This informative webinar discusses the ERC payroll tax credits that can be worth hundreds of thousands of dollars to your company AND help qualified employers keep their employees and businesses running during this pandemic.
The following is a text version of the recorded webinar presented by Windes on April 22, 2021.
The presentation slides can be accessed HERE.
Guy Nicio, CPA, MST is a Partner and Chairman of the firm’s Tax department. He has more than 20 years of public accounting experience and focuses on tax planning, compliance, and consulting with start-up to middle-market businesses and their owners.
Bella Wang, CPA, MST is a Tax Director and has more than 20 years of experience in public accounting and specializes in tax planning, consulting, and compliance.
DISCLAIMER: The information presented in this webinar is intended as general information and does not constitute tax or legal advice. You should always consult your tax, legal, or financial advisor for direction regarding your specific situation.
Please contact Windes for more information or questions regarding your particular situation at 844.4WINDES (844.494.6337) or via email at firstname.lastname@example.org.
Welcome everyone. Thank you for joining our webinar for the Employee Retention Credit Essentials for Businesses. I will be presenting together with my colleague, Bella Wang. Again, we thank you all for being here today. Give you a little bit of background on both of us presenters here first. I’m the chairman of the tax practice and a partner in the firm, I have been with Windes for 23 years now. My expertise is with tax and client accounting services. We’ve done a lot of work in this area with the Employee Retention Credit, PPP, and I’m sure many of you have seen some of our other webinars. We’re also fortunate to have with us today, presenting, Bella Wang. She is a tax director and a guru of all things technical on the tax space. So we’ll all enjoy to hear her expertise and knowledge as she always brings so much to the table.
We’re lucky to have Bella, who’s been with us for over 20 years. She’s had over 20 years of experience in public accounting. She specializes in tax. She has some great expertise in international tax, and she’s just a great asset to the firm. I’m happy to have a Bella with me presenting today. Here’s the agenda. We’re going to go over the qualifications for the Employee Retention Credit, or we’re going to go over how to calculate and claim the credit, the income tax implications and on the interplay, which maximizes the benefits from a tax perspective between things like the paycheck protection, program loan and the Employee Retention Credit. We will mention to a certain extent, the interplay with some of the other incentives, like the research and development tax credit and the WOTC credits, if you are familiar with those.
Finally, we’ll finish off with some other considerations and the California AB 80. All right, so without further ado, what are the qualifications for an employer to be eligible? Well, to back up a step, just for everyone’s knowledge of the history of this. Initially when the Employee Retention Credit came out, it was said that you would not be able to claim the credits if you were a PPP loan borrower, but that was subsequently changed with legislation. And thankfully you’re allowed to do both now. As you’ll see later in the presentation, you’re not allowed to double dip as they say. We’re going to have to work with you and make sure that everyone understands the rules so that we can maximize the benefits since you can only use the eligible costs for one or the other, but not both. We’ll talk a little bit about that in more detail later.
To qualify an employer must satisfy one of the following two criteria. The first one is the easiest one to understand, if you have a significant reduction in gross receipts for any counter quarter and the rules are different for 2020 versus 2021. Let’s break it up into two pieces starting with 2020, and I know that’s in the past, but so everyone’s clear even though 2020 is in the past, and even though the way you claim it is already done, we can still amend the returns that you need to amend in order to benefit from taking these credits. So it’s very important to make sure that we understand that we qualify or not for 2020 before we go on to 2021. So again, qualifying for 2020, if you have a substantial reduction in gross receipts, and that reduction is defined as 50% or more in reduction when you compare any quarter in 2020 starting with Q2 to that same quarter in 2019.
50% or more reduction in your gross receipts in 2020 for that quarter as compared to the same quarter in 2019. Now for 2021, as you’ll see in the parentheses here on the slide, it’s easier to qualify, the significant reduction is defined as only 20%. So if your gross receipts are reduced by at least 20% in 2021, also as compared to that same quarter in 2019, again, and I’ll be clear not comparing it to 2020, but comparing it to the same base initial quarter, year of 2019. So 50% reduction in 2020 or 20% reduction in 2021. It has been extended to go through the end of the year through December 31st. That is a relatively recent development. The other way to qualify, it’s a little bit more complicated depending on your situation. But it’s a partial or complete suspension of your business operations in either 2020 or 21 due to a government order.
That’s the key. It has to be a government order which limits commerce travel or group meetings. So if it comes complete suspension for under government order is pretty obvious, but a partial one, the rules get a little bit more convoluted, and that’s where you probably need to look to the guidance for seek professional assistance, which obviously someone like Bella and myself or the Windes’ team are happy to answer some questions, or our door will always be open for anybody who wants to follow up with us for help in these areas. So here’s a chart that shows a little bit about how this significant reduction in gross receipts works. If you look in the first row here for 2019, it shows the gross receipts by quarter. All right. It shows the gross receipts by quarter at 300,000 for the first quarter, 200,000 for the second quarter, 600,000 for the third quarter and 800,000 for the fourth quarter.
