Whereas if you have a suspension of operations, you only can claim the retention credit for the period that the suspension occurred.
So, if on April 1, the suspension started. On April 20th, the suspension ended. You can only claim the retention credit for the wages paid during that time period. So, in order to claim the retention credit, it must be an actual business, which is defined in code section 162. Household employees, even though they're paid on W2, those wages are not eligible for the retention credit. Self-employed earnings are not eligible. So, if you're a partner in a partnership and get guaranteed payments, none of those would be eligible for the retention credit. But the employees of the partners, of the self-employed individuals, those wages are obviously eligible for the retention credit. Like I mentioned, nonprofits may claim the retention credit.
So, a business must have paid qualified wages, which also includes an eligible employees' qualified health plan expense. It's not just strictly wages. So, keep that in mind. If there's not enough wages to max out the cap, that's $10,000 of wages, you could use health expenses. This is only a rule, the next bullet point, it only applies to 2020. They didn't want employers manipulating wages to claim the retention credit. Wages cannot exceed the amount the employee would have been paid for working the same duration during the 30 days preceding the period. This has been, I'm sure Jeff can attest to this as well, this is one of the most common questions we've been getting, and it's far from clear, but compensation of owners or shareholders that own more than 50%, our general position is that those wages paid to those more than 50% shareholders would not be eligible. Wages-
Jeff Kelson: I think it's also the view of many practitioners following all the related party rules, that greater than 50% shareholders or owners and their related parties would not qualify.
Ben Aspir:Right. And-
Jeff Kelson:And we say 50% could, but greater than, so 50.1, would not.
Ben Aspir:Right. While also applying familial attribution rules, where if wife and husband each own 26% but combined they own more than 50%, so their wages would not be eligible for this, essentially. Their employee's wages to non-relatives would be eligible for the retention credit. So, when calculating the retention credit, right? So, you've determined that you either have a significant decline of gross receipts or a suspension of operations. You need to determine whether the business or the nonprofit is considered a, quote-unquote, "a large employer" for the retention credit. So, the number of full-time employees will dictate the amount of the credit. So, for the retention credit purposes, if an employer is considered a large employer, they can only claim the retention credit for employees paid not to work.
Businesses of any size can claim the credit. But if they're over that threshold, which I'll talk about in a second, they could only claim the credit for employees paid not to work. Obviously if they're under that threshold, they can claim the credit for all employees. So, the measurement for whether a company is a large employer, you have to look back at 2019. So, for purposes of the 2020 credits, so from March 12th through December 31st of 2020, if the business had more than 100 full-time employees in 2019, they can only claim the credit for employees paid not to work. As you see for 2021, the threshold is significantly increased fivefold. So, if a business had more than 500 full-time employees in 2019, they can only claim the credit for employees paid not to work. If they're under 500, 500 or under, 500 or less, they can claim it for all employees.
So, this is also one of the more complicated and nuanced areas of the retention credit. The aggregation rules are very important. If the owners of the businesses own other companies, they may potentially have to aggregate, and they essentially have to look at that at a global level. So, if someone owns Company A, Company B, and Company C and there's common ownership amongst all of them, then the determination and analysis has to be made on whether they need to aggregate, whether it's brother/sister companies, parent-subsidiary, affiliated service groups. And what that aggregation will determine whether A. there's a significant decline in gross receipts.
So, you would have to combine all the gross receipts from all the companies. As far as the full-time employee threshold, like I mentioned, whether the company is considered a large employer, you'd have to combine to see if they have 100 or more for the '20 credit or 500 or more for the 2021 credit, of full-time employees. It may help a company as far as aggregating because if one of the related entities they have to aggregate, but if one of them has a suspension of operations, that's considered the entire group has a suspension of operations and may potentially claim the retention credit.
Ben Aspir:This is a little bit of a trick question, because as Jeff mentioned, there was three versions of the retention credit, but the question is based on the latest, ERC 3.0.
All right. So, 69% got the correct answer. It was a total amount of maximum retention credit of 2021 is $7,000 a quarter, and since the retention credit is now eligible through the end of the year, the maximum credit is $28,000. The maximum credit for 2020 is 7,000.
Jeff Kelson:No, it isn't, Ben. It's 5,000.
