In our webinars and writings, we’ve focused a lot of attention on the Paycheck Protection Program (PPP), but it’s important to remember that it’s not the only option for relief for struggling small businesses. The Employee Retention Credit (ERC) was also part of the CARES Act and, like the PPP, was designed to keep employees on the payroll. Though the ERC doesn’t get the attention the PPP does, you shouldn’t discount it. It’s a lucrative credit and far less complicated, and a new development late last week is bringing new attention to it.
In guidance issued by the IRS, employers will remain eligible to claim the Employee Retention Credit on their tax returns while continuing to provide health insurance to their furloughed employees. Previous guidance effectively denied the Employee Retention Credit to employers who continue providing health insurance to their furloughed employees unless they continued paying other wages.
Remembering the ERC
Unlike the PPP, the ERC is a refundable tax credit, not a loan. It’s calculated each quarter for wages paid after 3/12/20 and before 1/1/21. That means the ERC is generally available for part of quarter one and all of quarters two, three, and four for 2020. The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee for all quarters. Qualifying wages may not exceed 50% of $10,000 ($5,000) for any employee for all calendar quarters.
Employers are generally eligible for the ERC if they:
- Fully or partially suspend operation during any quarter in 2020 due to government shutdown orders or orders that limit commerce, travel, or group meetings due to COVID-19; OR
- Experience a significant decline in gross receipts during the calendar quarter.
Late last month, the IRS clarified that mere statements from government officials, such as those made during press conferences, do not rise to the level of government order. Declaring a state of emergency doesn’t either unless it limits commerce, travel, or group meetings, or if it doesn’t affect the employer’s operations. In other words, you can’t qualify for the ERC unless you’ve been specifically told to shut down or reduce capacity, or unless you experience a significant decline in revenue (voluntarily suspending operations makes you ineligible unless you’ve experienced that significant decline in revenue).
A decline in revenue is “significant” when gross receipts from 2020 are less than 50% of gross receipts for the same calendar quarter in 2019.
The ERC and employer-provided health coverage
Previous guidance effectively denied the Employee Retention Credit to employers who continue providing health insurance to their furloughed employees unless they continued paying other wages. Last week’s guidance clarifies that:
- Employers with 100 employees or less may treat health plan expenses as qualified wages even if the employees are not working and are not being paid for the time they are not working.
- Employers with more than 100 employees may not include health plan expenses if the employees are receiving wages. Only the portion of the health plan expenses allocable to the time that the employees are not providing services is treated as qualified wages.
This all can be a little confusing, so check out the IRS site for clarification, and reach out to us for help with your specific situation.
The ERC and PPP
Prior to last week, employers could not take a PPP loan and claim the ERC. Now, employers that applied for a PPP loan, received payment, and repay the loan by May 14, 2020, will be treated as though they hadn’t received PPP for purposes of the ERC.