That’s for 2019 and the second row shows 2020. We’ve done the math for you here, as you can see, it’s only 7% reduction in Q1, but in Q2 you have a 65% reduction. So a 65% reduction since it is greater than the 50% requirement means that you qualify for the Employee Retention Credit for that quarter. And you’ll notice here that even though the reduction in Q3 is only 40%, that as the slide shows, you down it in the note below, you still qualify in Q3 because of the fact that you qualified in Q1 for the over 50% reduction. Once you qualify, based on the 50% gross receipts, you continue to qualify in all subsequent quarters until your gross receipts exceed that 80% reduction. Once it got to the below 20% mark in that reduction, in other words, in Q4, that’s the first time it shows below 20%, what’d you get to the end of that quarter to qualify.
In this case, in this slide, Q2, three and four will qualify. All right, next slide. This one shows how it works for 2021. Again, you can see the comparison is still to the base year 2019. So in Q1, you won’t qualify because it’s not the 20% reduction in Q2. You do qualify because it is more than the 20% reduction and Q3, even though it’s not more than 20% reduction, you get till the end of the subsequent quarter that you qualify to claim the benefit. So in this particular example, it’s Q2 and Q3 that you qualify for Employee Retention Credit.
I just want to clarify, it’s a different rule for 2020 and 2021. So for 2020, you qualify on PLU hit at least 80% of the calendar quarter gross receipts in 2019, but if you exceed 80%, it’s the following quarter that is a qualified for the credit. In 2021, you don’t have that rule, but you have the prior quarter safe hover. In third quarter, in Q3, you qualify, because you can use the prior quarter safe harbor since you have one of 20% reduction in Q2.
Thank you for adding that clarification, Bella, and don’t fret. If any of this becomes, obviously we don’t expect anyone to memorize all the rules. There really are more details and intricate situations that need to be considered in some of these calculations. We’re trying to go over the fundamentals and making sure that everybody has enough of the fundamental concepts down so that you can understand whether or not you qualify. If you’re the DIY type of person who is an accountant or a finance person by trade, and you like getting into the code and doing these calculations and maybe having a little bit of professional support in the process, a lot of the people will do it. If you’re not on the other hand, you definitely want to seek some professional assistance. That’s again, an area we can help you with that.
So that we can make sure to get you the maximum benefit. You’ll see, by the end of this, that the credits that would result for those who qualify are extremely valuable. I mean, we’ve seen just the other day I saw a client’s calculation where the credits resulted in $874,000 of tax credits, to a client of ours. That’s real money. Anyway, without further ado, thank you for that clarification between the two years. I think we’re done with this slide, so we can go ahead and move on to the next one. All right. So what does gross receipts include? It’s not just sales, but also includes these other items of income, interest, dividends, rents, royalties, and annuities. It’s truly your gross receipts, sales less returns and allowance, and those other items. And here it’s says just excludes sales tax or the taxes legally imposed, and you can use the cash or a cool method of accounting.
Now, there is no specific guidance that talks about when you would use cash or accrual. I think that different practitioners will take different positions. The way that I like to think about in general, whatever you’re reporting on for income tax purposes, the conservative approach is to report consistently with that method, but there’s no specific guidance that says you can’t switch methods, and if he’s qualified one way or other so if you want to be more aggressive or your tax practitioner wants to be more aggressive and make sure that they use whatever method qualifies you if they don’t both qualify you in spite of the fact that may be contracted and your income tax return, well that’s up to you. And again, there’s no specific guidance that tells us a rule on that. All right, next slide.
Now I’m going to talk about the suspension. Guy went over the rules for significant reduction in gross receipt. Let’s say you did not have a significant reduction in your gross receipts, you could still qualify for the credit, if you have a partial or complete suspension for your operations. On this slide, you can see this is the actual statutory language from the tax law. So it has to be due to the governmental order, so it can be a federal or state local order. As you all know, if you have the PPP law, there’s a safe harbor for your PPP forgiveness. For the PPP forgiveness it says that if you couldn’t return to the same level of business activity as you had on February 15, 2020, then you can apply for the safe harbor and still get 100% forgiveness, even if you had a reduction in the full-time employee head count or salary reduction.
The rule for that safe harbor is a lot more liberal than this suspension rule. This one is very strict. It has to be a governmental older. That was from the mayor for the city or from the federal government. You need to have a very strong support to make sure that you have a suspension because the governmental order, it cannot be just a verbal announcement from the government official. So there’s a couple of examples. Let’s say you are a non-essential business in the city and the government issues a stay at home order for the period from March 20 to May 31st, 20. Because you are not an essential business, you are required to close your operation. During that period, you qualify for the suspension requirement.
Because of the governmental order, you have to close your workplace, you’ve got to be careful because there’s other factors you have to consider to see if you qualify for the suspension. For example, you are a software development company. You had an office in Los Angeles and during the period from March to end of April last year, you are required to close your workplace because of the governmental order, however, before the issuance of a governmental older, all your employee can work remotely. You already have the infrastructure set up. So everybody can teller work. There’s no interruption to the way they work. And then even after the governmental order, everybody continued to work the same way as they had before. In that situation, you do not have suspension of your operation because everybody still operated the same way as they had it before.