Ben Aspir:I'm sorry, 5,000. So, I'll turn it over to Jeff now to walk us through some examples.
Jeff Kelson:Okay. Thank you. So, we got an example here. I think it's easier when you look at the numbers, right? Spacely Space Sprockets. So, in 2019 tax year, you see the quarterly revenue and that's important because everything is compared to 2019. That's the pre-pandemic year or the last normal year we've had, in essence. And so even if you're measuring 2020 or 2021 for the ERC, everything goes against 2019. So, in 2019 here, we're doing a 2021 comparison. You see that the first quarter of 2019, we had $200,000 of revenues on an affiliated basis and on 2021, in the first quarter, 150. So, we definitely experienced a 25% decline. In quarter two, we had 300,000 down to 100,000. So, it was a 67% decline. That would work. Quarter three, our decline was only 12%. In and of itself, doesn't qualify, but I'll get to how you do qualify for quarter three. And at quarter four, a 14% decline. Again, not over the 20% threshold.
So, here we have wages paid to A, B and C employees each of the quarters. So, quarters one, two and three are eligible and quarter four is not. I'm going to go back to the slide to show you. Quarter one is eligible because you're over 20% decline. Pretty straightforward, right? Quarter two, you're eligible because this is greater than the 20% decline. Pretty straightforward. Quarter three, you would think you're not allowed because you did not have a 20% decline versus 2019, but you qualify under the one quarter look back. And since in the second quarter you had a 67% decline, you get the third quarter on the house. Now, the fourth quarter has to stand alone. It doesn't. Or it can look back to the third quarter. It doesn't. So, the fourth quarter is locked out of the fund. The first three quarters qualify. I think once you see it like this, it stays with you, okay?
And then what qualifies? So, an employee A can get 70% of 10,000, 7,000, because employee A was over the 10,000. They were working at 20,000 a quarter, making 80,000 a year. So, he's limited to 10,000 a quarter when you do the calc. But you see, employee B was not maxing out per quarter. They were only earning 5,000 a quarter. So, that's why there you're not getting the maximum 7,000 from employee B. You're limited to 70% of the wages of 5,000. You get 3,500. Employee C, again, was maxed out at 10,000 a quarter. So, you get 70% of that. So, in this situation, you get 17500 a quarter and have qualified for three quarters. So, this taxpayer would be getting $52,500 credit either through a refund claim if they've already filed their first quarter, 941, or through withholding deposits, or through just claiming it as a credit to a subsequent period, or even doing in advance. There's many ways of skinning the cat and getting the money.
Okay, here you go. And I've just mentioned this. So, how to claim the ERC. So, you can either reduce your payroll tax deposits and that could mean for employee FICA. It also means federal income tax withheld from employees, social security and Medicare taxes of the employees. You can claim it on a form 941 if you're doing it concurrently. So, let's say the second quarter hasn't ended yet, and you're doing your 941. You do that in early July, right? You can either reduce your deposits or you would just either claim it as a refund or apply it to the third quarter. Many choices. I only file for refunds over $25. If you did claim an advanced credit on a form 7200, you were true that up into 941. That gets a little trickier, but some people want to go that way with getting an advanced credit.
A lot of people would rather just do it through the 941 process, a little more straightforward. You can either reduce deposits or claim a refund. And in 2021, advances are not available for employers with more than 500 full-time employees. So, the payroll providers are very, very aware of this. So, your paychecks and the ADP have a well-trodden path to deal with. It gets a little trickier with the PEOs because they would have to almost carve out the business to do an amended 941. It gets a little trickier, but not insurmountable. I've seen it work. And then if you do it yourself, then you would have to work on that on your own. So, many ways I've seen it. I've been involved in a lot of these refunds and credits.
And here's something that is probably the hottest issue right now. Notice 2021-20. And it's effective from the beginning of the ERC, from March 13th, 2020, all the way to the end of this year. It talks about the PPP and ERC interplay. And as I said, I mentioned at the top, PPP didn't qualify for 2020 at the time, but now it does in retrospect, and you can co-mingle PPP and ERC on 2021. But wages paid cannot be claimed if the same wages were also reported. So, the double dip, as I referred to it before. You cannot have the government forgive the loan to the extent you used it for payroll and then also claim that same payroll as a credit because you actually then end up paying it yourself if you have it forgiven within the PPP process. But there's ways of parsing the payroll to see and strategizing what you're going to apply for forgiveness and have any excess apply for the ERC.
