Is Your Business Taking Full Advantage of the Employee Retention Credit?
March 29, 2021
The Employee Retention Credit (“ERC”) has taken on greater prominence since the signing of the 2021 American Rescue Plan Act. Ben Aspir, a senior manager in EisnerAmper’s National Tax Practice, discusses who’s eligible, credit amounts, timelines, the application process and more.
DP: So this is a really hot topic right now. The ERC, Employee Retention Credit. It was originally scheduled to end on June 30th, but the recently signed American Rescue Plan Act, the huge stimulus package that was just passed, it seemed to have breathed new life into the ERC. Tell us a little bit about this credit and why it's so important.
BA: Sure. So there's been three versions of the Employee Retention Credit. Let's start with it's originations. So the Employee Retention Credit was originally enacted as part of the Cares Act at the beginning of the COVID-19 pandemic in early 2020. It allowed a $5,000 credit per employee, a payroll tax credit, if a company had a partial suspension of operations or they had a 50% decline in their gross receipts. The credit was $5,000 per employee for the entire year. Then we had the second version, ERC 2.0, we like to refer to it as. The Consolidated Appropriations Act passed at the end of 2020 to provide additional funding of stimulus to the economy. And what that version of the Retention Credit allowed, and it was actually, part of it was retroactive, it extended the Retention Credit from December 31st, 2020 until June 30th, 2020.
And the old version of the Retention Credit didn't allow you to claim the Retention Credit and PPP funds. You have to choose one or the other. And if you have to choose one or the other, PPP was better because the cap was higher on the expenses you were allowed to take. But the Retention Credit, when you claim it, you can't deduct those expenses as well. Version 2.0 was also retroactive in the sense that it allowed anyone that claimed PPP to also potentially claim their Retention Credit. So that opened up the pool to significantly more taxpayers. And then now we have the ERC 3.0 as part of the ARPA, which now extends the Retention Credit through the end of 2021. And it also created this concept of recovery startup businesses. So businesses that have less than a million dollars in gross receipts and they started after February 2020, can get the Retention Credit potentially if they meet that criteria. Their credit is limited to $50,000 a quarter, but they don't need to meet the suspension of operations or decline of gross receipts.
DP:Tell us a little bit about who's eligible. Does it apply to certain sectors or are certain sectors exempt? What are we talking about as far as credit amounts? Get us a little bit there.
BA: So the beauty of this credit is it's available to a large swath of industries. It's not industry specific. Even non-profits can claim it. Businesses of any size can claim the credit. In my experience, in my decade-plus of practicing tax, I have never seen such a wide ranging tax credit, beneficial payroll tax credit. There's limitations in a sense that if for 2020, if a business has over a hundred full-time employees, it could only claim the credit for employees that were not working. If it's under a hundred employees, it can claim the credit for all employees, to the extent they haven't used the same wages as their PPP forgiven proceeds. For 2021, the big expansion is that employers up to 500 full-time employees can claim for employees that were working and were not working. So for 2021, if the employer has over 500 employees, they can only claim the credit for the employees they paid not to work, or if they had furloughed employees and they paid their health insurance premiums, they could claim that as well.
The credit amounts for 2020, the maximum is $5,000. So that 50% of the first $10,000 in wages for 2021, the credit is expanded significantly. It's 70% of the first $10,000 in wages per quarter. So that's a $7,000 credit per employee per quarter. So if a company is eligible for the entire 2021 for each quarter, they can potentially claim a $28,000 credit per employee. So, could really add up and be a meaningful amount of payroll tax savings if a company is eligible.
DP: Yeah, that's significant, particularly for a small business that's struggling. Ben, are there any unanswered questions or issues with respect to the IRS as far as this credit?
BA:So when the Retention Credit was initially passed in early 2020, Congress wanted to provide immediate relief to businesses and to ensure that they would retain their employees. Pretty soon after the passage of the Cares Act, they released Frequently Asked Questions on their IRS website. It was about close to 100 FAQs. But even with 100 FAQs, there were still a lot of questions that remained unanswered. A lot of it, especially once the Appropriations Act passed at the end of 2020 and allowed PPP recipients to claim the Retention Credit, there was a significant amount of questions between the interplay of PPP and the Retention Credit.
So if I've already claimed PPP funds and applied for forgiveness, and I wanted to claim the benefits of the Retention Credit, what are the mechanics? What is the interplay of claiming the credit? So fast forward, about a month ago, the IRS released a tax notice that that clarified a lot of this. And what they said basically was if those wages are claimed on the PPP forgiveness application, you can't use the same wages for the Retention Credit. So even though the taxpayer could have used less wages to claim forgiveness, they're still saying that you can't use the same wages for the Retention Credit. So the tax notice provided us guidance on 2020, but it was not binding on 2021. But it could give us insight into the IRS's thinking for the 2021 tax credit.
DP: Okay. So you're relatively comfortable with the amount of guidance that's out there on this, for the moment?
BA:For the moment. Yes. We could always use additional guidance. But for the interim, the tax notice was fairly comprehensive. It was over 100 pages.
DP:And finally, Ben, I know applying for stimulus from the federal government or state government, local government, it's never really push button. It often can be very complicated. And with business owners struggling to keep the doors open and do what they do, and do what they specialize in, this is really where someone like yourself, a business adviser, can come in really handy. Tell people about your involvement in the application process and what you need to do. What's involved. I know a lot of times, the slightest error, your application got kicked out. Talk about the application process a little bit.
BA:So the Retention Credit is a payroll tax credit. The penalty surrounding payroll tax credits can be pretty severe. The IRS takes payroll taxes very seriously. So I think it's extremely important to engage the tax advisor that's knowledgeable in the Retention Credit. At EisnerAmper, we can help determine if your company is eligible, and we could additionally help calculate the credit and work in tandem with the payroll processing company to ensure that the proper application and calculations are submitted to the IRS.
DP: Okay. Great. Any final thoughts looking into your crystal ball a little bit. How much of an impact this might have? How would you sum this up?
BA:I would say since originally back in 2020, at the beginning of pandemic, like I mentioned earlier, tax payers really had to choose between the PPP and the Retention Credit. The Retention Credit was largely ignored because the PPP was better. But now that you can have your cake and eat it too, I believe that this Retention Credit is going to become a extremely hot topic. And a lot of taxpayers are starting to realize that there could be significant savings, and and help them push their business through the pandemic. If a company has 100 employees and they're getting $28,000 per employee, if they're eligible for the whole year, that's a significant number for a small business. So I would suggest contacting your tax advisor, determine whether your company would be eligible for the Retention Credit.
DP:Great. Well, Ben, thanks for helping us spread the word and get the information out there to a lot of these businesses that are hurting and could use the help.
Ben Aspir: Thanks, Dave.
DP:And thank you for listening to EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics and join us for our next EisnerAmper podcast when we get down to business.