The other example would be, if you are an employer D you operate a physical therapy facility, and there’s a governmental order that you have to close the facility for a period of time, before the order, now your employee can provide service to your clients remotely, so everything has to be done in person. And now because of the governmental order, you move to online format and you still continue to serve some of your client remotely, but there is certain limitation, as some of your employees cannot access the equipment or tools that they typically use to work with their patients or a client. In that case, you do have a partial suspension of your operation, even if you continue to operate, but your operation is limited because there are certain limitation your employee have access to the equipment, then that’s considered a suspension.
Other situations that you can qualify for the suspension is that when you are switching from everybody working in person to working remotely, if there’s a period of time that you experienced a significant delay on your operation, because you have to modify the way people work, then that’s considered a partial suspension. Whether or not you meet the suspension requirement is really based on facts and circumstances. We have to review, very carefully, everybody’s situation because everybody’s situation is unique. Also, the IRS guidance states that there’s a couple of factors that we have to consider in order to determine if you have a suspension of your business of operation.
One of the factors they will consider is whether you have an adequate support for your employee to work remotely. For example, if you have an internal IT department, or you have an outsource IT consulting firm who can help you to switch from work in person to work remotely, the second factor is that the amount of the portable work or work that can be adaptable to be performed in a remote situation. So we being a CPA accountant is not hard for us to switch from working in the office to work from home. But if your job require you to be physically in the office, it’s not easy for you to switch to working remotely. Then you can consider to have a suspension of your operation. The third factor that we’ll consider is the role that your physical workspace play in your trade of business.
Do you to have the employee working physically in the office, is that considered critical and necessary, or is beneficial but not necessary? Or is really just for the employer’s convenience. So if it is a critical and necessary. Then you most likely have a suspension in your business operation. If it’s just for the employer convenience, then it’s very likely that you are not considered to have a suspension. If it is say somewhere in between beneficial and unnecessary, then we have to look at other factors to see if we can meet the requirements for the suspension. Let’s say if you have both essential business and non-essential business in your operation. Then we have to look to see the non-essential business would that constitute more than 10% of your gross revenue or the amount of time your employees serve on the non-essential business side is one and 10% of their total work time.
For example, like restaurant, a restaurant can have both essentially non-essential component in their operation to say if you own auto dealership, that can also be essential non-essential business. If you have a repair services that can be considered essential, but even on the sales portion, that’s non-essential. If you own a hotel, you can also have both and retail store you can also have both. Here’s the requirement. If you have both essential and non-essential, the non-essential portion of your gross receipt or the hours of service has to be 10% or more of your total gross receipt or total hours of services.
Here’s another example. Let’s say if you’re 100% essential, so you are a manufacturer, you never close your door even you have a governmental order because you are essential business. However, if you experienced significant interruption in your supply chain, then you can still consider have a partial suspension of your operation. So employer X is a manufacturer, is essential business doing the governmental shutdown or one of the major supplier cannot provide the supply because they are closed due to a governmental order. And this business cannot find alternative supplier or the service provider. And in this situation, you have an interruption in your supply chain, then you consider to have a suspension of your business operation.
The other situation that you can consider have suspension is that you have to reduce your operating hour due to a governmental order. Let’s say you are a food processing company. You are considered essential before the pandemic, you operate 24 hours a day. But because of governmental order, now you have to reduce your operating hours to only 18 hours a day, because you have to use the six hours to clean and sanitize. In that situation, you are considered having suspension of your operation. Then you will qualify for the credit. Again, the suspension criteria is not as black and white or is not as clear as the gross receipt reduction requirement. So we have to examine everybody’s situation carefully, consider all the facts and circumstances to see if you meet the requirement.
Another thing you have to keep in mind is that, let’s say, for example, you are the auto repair service business, you are considered essential. You never close your door. However, your customer has to stay at home because of the governmental order, the governmental order that limits travel. You don’t have too many customers coming to ask for the repair services, as a result, your revenue decreased significantly. In this situation, you are not consider having a suspension in your operation because it’s not your operation that got suspended. It’s just your customers having to stay at home. However, even though you don’t need a suspension requirement, you may need the gross receipt reduction test. In this situation, then the customers not coming to you is not considered a suspension.
The second situation is if you voluntarily reduce your operating hours. It’s different than what we’ve talked about previously in that you are required to reduce your operating hours. If you are not required to reduce your operating hours because the governmental order, you choose to voluntarily reduce it, then that is not considered a suspension. Later during the presentation, we’re going to talk about more who are considered an aggregate group or affiliation group. Let’s say if you have a related party and you own several related businesses and you have to aggregate them, keep in mind as long as you have one member in the aggregated group that has a suspension in the operation, then everybody will qualify for the credit. Now I’m going to turn it over to Guy. He’s going to go over how the credit is calculated. There’s a different rule for 2020 and 2021.
All right, thanks, Bella. And before I go on in this section, just wanted to mention that we realized that there are some that have sent us questions ahead of time. There are questions couple of coming in live during this webinar. At the end, we will answer whatever questions that we have time to go over. We may need to follow up with some of you via email, and I think our marketing team will be getting copies of the slides out to everyone as well. But we will follow up and Craig and the marketing team is tracking this information so that we can get back to those of you who we don’t answer the questions live today. So thank you for your patience on that, but now onto calculating and claiming the credit. So as you can see on this chart here, the applicability is four qualified wages for 2020, first of all, paid after March 12th.
