As the first quarter of 2021 comes to an end, we look back at what we have learned about the Employee Retention Credit (ERC) since the end of 2020 and roughly one year after it was enacted in the CARES Act. There were multiple rounds of updates and changes from the Consolidated Appropriations Act, 2021 (CAA, 2021) and the American Rescue Plan Act (ARPA), as well as over one hundred pages of guidance released from the Internal Revenue Service in the form of Notice 2021-20. Given that the Notice was only for 2020, it is likely we will see another round of guidance for 2021. As we begin the second quarter of 2021, it’s time to review our top ten list of the most noteworthy points and observations of the ERC:
- Even if a business doesn’t initially think it qualifies for the ERC, it’s worth a review of the eligibility rules. Some businesses only look at the decline in gross receipts test without considering the full or partial shutdown due to government order test. To be eligible, you have to meet only one of the two tests, not both. Given the dollars involved with some of these credits, it’s worth a deeper dive into eligibility, even if the business was considered essential during the pandemic.
- In regards to eligibility, it’s important to remember that the eligibility criteria are different for 2020 versus 2021. For 2020, the gross receipts decline test is more than 50%, while for 2021, it’s only 20%. Further, the full-time employee count to determine qualified wages was raised from 100 in 2020 to 500 in 2021. There’s also a safe harbor exception for 2021 that allows a taxpayer to review the preceding quarter for the gross receipts test.
- The full-time employee count in 2019 can be critical to maximizing the ERC. Many taxpayers still think that they must look at “full-time equivalents” for the ERC. However, the IRS guidance confirms that companies only need to include actual full-time employees. The definition used for a full-time employee as it relates to ERC eligibility is specific and should be reviewed in detail. This is particularly important and likely beneficial for the restaurant and hospitality industries that tend to hire many part-time employees.
- Under the CARES Act, the ERC guidance stated that an essential business can still qualify under the partial shutdown of operations due to a government order test, as long as the business can demonstrate that the government order had a more than the nominal impact on the business. For many months, taxpayers and practitioners wondered about the word nominal and what it meant for ERC purposes. Notice 2021-20 finally gave us the definition of that word. However, the topic is still not entirely clear in certain situations. It is important for businesses to be able to document a more than nominal impact to qualify under the full or partial shutdown test.
- When reviewing eligibility, the ERC’s aggregation rules are proving to be very important for many taxpayers. Specific to restaurants, we see groups of entities with common, but not identical ownership, which should be looked at in detail for ERC purposes. The aggregation rules require businesses to look at related entities to determine whether or not those entities need to be combined for purposes of the ERC. In other words, the applicable entities could be treated as one employer for ERC purposes. The aggregation rules can impact the full-time employee count, the calculation of gross receipts, and if the business was fully, or partially, impacted by government order. It is critical to consider the aggregation rules.
- The CAA, 2021 opened up the ERC for businesses that previously received a Paycheck Protection Program (PPP) loan. Under the CARES Act, those businesses were ineligible for the ERC. With virtually all of our restaurant clients getting PPP loans, this was not an option previously. Examples found in Notice 2021-20 show that there are ways to maximize both the ERC and PPP programs, without “double-dipping.”
- A common theme throughout the past year around all of these new programs and credits has been “no double-dipping”. As mentioned above, taxpayers cannot use the same qualified wages for both the ERC and PPP. However, it’s also important to remember that the same qualified wages eligible for the ERC cannot be used for WOTC, R&D credit, or the FFRCA sick and family leave credits, among others.
- When calculating qualified wages for ERC, many businesses do not realize that qualified health plan expenses can also be included. The CARES Act provides that “wages” include amounts paid by an eligible employer to provide and maintain a group health plan, but only to the extent that the amounts are excluded from the gross income of employees by reason of section 106(a) of the Internal Revenue Code. We have had many restaurant clients that had to furlough their staff, however continued to pay their healthcare costs during the pandemic. The addition of these expenses to the credit calculation can result in credits that are more valuable.
- Calculation of this credit is extremely complicated with many nuances, so documentation of the ERC is critical, especially with the substantial refund amounts at stake. Notice 2021-20 highlights the documentation that is required for the ERC around eligibility and the credit calculations. Moreover, the IRS now has five years to review the ERC, as explained in the ARPA, making proper documentation even more vital. Based on the fact the IRS has expanded the audit window from three years to five years, we expect this credit to be a focus area for future IRS examinations.
Finally, number 10. The ERC is proving to be very valuable to many businesses, in particular, those in the restaurant and hospitality industries. Taxpayers are using their ERC refunds to keep employees on the payroll and to keep their businesses running during this difficult time. If you have not reviewed the ERC yet for your business, now is the time.
GBQ continues to monitor developments related to the ERC. If you have questions or wish to explore the eligibility of the ERC, contact your GBQ advisor.
Article written by:
Sara Goldhardt, CPA
Director, State and Local Tax Services
Lorani Orobitg, CPA
Manager, Tax and Business Advisory Services