Some of the businesses have already applied for forgiveness and would have liked to have had this knowledge back when they did that. But that ship has sailed on the PPP1, but if they haven't applied for forgiveness yet, or if they could receive the PPP2, it's definitely a way of strategizing, optimizing between what qualifies for PPP loan forgiveness in payroll, and what qualifies to the ERC. And as I point out here, there's no way to amend a PPP forgiveness application. That ship has sailed if you've done it already. And I know some businesses are trying to be good citizens and saying, "Hey, my whole forgiveness, I'm just going to allocate to payroll." And it turns out though that maybe wasn't the best way to proceed because then you lose the ability to claim all those payroll expenses, the ERC, but at least anything that might have been paid as payroll that was not claimed in the PPP forgiveness is still in play.
And you might want to go back and look at that and amend the returns. So, I think that's how it interplays. And as I said, the same employee's wages can qualify both for PPP forgiveness and for ERC. How? Let's say you're making over $100,000 a year. The most you can claim in PPP forgiveness for that employee is $8,333. So, anything above the 833 per month would qualified for the ERC because that in and of itself is not being used for forgiveness. It can't be used for forgiveness. So, here's one employee where you can have some of their wages as PPP forgiveness and some of it as ERC. So, it takes some Excel modeling. There's not a shortcut. You got to go through it by employee.
So, let's go through an example, maximizing it. Got a PPP loan on April 1st, 2021, right? There was no reduction of employee head count or employee salaries. No government shutdown and the gross receipts change, as you see. For the first quarter it was a 25% reduction. Second quarter, five. Third quarter, 22. Fourth quarter, 50. We've learned this now. Everybody here is educated. You qualify for every quarter. Qualified for the quarter one on face, quarter two you get because you're qualified for quarter one. So, quarter one gives you two for the price of one. You're qualified for quarter one and you get the next quarter under the look back. And quarter three and four. Actually, quarter three qualifies. Quarter four you have an increase, but you qualify because of the look back in quarter three. Very tricky, but you get all four quarters. The average full-time employees for 2019 was 490, so you were under the 500 employee limit.
And for 2021, you have 510. And you're going to see that it doesn't matter. You can have 1000 now and they all qualify. Because you only look at it for 2019, whether you had 500 or under. So, you claim the Employee Retention Credit on wages paid from January 1st through March 31st on the 510. Why, if you got a PPP loan, am I so confident you're going to get for all 510 employees? Because you received a PPP loan on April 1st, so you're covered period begins then. So, you couldn't possibly be using the first three months' wages for your PPP forgiveness. Because you didn't even receive the PPP until the second quarter. So, that's on the house, all 510. You can achieve a 40% required percentage for non-payroll costs like rent and utilities, as you know, under the PPP loan forgiveness. You looking to maximize that. You also want to claim the 60% required percentage for the shortest numbers of weeks possible.
So, maybe it will go to a smaller covered period or you're just going to limit it to 60% payroll. You cannot have under 60% payroll to qualify for PPP forgiveness. But if you can look at allocating as much as you can to qualified overhead, maybe you can limit the payroll to 60% of the total forgiveness. You claim the ERC on all payroll paid during a covered period that the company didn't request the PPP. That's why you get it automatically in this example for the first quarter, because you did not have the PPP concurrent in the first quarter. And you claim the Employee Retention Credit on 100% of payroll paid after the covered period.
Because as you know, the PPP has a covered period of either eight weeks or 24 weeks. Anything after that period is automatically fine, right? This is not coexisting. So, you see there's a lot of maneuvering and optimization between the PPP and the ERC, one for having it outside the covered period, and within the covered periods, it's not using all your payroll costs and trying to maximize the overhead up to the maximum overhead of 40% of the forgiveness.