Through December 31st, the credit is based on 50% of the qualified wages maximum is 10,000 per employee per year. That’s for the whole year for 2020, the maximum qualifying wages is 10,000. Since the credit is 50%, the maximum credit per employee is $5,000. Versus 2021 and it’s the entire year where you can have qualifying wages. Well, the increase in improvement allows for 70% of qualifying wages which is a maximum of $10,000 per employee per quarter. So if you think about the math on that $10,000 is the maximum wages per employee, times 70% is $7,000 and you get to have that every quarter, if you qualify. So the maximum credit you can have per employee for the year is $28,000. So you can see how the math and the credits add up greatly for those who continue to qualify.
All right. Now. So what are qualified wages? Wages and qualified health plan expenses that the employer paid on the employee’s behalf, wages that are exempt from FICA are not eligible for the employee retention credit. Owner’s compensation, shareholders, partners, et cetera. Those wages are not eligible for the credit, nor are the wages of the relatives of greater than 50% owners. So we have some clients that obviously are in that situation where they compensate themselves and family members or those wages don’t qualify, and you do not get to take the credit for those shareholder and owner employees. All right. So there is a special rule that makes these benefits a lot less beneficial for large employers. And so large employers for 2020 was defined as employers with more than 100 full-time equivalent employees. As you can see here qualified wages with more than 100 full-time equivalent employees in 2019 and then only wages paid to an employee for the time that that employee was not providing services qualify.
In other words the wages that you pay for them to work, if you’re a large employer, those do not actually qualify as wages for purposes of the credit, but if they are not working and you’re still paying them, you get to use those wages. And again, this is for large employers. If employee is paid for teleworking, like a remote employee, those wages also do not qualify for the credit in this situation. So also the other penalty for being a large employer in this case is you can’t count payment for vacation holiday, sick pay, et cetera. So none of those wages, none of that compensation will count as qualifying wages for larger employers. And as you can see here, it’s more than 100 employees for 2019. And then that changes to over 500 for the 2020.
All right, increasing the amount of wages paid. So this is the same qualified wages, more than 100 full-time equivalent employees. Increasing the amount of wages paid to employees during the time that employees are not providing services, do not qualify for the credit. So what this is saying is if you try to give them an increase in pay during non-qualifying periods, you’re not allowed to count that increase as qualifying wages. You have to look back to the 30 days immediately prior to count that as the base wages for these purposes as qualifying wages as well. All right. So here’s another chart here that walk through an example of how the numbers work out. So in this chart represents for large employees. So in other words, employers, so for more than 100 full-time equivalents. So in this example, this employer had more than it’s a restaurant.
It had more than 100 full-time equivalents in 2019, they had a partial suspension of their operations from the period, April 6, through May 31st of 2020. Take out delivery service was available. And it paid all employees the same wages as it did pre COVID. So there was no reduction in their wages and it paid 100% of the health insurance premiums, which equaled $150 per week per employee. So as you can see in the chart here, John and Mary, John is working. Mary was not working, John’s weekly gross pay is 1,500, the math resulting for that period of time. It would be 12,000 and wages. They would’ve paid them, but since it says here that they only paid him 60% of his normal wages, 60% of the qualifying wages are, I’m sorry, he’s only working 60% of the time. The only wages that qualify are the wages that he’s paid for not working.
The 40% or 4,800, 12,000 times 40% are what’s qualified wages for John. The health insurance that they paid on his behalf was 1,200. So the total qualified wages, including the insurance was $6,000. The limit was 10,000 per employee. He doesn’t hit the limit. So it’s still the same $6,000 in that column. And since the credit is 50% of qualified wages, that’s how we get to the 3000. For Mary, it’s a little different because she wasn’t working. She doesn’t have to… none of her wages are disqualified. Basically, all of the wages that she was paid, which in this case is 9,600 that’s for the amount that they were paying her 60,000 would have been her non reduced pay. But for the month they paid her $9,600. That was all qualifying. They still had the same 1,200 of health insurance.
Her total qualified wages and insurance was 10,800. But since the limit is 10,000 per employee, you can only count 10,000. So she gets 50% for her credit. And that’s 5,000, which is the maximum, as we talked about in the prior slides, maximum per employee is 5,000. And that’s what this employer would get for Mary. So the total credits for John and Mary for this employer are $8,000. All right. So the qualified wages look a little bit different for small, not large employers. So within 100 or less full-time employees in 2019, all wages just qualify, even during the time employees are working, which is what we would expect. And you do get to include the wages for pre-existing vacation, sick and other leave policy wages as qualified wages for the credit. All right. And so here’s a slide that walks through that.
Again, this one is as compared contrary to the last slide, which was for large employers over 100, this one is for less than 100. So it’s not subject to the rules. You get to qualify all of the wages that they were paid. So let’s just look at the chart here. John was working, his normal pay was 1,500. Now notice in the fourth bullet point above, it says it paid all employees 60% of the wages that they were earning before COVID. So in other words, even though the normal pay that John would have been making before COVID times was 1,500 a week or $12,000 for this period, they actually only paid 60% of those wages. The qualified wages that they paid John were 7200 during this time period, the same 1,200 for health insurance. His qualifying wages are 8,400 are still below the 10K limit.
