The Employee Retention Credit under The CARES Act
I’m sure that many of you have already begun the process of applying for The Payroll Protection Program (PPP) Loan with the Lender of your choice. If anything that I have heard is reasonable, this process has become a nightmare. Bank of America supposedly received over 10,000 applications from small business owners within the first hour.
My presumption is that the PPP Loan is not going to be easy to get. I have written extensively about how lenders have a tendency to tighten up their lending requirements in recessionary periods. They don’t make it easy for people to get a loan, which is why I have said that this isn’t about getting them to say yes. It’ more about getting them to not say no.
But let’s not forget that the PPP Loan isn’t the only thing out there to help Entrepreneurs through this difficult time. Additional information came out recently about The Employee Retention Credit.
This isn’t something that you need to apply for, in order to receive it. No one needs to say yes. This is a credit that you take on your payroll tax return. I want to repeat that so that the people up in the nose bleeds will actually understand it.
You don’t need to get on your knees and beg for this one. If you qualify under the rules, you just take it.
The rules aren’t easy. Nothing in taxation ever is. So let’s go through some of the highlights.
Can I get the Employee Retention Credit if I also get a Payroll Protection Plan Loan?
No. You cannot get both. You have to choose one. Can you begin to understand this nightmare?
It’s April. It’s time to complete payroll tax returns for the first quarter. Normally, I would put my people on it, have them go through my normal quality control processes, and get the returns out. But I can’t do that this time. If you have applied for the PPP, then I can’t do the credit on your 941. I have to do the return in the normal fashion, without the credit.
Okay. Let’s say that this is what happened. You apply for the PPP Loan, and we do your 941 for the 1st Qtr 2020 without this credit. But it will probably take at least two or three weeks for the Lender to get back to you about the PPP loan. What if you are then turned down? Now we need to amend the 941 and ask for a payroll deposit refund on your 1st Qtr 2020 Payroll Tax Return.
You get the picture. The point is that you can’t do both. You need to decide, so that we will know how to proceed.
What is the Employee Retention Credit?
– It is a fully refundable tax credit equal to 50% of the qualified wages that an Eligible Employer pays its Employees.
– It applies to wages paid between March 12, 2020 and January 1, 2021.
– The maximum amount with respect to each Employee is $10,000 in Payroll and Qualified Health Plan expenses, so the maximum credit is $5,000 per Employee.
How does an Employer become eligible?
There are two ways.
1) A Governmental Agency fully or partially sends out an order limiting commerce.
– Please notice how I just said, “fully or partially”. An example would be a restaurant or bar operation. Prior to the Shelter in Place Order, they had customers that would come inside their establishment to eat lunch and dinner. After the order, they can only do delivery or take out. This would be the definition of partially limiting commerce and would qualify under the new law.
2) A company experiences a significant decline in gross receipts during a calendar quarter.
– Please remember that this goes by quarter, rather than individual months. A “significant decline” is defined as beginning with a quarter where your gross revenues decline by more than 50% and ends with a quarter where the decline is less than 20%.
Example – An Employer’s gross receipts were the following in the first three quarters of 2020 and 2019
2020 2019 % Difference
1st Qtr $100,000 $210,000 48%
2nd Qtr 190,000 230,000 83%
3rd Qtr 230,000 250,000 92%
Under this scenario, the Employer can take the credit in the 1st and 2nd Quarter of 2020, but becomes ineligible in the 3rd Qtr. I realize that I just said that you cannot take the credit if the decline is less than 20%. In our example, the difference was 83% in the 2nd Qtr. Therefore the decline was only 17%. But the presumption under the law is that the Employer still qualified in the first part of the second quarter as the business continued to rise. Therefore they still get the credit in the entire 2nd Qtr.
How is the Maximum Credit determined?
The credit is 50% of the qualified wages paid to an Employee in a calendar quarter.
– The maximum eligible wages per employee is $10,000 for all applicable calendar quarters in 2020.
– So that maximum credit is $5,000.
– That’s per employee, not in the aggregate.
Example 1) An Eligible Employer pays $10,000 in qualified wages to Employee A in the 2nd Qtr of 2020. The available credit is $5,000 in the 2nd Qtr of 2020.
Example 2) An Eligible Employer pays $8,000 to Employee B in the 2nd Qtr of 2020 and another $8,000 to the same Employee B in the 3rd Qtr of 2020. The available credit is $4,000 in the 2nd Qtr and the remaining credit is $1,000 in the 3rd Qtr.
What are Qualified Wages?
– Payroll and Qualified Health Plan Benefits allocable to those eligible wages
– Paid between March 12, 2020 and January 1, 2021
– If you have less than 100 employees, it applies to everyone.
– If you have more than 100 employees it only applies to employees who are not working due to either a full or partial government shutdown or who are not working because of a significant decline in receipts.
< strong>Are you required to pay wages to Employees under this Act?
No. This is still America, the last time that I checked. You can lay people off. But you certainly cannot get this refundable credit if you aren’t paying payroll in the first place.
Can you claim this credit for wages paid in the 1st Qtr of 2020?
Yes, but it only applies to wages paid from March 12, 2020 to January 1, 2021. So for the first quarter, it only applies to eligible wages paid from March 13, 2020 through March 31, 2020.
Can you claim the credit for periods after December 31, 2020?
No. The credit is only available on wages paid up to January 1, 2021.
Additional information can be found on the IRS Website at the following address.
There is a lot more on this, that I will address in tomorrow’s communication. Let me leave you with this final thought.
These are difficult and trying times. In order for you to get through them, you need to pay attention to not only your mental but also your physical well being. If you don’t pay attention to your physical well being, then you will never be able to make the important decisions which are so critical in these difficult times.
I realize how difficult this can be if you have small children at home, but you need to take the time to exercise. Dust off that stationary bike that you forgot that you had. Do some yoga or some push ups. If you do have small kids in the house, maybe they can participate in your exercise routine as well. Turn it into a family thing.
Don’t forget to eat right and take your vitamins. Limit alcohol consumption whenever possible. Did you notice how I said, “Limit”? I don’t know anyone who isn’t having a cocktail of two from time to time, given what we are all dealing with.
But no matter what happens, don’t take this out on your kids or your spouse. They might be the only people that you come in contact with, and are certainly the easiest targets. But they don’t deserve your rath. They might deserve your empathy. This isn’t easy on them either.
Be the solid hand at the helm, that everyone needs right now. Be that bright shining light at the end of the tunnel. Be the entrepreneur that you were born to be. In other words…
Accounting Solutions Ltd. stands ready to complete its mission and purpose of protecting you, your family, and your business. If there is anything that you need, or even if you just want to talk, we stand ready to serve.
Most of all know that you are not alone in this. I’m here, and I remain,
Accounting Solutions Ltd.
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