Employee Retention Credit

Employee Retention Credit

Background: Overshadowed in last year’s tax relief bill(s) was a wages tax credit that was camouflaged by all of our efforts to navigate and apply for the confusing and sometimes complex PPP loan funds. Both of these were intended to assist small businesses in keeping employees on the payroll. At the time these programs came online, the CARES ACT made you choose between PPP monies or the wage tax credit. For obvious reasons, the PPP Loan monies took priority. Recently, Congress enacted Legislation that allows those who received PPP funding to use  the credit for those that qualify.

Revised and Retroactive. In dealing with tax breaks, there can be no sweeter word than “retroactive”.  Late in 2020 Congress backtracked in the Consolidated Appropriations Act and allowed a tax credit to be claimed in 2020 so long as the wages were NOT used in the PPP Loan Forgiveness computation. 

Better still, Congress allows those qualifying to go back to 2020 to claim these credits using amended payroll tax returns. With that as a lengthy set up, let’s look at the particulars.

Who qualifies for the clawback of 2020 tax credits? The ability to retroactively claim wage credits is limited in scope to a very specific target group that either:

• had operations suspended or limited due to  Covid-related government order in any quarter of 2020, or
• your business suffered at least a 50% decrease in gross receipts in any quarter of 2020 compared to the same quarter of 2019.

How much is the credit? The maximum credit per employee is 50% of eligible wages paid per employee capped at $5,000.  Again, it is important

to note that the wages used for the credit can not be the same wages used in the PPP loan forgiveness application.

How can they not be the same wages?  Wages that fall outside the PPP covered period would be one example.  Also, using non-payroll costs as part of your PPP funds-usage when applying for PPP forgiveness could possibly free up wages to be used for the credit.

Does my eligibility ever expire? Yes. It ends in the quarter of 2020 where your gross receipts exceed 80% of the same quarter of 2019.

When does the credit begin? In the quarter that your gross receipts drop by 50%.

Is the credit available in 2021? Yes, with slightly modified qualifications. We’ll address this topic in the next issue. 

IRS experiencing historic delays: A common complaint we are receiving is that some either haven’t received 2019 tax refunds or, even scarier, their 2019 tax return has still not been processed.   Is this possible? 

Unfortunately, yes. According to the IRS Commissioner, over 335,000 2019 tax returns have yet to be processed. 

Blame it on late legislation that required structural changes to the return processing task that created a strange interaction between the 2020 and 2019 tax returns, such as the earned income tax credit and economic stimulus check. This has required manual verification of amounts. Add to this, the significant shortages of IRS staffing and it is a perfect storm for backlog.