In December of 2020, Congress passed the Consolidated Appropriations Act. This 5500-page bill has great implications for business owners, in a good way. The CAA provides free money for your business. Most businesses have already seen savings in their tax bill of 6 figures. Here are some of the changes that you need to know and what to do about them so you don’t leave money on the table.
There are a lot of changes in this bill but Section 206 requires your immediate attention. It allows businesses to retroactively both borrow a PPP loan and claim an Employee Retention Credit for 2020. What does that mean for you?
Many of you remember last year when the CARES Act passed. This created two mutually exclusive incentives that provided funds to business owners to help them with payroll during the pandemic. Most business owners used the Paycheck Protection Program. This provided billions in forgivable loans to businesses with less than 500 employees. If you took part in PPP this made you ineligible for the second incentive - the Employee Retention Credit (ERC).
The ERC is a refundable payroll tax credit that was available to taxpayers who had their business fully or partially suspended for at least one quarter of 2020 or had a decrease in revenue over the same quarters in 2019. The CAA (Section 206) made changes to the ERC about who may claim the ERC for the period of March 12, 2020 - December 31, 2020. And in Section 207, the bill extends the ERC until July 1, 2021. This tax credit was scheduled to expire at the end of 2020. 207 also changes the computational rules for January - June 2021: the final six months of the program.
As a refresher, here is how the ERC tax credit works for 2020 which is much different than how it works in 2021.
Employee Retention Credit: Computational Aspects
Basically, a for-profit business or tax-exempt organization can claim a refundable payroll tax credit of up to $5,000 per employee for wages paid between March 12 and December 31, 2020, but only for wages paid during a calendar quarter in which the business is either 1) Shut down by government order, or 2) Experiencing a large drop in year-over-year gross receipts.
In order to meet the requirements for the ERC for any quarter in 2020, your business must have been “fully or partially suspended” during the quarter due to “orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for social, religious or other purposes) due to COVID-19.” If you meet the criteria then that quarter is considered an “eligible quarter.” However, you only get a credit on wages paid during the part of the quarter that was shut down. So, let’s assume your business was closed March 22nd - April 17th. You would have an eligible quarter for Q1 and Q2 but the credit only applies to the wages paid while you were closed, not for the entirety of Q1 and Q2.
The other way to qualify for the ERC is that for any quarter in 2020, the “gross receipts” from your business must be less than 50% of what they were for the same quarter in 2019. Once this happens, every quarter is an “eligible quarter” until the END of the quarter in which the “receipts” are at least 80% of what they were for the same quarter in 2019. Here’s a great example from Forbes on how this plays out: “if receipts in Q1, Q2, Q3 and Q4 of 2019 were $100,000, $120,000, $100,000 and $150,000, and for the same quarters in 2020 receipts were $40,000, $70,000, $85,000 and $125,000, the “eligible quarters” for 2020 are Q1 (the first quarter in which receipts are less than 50% of 2019), Q2 (still less than 80% of 2019) and Q3 (the end of the first quarter in which receipts have returned to at least 80% of the same quarter of 2019).”
In short, if there was a time frame during any quarter in 2020 where both eligibility requirements for ERC applied to your business, the result is in a credit. However, the rules change a bit if you averaged more than 100 “full-time equivalent employees” during 2019.
With all that spelled out, the one thing that the CAA changes is that for the first time a business that borrowed a PPP loan may claim the ERC for 2020.
So, all of you who borrowed a PPP loan can now go back and claim the ERC for 2020!
Implementing that idea is easier said than done.
There is a key way to stack these credits. As we said earlier, this act increased the payouts of many of the programs we were already using. Whether that is for business owners, who are hiring people, or those who have retained employees through this COVID pandemic, some programs were available to get money for hiring and retaining employees. Some of these programs do change yearly, and that is why we are here to catch the changes that could easily slip through the cracks.
Here’s an example: Let’s take a restaurant in Houston, Texas. They hire about 10 people a year, have 25 employees, own their commercial property that they purchased for $1MM. This restaurant had to shut down operations during COVID - and they had at least a 20% income reduction in at least one quarter comparing 2020 to 2019.
Looking at this image, we can see that this business found $496,000 in savings. Sounds pretty sweet, right? And, there are many more savings on the way. By taking the same approach to tax incentives that these big companies are doing, you’re picking up the cash that’s already sitting on the table in front of you.
What to do now? Don’t leave money on the table. Talk with your tax professional or business advisor to get more information.
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