The Employee Retention Credit, or ERC, saw significant expansion in 2021. But, do you qualify for the ERC? Can you still get the ERC if you got a PPP loan? We have a special guest, Randy Crabtree, of Tri-Merit Specialty Tax Professionals, on this episode to talk about various ways for businesses to qualify for the credit, how much benefit you can receive, and how the credit interplays with other available credits, including the Paycheck Protection Program (PPP) and the Work Opportunity Tax Credit (WOTC).
What we cover in this episode:
- 03:23 – Who is Randy Crabtree?
- 06:42 – What is the Employee Retention Credit (ERC)?
- 09:13 – Is your business eligible for the ERC?
- 12:34 – ERC for the legal, restaurant and healthcare industries
- 20:12 – Why is the ERC being refundable important?
- 22:41 – How the ERC works
- 33:21 – Special Offer from Tri-Merit
Who is Randy Crabtree?
As the co-founder and partner of Tri-Merit Speciality Tax Professionals, our guest is uniquely qualified to speak about the ERC and help us better understand how it works. A widely followed author, lecturer and podcast host for the accounting profession, we are happy to welcome Randy Crabtree to the show! He holds a CPA license and he has been in public accounting for many years. He has been working on specialty taxes solely for almost 15 years, meaning he is very familiar with the complexities of ERC and other specialty tax situations. Tri-Merit has many resources you can take advantage of to learn more about the ERC. Visit www.tri-merit.com/erc to access on demand webinars, check if you’re eligible for the ERC, and receive a free, no risk, no obligation consultation as well.
What is the Employee Retention Credit (ERC)?
The ERC was defined in the CARES Act in March of 2020, and it created another incentive for businesses to keep employees on their payroll. The ERC is a fully refundable tax credit for a percentage of the qualified wages you pay your employees. It’s applied to your federal payroll tax liability, and any excess credit amount is refundable.
This tax credit applies to businesses whose operations have been impacted by government executive orders or are experiencing a remarkable decline in revenue. Also defined in the CARES Act at the same time was the PPP loan program. The CARES Act legislation originally stated that if you took a PPP loan, you could not take an employee retention credit – they were mutually exclusive and you could not take both.
A big change occurred with the passing of The Consolidated Appropriations Act, 2021 (CCA) in December 2020, by increasing the credit amount and allowing businesses to reap the benefits of both the ERC and the PPP program. This CCA also allows some changes to be retroactive to the passing of the CARES Act in March 2020. Then additional legislation passed in March 2021 – the American Rescue Plan of 2021 – and extends the credit to December 31, 2021. The ERC provides up to $5,000 per employee during 2020 and up to $7,000 per employee per quarter during 2021. That’s up to $33,000 per employee for qualifying businesses.
Randy stated, “This could be a very big benefit. So if there are any businesses out there that had looked at some of the rules and thought they didn’t qualify or had an advisor say they didn’t qualify, it’s definitely something that you want to go back and make sure of.” We do recommend speaking to an advisor, as the landscape keeps changing, and your situation and ability to take advantage of these changes can be a big benefit.
Is your business eligible for the ERC?
Any business or tax-exempt organization operating in any calendar quarter of 2020 or 2021 can claim this credit, with the exception of governmental employers and self-employed individuals, and there are two ways to qualify for the ERC.
The first way is a safe harbor rule, and the rules do change from 2020 to 2021, but the bottom line is that you can qualify if you’ve experienced a significant decline in gross receipts during a calendar quarter in 2020 or 2021. You compare the gross receipt for a particular quarter in 2020 or 2021 to the same quarter in 2019. “In the year 2020, if I can show a 50% percent reduction in revenue in any quarter in 2020 compared to 2019, then I meet the safe harbor rule and I qualify for the employee retention credit. Then in 2021, it got even easier. If I show a 20% reduction in revenue in any quarter in 2021, compared again to 2019, I meet the safe harbor rule”, stated Randy.
The second way to qualify is a bit more complex, with just a little more interpretation that needs to go into the determination if you qualify. This way per the IRS rule, is that you qualify if you’ve fully or partially suspended business operations for any calendar quarter in 2020 or 2021 due to governmental orders limiting commerce, travel, or group meetings due to COVID-19. This way does seem to cause confusion as it’s a little more vague than the first way. The math is easy to calculate in the first way, but you have to dig deeper and assess your business in this second way to see if you qualify.
Many people may say that 100 percent of people were impacted because of the pandemic, but you really need to look at the actual restrictions, and if they really impacted your ability to do business. Randy stated, “There’s definitely more in there. So, I can say I was under restriction because there was a mask mandate, and everybody had to wear masks to come in. That didn’t really affect my business, that there was a mandate out there. There wasn’t a government order. But did that really reduce my ability to conduct my business? Probably not.”
ERC for the legal, restaurant and healthcare industries
Now, we asked Randy to provide a few examples for us in some service-based businesses to help illustrate the complexities of the ways to qualify. More specifically, we discuss the restaurant, legal and healthcare industries to give a few examples. Please note that every business is different and there could be a variety of qualifications even within these industries.