You get to take 50% of that full amount or 4,200. And marry similar situation as before where she wasn’t working at all. So she doesn’t run across any limitations. She didn’t now, she did it before. So she gets the full 9,600 that she was paid as qualifying wages, or that same $5,000 if you carry it across. So the total in this case at 9,200, so you can see how the benefit is greater for small employers. All right, next slide. So the large employer again, more than 100 full-time employees in 2019 for 2020 it’s 500. So it’s a lot easier to qualify, a lot less employers and many of our clients will qualify because 500 is a lot of employees. So I would venture to guess that most of the people on this webinar do have less than 500 employees. So you probably will not run across this limitation.
But what does a full-time equivalent, as it says here, it’s an employee who had an average of at least 30 hours of service per week, or 130 hours of service in the month in any calendar month in 2019. So the total full-time equivalent is determined by taking the sum of the number of full-time equivalents in each calendar month in 2019, and dividing it by 12. And then for employers who started in 2019, is determined by taking the sum of the number of full time equivalents in each full calendar quarter, month in 2019, and dividing it by the number of full calendar months in 2019.
Thank you, Guy.
Aggregate goals. So Bella takes over to talk about the aggregate rule.
I also want to clarify the definition of full-time employee for ERC purposes, as it is different for the PPP forgiveness purposes. So if you’re familiar with the PPP forgiveness rule, the full-time employee head count is you take 40 hours a week as a one, as a full-time employee, but for the ERC purposes is 30 hours. Also, I do want to apologize. I realized that on the previous slide, it said the 500 for 2020, it’s the 500 employee’s threshold for 2021 ERC. When we send out the final version of the slides, we’ll make sure that it was reflected as the 500 thresholds for 2021 ERC. I’m going to talk about the aggregated group. As I mentioned, when you’re calculating yours, when you look at your suspension, also look at the gross receipt, reduction test, and number of the employee calculations. If you are considered an affiliate and you are a member of the aggregate group, then you have to combine everybody, all the company in the aggregated group.
We’ll consider who are considered as an aggregate and need to be included in the aggregated group. If you are parents of subsidiary groups or have a common parent with more than 50% of all the subsidiary. So, you have a company A who owns company B and company B owns company C and this is all vertically related, then they are considered an aggregated group. Or if you are brother sister company who has company control owned by five or fewer people and the five or fewer people own 80% or more of the brother sister company, then you’re considered affiliates and you have to aggregate them.
The third is that if you have several business entities, they are providing service to each other and they are related. Then you have to aggregate them. If you are considered a member in the aggregated group, you do your gross receipt test, you look at your suspension, look at your number of employee head count under the aggregation rule. Then, let’s say, you still qualify for the credit and how you allocate the credit amongst the members are based on the payroll. Let’s say company A pays $2 million wages, company B pays a million, then the credit will be allocated based on the actual wages paid by each member. And it’s going to be based on the payroll tax return. So now you qualify for the credit, you calculate how much credit you’re eligible for, how do you claim the credit?
The credit is a payroll tax credits. You must claim the credit on your form 941. Now let’s say you find out you qualify for the credit for 2020, but you’ll refile your 2020 form 941, the only way you can credit, you have to go back and amend your 2020 form 941. Let’s say you qualify for the credit for the second and third quarter of 2020. Then you will have to file the form 941X, which is the amended payroll return for the second and third quarter for 2020. Now it’s almost time to file your first quarter 2021 form 941. If you haven’t filed it yet, and you qualify for credit, you should consider to claim the credit on the timely file 941. It’s a lot better, quicker for you to get a refund if you can claim credit on the timely file 941, because most of the time, file 941 can be filed electronically.
If you have to amend your 941 to plan a credit, you have to file the 941X paper. And we were told that the IRS is very behind on processing those paper returns, especially the amended return. They are still processing some of the paper returns from 2019. It can take a while for you to see the refund check, it probably is going to take about five to six months or more than six months. So you just need to be patient. Let’s say you look at your criteria. You qualify for the credit for the second quarter and third quarter, and you want to get the refund quicker. There’s another option, you can file this Form 7200, which is the events payment form with the IRS. If you filed a 7200 you can request the events payments on the IRS, and basically, you’re going to get the refund ahead of time before you file the 941. And if you filed the 7200 and it’s time for you to file the 941 for that quarter, then you have to do some reconciliation.
Just as information, if you filed a Form 7200, no banking information is required on the form. You may receive IRS letter 6313, which is to verify that IRS has the correct business address on their records. There is a way to make sure that they’ve mailed the refund check to the right location. Then, like I mentioned, if you filed a 7200 and you receive the events payments on the IRS, then when you file your action 941, you have to do some reconciliation. If you claim the credit too much when you apply for the event’s payment, then you have to pay them back when you file the 941. Vice versa, if you are eligible for more credit, you can get more refund when you file 941.