Jeff Kelson: We're getting a ton of questions. I'm trying to answer some and some I'll answer during the presentation. Some of these are lengthy. Yeah. Some people are saying that they haven't gotten their refund yet. IRS is backed up. We noticed that in the beginning, the refunds took, for 2020 returns, sometimes six months. Now, they're starting to turn it around a little faster. So, just hang tough. You do get interest. I know it's not an amazing amount, but it is something. People are asking, "Can you claim ERC for a partial quarter?" Yes, you can. If the PPP was used for part of it and not part of it, sure. You work around the PPP covered period, you have no limitation on it. All right, let's see what the answer was here. People put 96.8% false and that's true. Absolutely. So, the PPP loan recipients are always prohibited from claiming the ERC. That is not true as we just went through many slides of that. All right. Thank you. Ben, you can take it, the next.
Ben Aspir:So, the two biggest takeaways from this notice 2021-20, all 102 pages of it, A. was the interplay between PPP and ERC, which Jeff just discussed. The other, which took up probably half the amount of the guidance that was part of 2021-20 talked about whether a company has a partial or full suspension of operations. And like we mentioned, you either need a significant decline in gross receipts. So, if a business or nonprofit doesn't have that, maybe they have a partial or full suspension of operations. But it can be very facts and circumstances-based, clearly nuanced. So, what does notice 2021-20 discuss? It uses the word nominal. So, if a workplace closed but remain open for limited purposes, those operations may be considered partially suspended if the operations that are closed are more than a nominal portion of its business operations and cannot be performed remotely in a comparable manner. That's the other operative work that we'll talk about.
So, this is the first time the IRS has given us a quantitative threshold. And the way it uses nominal is if the gross receipts from the portion of the business is not less than 10% of the total gross receipts, or the hours of service performed by the employees, the portion of the business that had temporarily closed, and that portion is not less than 10% of the total number of hours of service performed by all the employees in the employer's business. So, the key is 10% as far as the nominal. If the business is effected by more than 10% of gross receipts, if they have to shut down for whatever reason, due to a government mandate, partially shut down, or 10% of the hours. So, comparable operations. If an office is closed due to a governmental order, but the employer is able to continue compatible operations following the closure through perhaps telework, the company is generally not considered to have a full or partial suspension of operations due to a governmental order.
My favorite example is EisnerAmper. Many of our offices were forced to close last year temporarily and 98% of the EisnerAmper workforce was required to work from home. So, based on this definition, even though we were all forced to work remotely due to government mandate, we were able to perform comparable operations. We were able to do almost everything that we were able to do from the office, we were able to do from home. The following factors may be relevant in the determination of whether there's a partial suspension of operations: the employer's telework capabilities. Portability of the employees work. Right? So, in our line of work, in accounting firm's work, that can be done from home. But many other businesses, that type of work, the work they do cannot be done from home.
The need for a presence in the employee's physical workspace. And we'll talk through an example. This is an interesting one. The time necessary to transition to telework operations. So, maybe piggybacking on the same example of a CPA firm, like my example, but what about a very small CPA firm that has limited resources? They didn't have telework capabilities on day one of the pandemic and it took them several weeks or a couple of months to get up and running. So, an argument can be made that they had a partial suspension of operations.
So, it's really a case by case basis. And what this notice did provide us is many examples. I'm going to walk through a couple today on whether a company has a partial suspension of operations. So, let's say a retail employer must enforce social distancing guidelines that require you to admit only a specified number of customers. So, as anyone who's gone to any of the big box stores know, especially early in the pandemic, the retailers were forced to have a limited amount of customers and then employees. So, let's say that the county or the jurisdiction requires, you can only have a maximum X amount of customers per 1000 square feet. But while the government order results in customers waiting in line for a short period to enter the store during busy times, the size of the employer's store front is large enough.
So, again, if it's a big box retailer, so it may require that customers have to wait outside for a few minutes, but it's a huge box store that could more than accommodate people. It's just more of an inconvenience for customers having to wait a few minutes to walk in, to wait for the exiting customers to leave. So, the governmental order requiring to enforce social distancing does not have more than a nominal effect on its business operations under the facts and circumstances, even though it was required to modify its business operations. And therefore the employer's business operations are not considered to be partially suspended. But in another business's case, maybe they have a much smaller footprint and they're losing customers because they don't want to wait outside. It's obviously very nuanced, so it's not black and white here, just because there's a limit on social distancing that they wouldn't be eligible.