In the case of the restaurant industry, when the government imposed restrictions stating no indoor dining was allowed, that definitely affected businesses. You couldn’t have indoor dining, but you could still do curbside pickup, and perhaps outdoor dining was still an option for your business, and maybe you could do delivery. The suspension rules or restrictions were never static, and perhaps changed over a period of time from 25% capacity to 50%, then eventually back to 100% capacity, but you had to have your tables 6 feet apart. In all these cases, the restrictions effectively reduce your ability to have full capacity in your restaurant, and you can claim you were affected. The government restrictions don’t have to have been direct to affect your business though, and if you look at the imposed restrictions from the viewpoint of the supplier for that restaurant business, you can be affected indirectly and may qualify.
The IRS has given out a few examples of things that qualify, but we encourage you to reach out to your advisor, or reach out to Tri-Merit so they can get the details of your specific business and really dig into your unique situation and see if you qualify for the ERC.
Healthcare is also an industry that is interesting to look at as an example of the second way to qualify for the ERC because healthcare all around the country was affected in some way. A majority of them were affected by not being able to have elective procedures. “That was a number one thing that happened right off the bat”, stated Randy. When the restriction went into effect, many doctors were unable to perform surgeries, which meant, no knee replacements, no ligament replacements, etc…, and thus they were affected. This happened in a lot of cases throughout the medical, and dental industry as well, and a very large percentage of them can qualify and claim the ERC.
Many service-based businesses were affected as well. Randy stated, “I had an example of a client that is in the legal field, and I know they were impacted. Not necessarily from the gross receipts reduction and meeting that test, but they were definitely impacted by the courts being shut down.” The social distancing restrictions, and the ability to meet clients face to face, or in group settings, affected a lot of service-based businesses. The restriction rule is pretty broad, and the main point is to know that it is available to service-based businesses, and use this knowledge to have discussions with your advisor about your situation, what restrictions your business faced to see if you can qualify for the ERC.
The ERC is refundable. Why is that important?
The fact that this credit is refundable is a big deal because refundable credits are very rare when it comes to taxes. You can use it to offset some taxes, or at least reduce your current tax bill, and “the value of the credit is the value of the check you get sent,” stated Randy. You receive the credit when you file your Form 941, or most likely an amended Form 941-X, for your payroll taxes. There are some stipulations on if you are a large or small employer, and the qualified wage percentages change from 2020 and 2021, but as long as you qualify, the calculation can be significant. Bottom line is you may actually get a refund!
How the ERC works
For 2020, the Employee Retention Credit is 50% of all qualified wages you paid employees between March 12, 2020, and Dec. 31, 2020. It is limited to $10,000 in wages per employee for all quarters. Therefore, you could claim a maximum credit of $5,000 for each employee.
For 2021, the credit is 70% of all qualified wages you pay employees from Jan. 1, 2021, through Dec. 31, 2021. It’s limited to $10,000 in wages per employee for any quarter. Therefore, you can claim $7,000 for each employee in every quarter. That means, the maximum credit is $28,000 per employee! Generally, qualified wages are compensation you pay to employees, including qualified health plan expenses. But, the definition also depends on your average number of full-time employees in 2019. If your business wasn’t in existence in 2019, you’ll use the average number of full-time employees in 2020.
One important thing to note is if those wages were used to get a forgivable PPP loan, you can not also use them for the employee retention credit. One of the largest questions we’ve had relates to smaller companies, companies that have a business owner or one or two employees, and if they also can qualify for the ERC. The IRS has put out some recent guidance in early August of 2021, and it comes down to percentage of ownership in the business, and if you have relatives that also are owners of the business. The rule is following the current tax codes, and in reality the majority owner of the business and family members can not be used in the calculation of the credit. There can be a lot of paperwork to do to claim the credit, such as amending payroll tax returns, and we really can’t stress this enough, but it’s best to talk to an advisor to make sure you are calculating the credits properly, and taking the ERC only if you qualify.
The IRS does allow for amending payroll tax returns, but there is a statute of limitations on how far you can go back. Typically the limit is 3 years, but the IRS did announce they are extending this to 5 years, so it gives business enough time to go back and make corrections and make sure calculations are done correctly.
More about Tri-Merit
There is an abundance of information to absorb, and the bottom line is this ERC is available to help businesses. You just want to make sure that you’re consulting the right professionals to make sure that you’re covering your bases. Tri-Merit has many resources you can take advantage of to learn more. Visit www.tri-merit.com/erc to access on demand webinars, and you’ll actually find a link where you’re able to check if you’re eligible for the ERC and receive a free, no risk, no obligation consultation as well.
Today, we talked to Randy Crabtree of Tri-Merit Special Tax Professionals. We talked about various ways to qualify, provided industry examples, covered the amounts you may qualify for and why this all matters! There are many resources available to you to better understand the ever-changing landscape of taxes. Please take a moment to look at what may be available to help your business.
If you’re working with a CPA or CFO, talk to them, and the bottom line is go look at this program and the ERC because it’s available to help you and your business. We know business owners may not have the time to keep up to date on this topic, and spend their time running a business, but we want you to know we are here to help. We are spending a lot of time to stay up-to-date on all of this information, so you can come to us with questions and see if you qualify for the ERC.
Links mentioned in this episode:
- Tri-Merit Speciality Tax Professionals
- Tri-Merit ERC Resources
- Tri-Merit – Does your company qualify for the Employee Retention Credit?