Next, I’m going to talk about what the income tax implication is if you claim the employee retention credit. The rule is that if you claim the employee retention credit, then you cannot deduct the wages that were used for the credit. Let’s say in 2020, you went back, and you claimed 100,000 of the ERC, employee retention credit. You have to add back 100,000 of non-deductible wages on your 2020 tax return. Because the employee retention credit is a federal payroll tax credit only, then that add back is not required on your California return. On your California returns, you can still deduct that 100,000 of wages.
It’s very important to know if you’re eligible for the credit in 2020, and it’s time to file your 2020 tax return. You need to keep that in mind, even though you haven’t filed the 941X, the amended payroll return for the 2020 credit, but because the credit is going to affect your tax deduction on the 2020 wages, then you need to make sure that you have the credit or have the credit determined. Then you can add back the wages on your 2020 tax return. And now we’re going to move on to the next topic. Is that how you’re going to maximize both your PPP forgiveness and the credit? Because remember at the beginning of the presentation, I mentioned that you cannot use the standard wages for the PPP forgiveness, and also for the credit, there’s no double dipping.
How you’re going to allocate the wages between the two programs and maximize the benefit on both. It’s very important to know the rule, how you use it. Let’s say most of the people, probably already received their second job PPP. Let’s say you apply for the second job PPP, you receive the second PPP March 1st, this year, as an example, and you also know that you qualify for the ERC in the first quarter of 2021, so, it’s easy, because you got the second job PPP on March 1st, then all the wages you pay from January 1st to February 28th will be used for the ERC wages from March 31st to March 31st. Then you want to see you should allocate those wages to ERC or allocate for the PPP forgiveness for the second PPP. Keep in mind that when you apply for the first and second PPP, it is based on 2.5 times your average monthly payroll costs.
For your second child PPP, you’re going to use the 24 weeks, the maximum covered period for the forgiveness. The 24 weeks is almost six months, six months is more than 2.5 months. You’re getting a lot more wages and qualified payroll costs for your PPP. You should have excess wages for the ERC, but again, if you don’t have enough wages for both ERC and PPP forgiveness, the recommendation is that you want to pick PPP first, because the PPP is a dollar to dollar benefit on the wages you pay. The ERC is 70 cents to a dollar. Also, for the ERC, you have to add back the wages so you have to factor in some of the income tax implications, if you have the ERC on the wages.
If you can only pick one, then you want to go with the PPP. A couple of things to keep in mind. Let’s say for your PPP, we recommend that you use the maximum 24 weeks covered period. So you can maximize your forgiveness. Even though you have the salary reduction or a full-time employee head count reduction, you may still qualify for a 100% forgiveness if you have enough qualified expenses during the 24-week period. Again, when you interplay with the ERC, we recommend you use the 24 weeks covered period for the forgiveness. Also, you want to maximize the 40% non-payroll costs. For your PPP, you are required to spend 60% of the long on the payroll costs. And 40% on the non-payroll costs is expanded to include more category.
It’s not just rent utility and interest. You can also include the walkup protection, equipment expenses, certain cover operating expenses, certain supplier costs, or the qualified damaged costs. You can include all of those on the non-payroll cost category. You want to make sure that you maximize that 40% and remaining 60%, you also want to maximize your retirement plan contribution, because that’s also part of the payroll costs for the PPP forgiveness. Then after that, you want to you see how much you need for the PPP forgiveness based on the wages and the healthcare benefit. And then you will allocate those between the PPP and ERC.
And the other thing to keep in mind is that for the PPP, everybody’s wages limit at 46,154 if you use the 24-week covered period. Let’s say during the 24-week covered period, you pay somebody more than 46,000, the excess wages, you pay somebody 50,000, then the 3,000 additional wages qualify. You can use that for the ERC. As we mentioned earlier, for an employee, if you own more than 50% of a company, you don’t qualify for the ERC but you can use the wages for the PPP.
Bella, before we move on past this interplay section, I just wanted to pause for a moment and just reiterate to the audience here the importance of the interplay between PPP and ERC. And I can see as I’m listening to Bella, who’s obviously got all the rules for both the PPP and the ERC down. She’s a professional. This is what she does for a living. I realized that not everyone in the audience may be as well informed or studied on these particular topics. So particularly when you’re talking about the interplay between PPP and ERC, well, this has been a webinar on ERC. So some of you may not know all the rules for PPP, but let’s just say that because they’re connected and you can’t double dip as we’ve explained a couple of times now, it’s going to be crucial for purposes of maximizing what I think are tens or hundreds of thousands dollars in credits and for loan forgiveness, potentially to make sure that you optimize by being very familiar with these rules or working with someone.
One of the most important takeaways for me that all of you should have from this particular section of the webinar, is that if you have a PPP loan that you’re going to be seeking forgiveness that has not already been submitted to the bank for forgiveness, that you stop and do not submit that loan forgiveness application, unless you know that you 100% understand the rules for PPP, PRC and how the interplay works that Bella just described. If you are not sure, well, it’s possible that if you submit the application for loan forgiveness for PPP, that you did not optimize your credits for ERC and forgiveness for PPP.