Let's go through another example, an office now. A software development company maintains an office in a city where the mayor has ordered that only essential business may operate. The business is not considered under the mayor's order to be essential and therefore is required to close his office and all the employees have to telework. So, prior to the governmental order, all employees at the company telework once or twice per week and business meetings were held at various locations. Following the governmental order, the company ordered mandatory telework for all employees and limited client meetings to telephone or video conferences. Again, in this case, the company's business operations are not considered to be fully or partially suspended operations due to governmental order. But if this was a company performing R&D in a lab, clearly they would not be able to do that from home and they would likely have a partial suspension of operations.
So, it's really, like I keep on saying, a case by case basis. And so the most recent note is, we spoke about 2021-20. That's gave us a lot of insight into the PPP and ERC interplay, and then also the partial suspension of operations. And then our more recent notice, which was a lot shorter. It was only, I think, it was under 20 pages, 2021-23, And this was guidance for the first half of 2021. So, what it did say is that employers, which we kind of already knew already, employers can access the retention credit prior to filing their quarterly payroll taxes, their 941, by reducing the employer tax deposits if they claim the credit for the first two quarters of 2021. Employers with an average of 500 or less full-time employees may request also an advanced payment filing form 7200, like Jeff spoke about earlier. They're going to file for an advance refund on the retention credit if they have 500 or less full-time employees in 2019.
If the company has more than that, they cannot claim an advance retention credit. They can claim the retention credit, they just can't claim an advance on it. And this 2021-23 allowed a governmental entity that was a college or a university or the principle purpose of the function is providing medical or hospital care, they would be eligible for the retention credit. And before we get to the next polling question, just talked about it just briefly, Jeff talked about the ARPA out of this Recovery Start-up Business. So, ABC Company begins business on 4-1-20. Most of today's session, we're talking about a suspension of operations or a decline of gross receipts. ABC Company didn't experience either of those. So, normally prior to the ARPA passage, ABC Company wouldn't be eligible for any of the retention credit.
But for the Q3 and Q4 of 2021, they created this concept called the Recovery Start-up Business. So, they started on 4-1-20, which is the right date to start. And then they had quarterly gross receipts in 2020 of Q2 of 50,000, Q3 of '20 of 60,000 and Q4 of '20 of $100,000. So, they're annualized gross receipts are going to be less than $100,000. So, they check all the boxes for this Recovery Start-up Business definition. And ABC Company paid, just obviously round numbers, they had five employees and they paid each of them $10,000 in quarterly wages.
So, like I mentioned, for this Recovery Start-up credit, they can claim it for Q3 and Q4. So, they paid $50,000 in total, $10,000 for five employees, in Q3 and Q4. So, you see on the bottom here, they can claim a $35,000 retention credit for Q3 of '21 and a $35,000 retention credit for Q4 of '21. They're capped at $50,000 a quarter for this Recovery Start-up Business credit. So, the total retention credit, where this company normally prior to this would not have even been eligible for the retention credit, they're able to take advantage of a $70,000 ERC credit.
Ben Aspir:Now, I do find that interesting. Jeff has mentioned that the ERC has not gotten as much publicity as it should have, especially now with the PPP program winding down. So, I think it's going to be gaining traction as the word gets out there of the significant benefits that the ERC can give.
Jeff Kelson:All right. This is our last slide. So, this is not meant to be adored by you, but just to show that there's three different tranches to it, and this a good guide. That the period in 2020, the first, what, nine and a half months, that has a 50% rate, the qualified rate goes up to 10, the most you can claim is 5,000. So, it takes you through that. There's no look back election for gross receipts. There's no Recovery Start-up business. And you can overlap with the PPP. The second tranche is the first two quarters of 2021. And the reason why we have it like this is, of course, these came about in three different Acts. So, there's three different sets of rules. And you see that the time period for the first two quarters, they get a 70% up to 10,000 to 7,000 per quarter.
That actually goes through the entire year because the third and fourth quarter both sign on to that. And whereas the 2020 we're limited to 100 full-time employees on average 2019, and for the 2021 credit, you only have to have less than 500 full-time employees in 2019 to get it on all the employees you have now, rather than those you're paying not to work again. Again, the gross receipts decline is different. For 2020 it's 50% versus 2019 per quarter. And in 2021, it's only 20. I think we've gone through this enough. It also applies to nonprofits. And I think what I'd like to do, Ben, is go through the questions. We've gotten over 125 questions. I've been answering some of them and getting back to the folks, but there's a lot. It's just so many.
