Employee Retention Tax Credits

Like most things relating to COVID-19, the various government programs designed to help businesses are confusing and have changed over time.  One such program is Employee Retention Tax Credits (ERC), refundable tax credits providing an incentive for employers to continue to pay workers during the pandemic.  ERC was created by the CARES Act, extended and expanded twice and terminated for most employers as of October 1, 2021.

Originally, ERC was not available for employers who received PPP (paycheck protection program) loans, but that provision was changed.  Businesses that took out PPP loans in 2020 can still go back and claim the ERC, but they cannot use the same wages to apply for forgiveness of PPP loans and to count toward the ERC.  If your business had payroll costs that were more than the amount covered by your PPP loan, you may be able to claim tax credits for those additional payroll costs.

ERC is available for employers with 500 or fewer employees.  It applies to all of 2020 and the first two quarters of 2021.  (Certain businesses are also eligible for the third and fourth quarter of 2021.)  Qualified wages do not include wages paid to the majority owner of the business or to the owner's family members.

It is not too late to claim the credit.  Employers can file amended payroll tax returns for 2020 and 2021 to do so.

The test for eligibility is whether or not your business was partially or fully shut down due to a government order during any part of the quarter OR your revenue declined by 20% or more for the quarter.

Determining eligibility may be straightforward for many businesses, but eligibility is not as simple as it seems.  Jim Hogge, of Eck, Schafer & Punke, LLP, CPAs, who helps clients claim ERC, says, "You should talk to your accountant to see if you qualify for the Employee Retention Tax Credit if you had a full or partial suspension of operations due to a government order due to COVID-19 or significant decline in gross receipts in 2020 or 2021 compared to the same quarter in 2019."

Full or Partial Shut Down.  Many "non-essential" businesses in Illinois will meet the shut down test for 2020 and possibly 2021.  However, even if a business was barred from using its facilities, it will not be eligible if it was able to continue is operations in a "comparable" manner, for example, if employees were able to continue their work at home.  The IRS offers these examples:

    Employer C, a software development company, maintains an office in a city where the mayor has ordered that only essential businesses may operate.  Employer C's business is not essential under the mayor's order, and therefore Employer C is required to close its office. Prior to the governmental order, all employees at the company teleworked 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.  Employer C's business operations are not considered to be fully or partially suspended due to the governmental order because the employer is able to continue its business operations in a comparable manner.

    Employer D operates a physical therapy facility in a city where the mayor has ordered that only essential businesses may operate.  Employer D's business is not considered essential under the mayor's order, and therefore Employer D is required to close its workplace.  Prior to the governmental order, none of Employer D's employees provided services through telework and all appointments, administration, and other duties were carried out at Employer D's workplace. Following the governmental order, Employer D moves to an online format and is able to serve some clients remotely, but employees cannot access specific equipment or tools that they typically use in therapy and not all clients can be served remotely. Employer D's business operations are considered to be partially suspended due to the governmental order because Employer D’s workplace, including access to physical therapy equipment, is central to its operations, and the business operations cannot continue in a comparable manner.

"Essential" businesses that remained open may also be eligible for the credit.  For example, restaurants may have been allowed to be open for take out but not for dining.  The prohibition on dining could constitute a "partial shutdown" if dining is more than a nominal portion of the restaurant's business.  A business may also qualify as "shut down" if it was unable to do business because another business was shut down.  The IRS offers the following example:

    Employer A operates an auto parts manufacturing business. Employer A's supplier of raw materials is required to fully suspend its operations due to a governmental order.  Employer A is unable to procure these raw materials from an alternate supplier.  As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations for a period of time.  Under these facts and circumstances, Employer A would be considered an eligible employer during this period because its operations have been suspended due to the governmental order that suspended operations of its supplier.

If a business was not shut down, it can still qualify for ERC if its gross receipts in a quarter declined more than 50% compared to either (a) the same quarter in 2019 or (b) the immediately preceding quarter in 2020 or 2021.

The amount of the credit is significant.  For 2020, it is 50% of wages per employee up to $10,000, for a maximum of $5,000 per employee per quarter.  For 2021, it is 70% of wages per employee up tp $10,000, for a maximum of $7,000 per employee per quarter.  So, if you think you may be eligible, talk to your CPA or tax preparer, as always, sooner rather than later.
This article is for informational and educational purposes only and does not constitute legal advice.