If that’s the case, it is an irreversible submission of that application. Once you submit your PPP loan forgiveness application to your bank, you’re done, you can’t change the allocation of your payroll costs or your non-payroll costs. So my advice to you is if you’re not sure you have these calculations and dialed in, and if you have a PPP loan application that you haven’t submitted for forgiveness yet, that you stop and reach out to whoever your tax advisors are or whoever you know that’s an expert on the topic. Or if you don’t have one already, obviously Windes, we do provide consulting services for both PPP and ERC. We’d be happy to review your calculations for you and make sure that you’re getting the best bang for your buck. So I just want to leave that with you before Bella moves onto the next section. Thank you, Bella.
And you Guy. So next to discuss is consideration, and also briefly touch on the new, and this is still a proposed bill, the Assembly Bill 80 on the tax deductibility of your PPP expenses. So we got this question a lot, many of our client they are part of the PEO or they use PEO and they always ask, “Can I claim ERC on the wages I paid to the PEO?” The answer is yes. So you have to work with your PEO to claim a credit on your 941, or if it’s a retroactively to the 2020 ERC, then they have to emerge your prior year 941 plan of credit. And also we experienced that some of the PEO they really require events notice. So let’s say if you qualify for the Q1 941 this year, even though the 941 is not due until April 30, that PEO may require you to tell them the amount of ERC that you are eligible for by end of March or even mid-March in order for them to process the ERC on time.
There’s a special provision in the American Rescue Plan. If you are considered a recovery startup of business, a brand new startup business in 2020, you’ll gross receipts a million or less, then you can claim up to 50,000 of ERC for each of the third and fourth quarter this year. Keep in mind, this only applies to the third and fourth quarter. The other special provision is that you are considered a severely financially distressed business, you had a more than 90% decline in your gross receipt, this year compared to 2019, then the 500 full-time employees’ threshold is waived. You can claim ERC on all the wages you pay to all your employee. And again, this only applies to the third and fourth quarter of 2021 ERC. Let’s say you qualify for the ERC for 2020 and the deadline for you to file the amended 941 is April 15, 2024.
You claim on the credit and knock on wood nobody likes to get out of it, but in case you would want to get out of it, you got to make sure that you have a proper supporting documentation, need the substantial requirement for the credit. So if you are relying on the suspension requirement, then you got to have some kind of printouts and a supporting document for the governmental order, that proved that you had a business operation that was suspended because the governmental order. If you are relying on these significant declines in gross receipt, then you’ve got to make sure that you have the quarterly financial statement. It can be internal produced financial statements for 2019 and 2020 and 2021 to prove that you need a 50% or 20% reduction, you got to make sure you keep all your payroll record with your large employee year.
You need to have as a supporting documentation to show you only claim credit on the wages pay while people were not working. Also, you need to have approval of all the healthcare benefit you pay for your employees, and definitely keep a copy of your Form 7200, the 941 file. And normally the federal statute of limitations two years, but for the ERC purposes, according to the IRS guideline, you need to keep all your records for at least four years. And for the fourth quarter, 2021, ERC, they even extend the statute for one more year. So you’ve got to make sure that if you claim the ERC in the third and fourth quarter this year, you got to keep all the records for five years.
So just to clarify on that point, Bella, I know you have it in the chart, but the statute of limitations is extended to five years. Not really just so in addition to keeping your records obviously, the actual statute of limitations for them to audit those returns is five years versus the original statute of limitations of three years.
Correct. Exactly. And also the other point I want to bring up, this is actually just something issued by the IRS yesterday. I know we always spend a lot of time talking about ERC, but keeping in mind that you also have the paid family leave and paid sick leave credit available at the end of this year. Yesterday the ERC issued a notice reminding people that according to the American Rescue Plan at the employer, if you’re considered a small employer, which Guy mentioned is 500 or less in 2019, you have less than 500 full-time employees in 2019, you’re considered a small employer, you pay employee leave for getting the COVID-19 vaccine, then those wages qualify for the payroll tax credit as well. You probably have a lot of people now taking leave to get vaccinated.
The wages you pay will qualify for the payroll tax credit as well. Then my last slide here is that the California Proposal Assembly Bill 80. Most of our clients are extension this year because we are waiting for the final result on this proposed bill. We know for federal, you’ll deduct all the PPP expenses on the 2020 federal return. The question is, on the California. There’s been a significant change to this proposed bill. The original draft is that you can keep the PPP expenses on your 2020 California return. Only up to 150,000. For the most recent proposed bill, they removed the 150,000 limit. You can deduct all your PPP expenses on your 2020 California return; however, you must demonstrate that you have at least 25% reduction in your gross receipt in any one accountant quarter in 2020 compared to 2019.
This is the same requirement for getting a second job PPP. If you qualify for the second job PPP, then you qualify for getting the full tax deduction on the 2020 PPP expenses on the California return. That’s all I have for today. I think we still have seven minutes left, I saw some of the questions that were submitted through the chat.
Yeah. Maybe we can take down the slide Bella, and just put it up on your… there you go. Craig, I think you’re setting the slideshow out to our attendees today. So if that’s the case, you’ll have all this contact information, but as you can see there’s our contact information, if anybody would like to consult with us on any of this since it is a lot of information, please don’t hesitate to reach out. All right. So questions, Bella, did you have some of the questions in the chat room perhaps?