Ben Aspir:Sure. Yeah.
Ben Aspir: Someone had asked, "What is the deadline for filing the retention minutes?" So, the deadline is actually the statute for filing your 941 return. So, it would be three years from the due date of the actual payroll tax return. It's not like if you don't claim it by December 31st, '21, you're not eligible for the credit. It has to do with the statute of limitation on the payroll tax, the quarterly payroll tax return, to claim the refund.
Jeff Kelson:Right. Talking about the look back period, I think that you use, for gross receipts, you've got to look at all the receipts in the business. The way we interpret it, we think it works off the tax. The AICPA, American Institute of Certified Public Accountants, had reached out to the IRS for clarification. Another question that comes up is pre-revenue companies. "How can you have decline if you don't have any revenue?" That's a good question. But some of them do have interest income, and as we've seen in other facets that's a code, like in the R&D credit for FICA offset. You do look at any amount of interest to any other revenue as revenue.
So, maybe if you had $100 of interest income in 2019 and $60 of interest income in 2021, you might qualify. There are some open answers. We expect the IRS will be issuing guidance in the next few months. So, that might address some of these nagging questions that a lot of clients and practitioners have been asking. Some person asked if you can claim a ERC for a partial quarter. If you qualify for the quarter, based on the revenue, you qualify for the whole quarter. If you qualify based on governmental suspension of your business, that is only for that period. So, it's a distinction of that. A lot of good questions. "Can you compare first quarter of 2021 versus fourth quarter of 2019?" No. Because there are seasonal businesses so the IRS made sure that you're looking at the comparable quarter in 2019 so you don't monkey around. Because your first quarter is to be compared to your typical first quarter of 2019. So, no, you can't mix and match the quarters. Getting, "How soon we can file."
Ben Aspir:"Does the manufacturer forced to stop and clean for a few hours each day qualify for the partial suspension of operations?" That's definitely a positive fact pattern for the retention credit. You'd have to do a full analysis, but that is definitely a fact pattern that would help the claim of the retention credit.
Jeff Kelson:Somebody is confused. It says, "It says 7,000 per quarter, up to 10,000 in 2021." Well, you take 70% of the quarterly wages up to 10,000. So, that's how we get the 7,000 max. It's not just claiming on 10,000, but you use the 70% to apply. If you have 40,000 of employee wages in that quarter, you're still limited to 70% of 10,000. When you have less than 10,000, then it's a lower amount. By the way, some people are asking, it does include health insurance paid by both the employer and the employee in determining gross wages. That's a nice thing. "Do you file a 941-X or do you claim it under current 941?" Depends on which quarter you're talking about. If you haven't filed the 941 for the quarter yet, claim it there. If you already did, you have to amend it. There's no other way to do it.
There's a lot of questions about the 50% rule, over 50% knocking you out from claiming it. That's the way we interpret it. That's the way many who have spent a lot of time working through the different code sections have. The IRS might expound upon this the next few months, but we are not recommending it to our clients to claim it if you own more than 50% or you're related to someone who owns more than 50%. The penalties are immense in the ERC. So, we'll rather amend it later if a ruling comes out or guidance comes out that says it does. Right now, we don't see it that way. And we're just not going to do it that way until we see that. But that's our interpretation.
And I think we have time for one more question. In PEOs, yeah, you got to break it out. You have to work with the PEO. They have to do a subset because they do one 941 for all their clients. Can they refuse? I guess they can always refuse. I just can't get into the mindset of the PEOs and the payroll providers. That's a whole different animal. Hopefully you have a representative that you can bounce all this off of. And believe me, there's been hundreds of thousands of taxpayers have already done this. So, they know what to deal with. Taxability or credit. It's not so much that it's taxable, although it tends to be because you lose a payroll deduction, which is tantamount to having it be taxable in essence, right? So, okay, I think we're at the 12 o'clock or Eastern time stop point.
Ben Aspir:Thank you, everybody.
Transcribed by Rev.com
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