The federal add back for ERC is the credit amount versus the wages use for the credit, correct? Yes. That’s correct. William asked is add back is the credit amount. Yes, it is. You would add back the credit to the wages. So you can’t claim not the actual wages. And that’s a reminder that obviously, if you have this stuff, particularly for 2020, all of your tax returns shouldn’t be on extension because they are impacted by whether or not you get the Employee Retention Credit, because if you claim them, you will have to the add back, which obviously is going to impact your tax return. So if you’re not already on extension for 2020, or if you are an extension, no rush to file it since we do have the six months when you’re still potentially calculating some of these retention credits, all right, you want to take another question, Bella?
I’m just going to the question and answer.
Yeah. There’s a few questions in there for now. Let’s see. Is there any guidance or recourse for those companies that have more than 500 employees? So I’m not sure what that question means. Basically, the situation for more than 500 employees is that you can only count the wages as qualifying wages for the time you paid them, that they did not work and that you cannot use sick time, vacation time, things like that as qualifying wages. Whereas if it’s less than 500 in place, the only rule that’s different from that is for Q3 and Q4. If you’re a severely distressed business, which means a 90% reduction in gross receipts, all the wages qualified, no matter how many employees you get. So that’s the only recourse that I know of.
I saw there’s a question. Say a client only qualified for a credit due to a full suspension of the business due to governmental order, the wages qualify for the ERC will only be the wages paid during the period when the business was closed due to a governmental older, is that correct? Yes. You can only claim ERC on the wages paid during the shutdown period. But let’s say if you shut down from April 1st to May 31st, that’s two months, even though it’s not a full quarter, the whole quarter will qualify for the ERC. Even if it’s a partial quarter that has the shutdown, the wages paid during the entire quarter will qualify for the ERC.
So another way, you said once you qualify, you qualify for the entire quarter.
Correct. Exactly. I saw there’s a question. Can you go over the California proposal for PPP expenses again? The most reason proposed bill is that if you qualify, you meet the 25% reduction in calendar quarter, gross receipt in 2020 compared to 2019, then you get to deduct all the PPP expenses on your 2020 California return, there’s no longer 150,000 limit.
And if you want to read that in the attached alert, you can find it on our website. We actually have our tax alerts posted on our website, www.windes.com. And one of our most recent alerts did describe that California proposed a rule on the PPP loans.
There’s another question. For the 2020 ERC, is the year of credit added back to income 2020 or 2021 the year you received the credit? If 2020, do you recommend waiting to file 2020 tax return or amend later when the final amount of credits are determined? Even though you file the amended return in 2021, but it was related to the wages paid in 2020, then you have to add back the wages, on your 2020 return. It doesn’t matter your cash method, cash basis, or accrual basis for the income tax purposes. If the ERC is on the wages paid in 2020, then you have to add back the wages on the 2020 returns. Yes, like I mentioned, we do recommend that you wait and file the 2020 return extended first and file the 2020 return once you have the 2020 ERC all determined.
And as a general rule, we would always recommend filing it correct on an original return and not having to amend. Obviously, if you have a valid reason to that you need to amend, you don’t want to forego any tax benefits because of fear of amending, but when given the choice, wait, and don’t file, get it right the first time. And that way you can avoid amending, it’s unnecessary cause.
There’s a question nondeductible wages relate to ERTC is the portal quit. Oh, I think Guy you already mentioned that.
Yeah, that’s all.
There’s another question. Say my company operates RV parts. In January, the sale company allowed transit travel for a month or so, we therefore could not accommodate guests who had wanted to stay for a day, weekend, or week. We could however, accommodate our longer term guests. Also, we operate now shutter banquet party event business that hasn’t been able to operate due to limited crowd capacities since early 2019. Do either of those qualify us for ERC in 2021?
Again, the suspension rule is based on facts and circumstances. We may want to discuss a more, your specific situation. If you have to limit your operation because the governmental order then yeah, you’re considered having a suspension. The other good example you can think of is a restaurant. Even now, and earlier this year, restaurants cannot open completely. The dining area cannot be opened yet, the only availability is for takeout and delivery. They are considered having a suspension, even the restaurants still in operation, but there’s a certain portion of their business that has to be closed because of the governmental older. We have a few clients, actually, the profitability didn’t go down during the pandemic because there’s a lot of takeout, a lot of delivery, but there’s a significant amount of the revenue generated from that sector. But just because the dinning is closed, then they are considered having a suspension and they qualify for the credit.
All right, well, we are at the 2:00 hour. And I think it’s all the time we’ve allocated. As we mentioned before, we will follow up with some of you have submitted questions by email. If for some reason you don’t hear from us one reason or another, please don’t hesitate to email Bella and or myself. But again, we wanted to thank you for taking the time out to be with us today for our webinar on Employee Retention Credits, we hope you found this information very valuable and informative. And again, we are here to answer any questions, so don’t hesitate to reach out, but for now, we’ll bid you all a good day and until next time, take care.
DISCLAIMER: The information presented in this webinar is intended as general information and does not constitute tax or legal advice. You should always consult your tax, legal, or financial advisor for direction regarding your specific situation.
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