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The Employee Retention Credit and You

By Contributor
Features

Determining Whether a Business Qualifies Can Be Complicated

By Scott Foster & Jacob Kosakowski

 

Scott Foster

Scott Foster

Jacob Kosakowski

Jacob Kosakowski

Business owners have been bombarded recently with solicitations from firms offering to help them realize millions of dollars through the IRS’s Employee Retention Credit (ERC) program, which was included in the CARES Act adopted in the early phases of COVID-19. The CARES Act also contained the popular, and well-documented, Paycheck Protection Program (PPP), with forgivable loans that kept many businesses afloat.

Originally, if a business received a PPP loan, it was not eligible to receive ERC. The initial IRS guidance on this could not have been more clear: “an employer may not receive the Employee Retention Credit if the employer receives a PPP loan that is authorized under the CARES Act. An Eligible Employer that receives a PPP loan, regardless of the date of the loan, cannot claim the Employee Retention Credit.”

However, subsequent legislation, namely the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted Dec. 27, 2020; the American Rescue Plan Act (ARPA) of 2021, enacted March 11, 2021; and the Infrastructure Investment and Jobs Act, enacted Nov. 15, 2021, greatly expanded eligibility for ERC.

While some of these firms are offering legitimate services and will help businesses file accurate and legitimate claims for ERC, business owners should proceed with extreme caution due to several factors: the very complex rules regarding eligibility for an ERC, the IRS’s near-automatic acceptance of these filings (and payment of the credit, of which the firm usually collects 25% or more), the very strong likelihood that these filings will be audited in years to come (the IRS has up to five years to audit ERC returns), and the equally strong likelihood that the less-reputable ERC firms will have closed their doors and have liquidated all assets before those audits are completed, leaving the business holding the proverbial bag for tax penalties, fines, and interest.

“Perhaps the most complicated facet of determining eligibility under ERC relates to how its provisions interact with the Internal Revenue Code’s special aggregation rules for businesses.”

The IRS issued a warning on Oct. 19, 2022, stating that some firms “are taking improper positions related to taxpayer eligibility for and computation of the credit.” The IRS warning goes on to explain that firms “often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income-tax return must be reduced by the amount of the credit.”

Determining whether a business qualifies for ERC can be quite complicated. If the business was fully or partially suspended due to a governmental order limiting commerce, travel, or group meetings related to COVID, then it may qualify for the time during which it was so suspended. If the business was not suspended but suffered a “significant decline in gross receipts,” it may also qualify. A significant decline in gross receipts is measured on a quarterly basis, comparing 2020 quarterly receipts to 2019 quarterly receipts (50% or greater decline), 2021 quarterly receipts to 2019 (20% or greater decline), or Q4 2020 receipts to Q4 2019 receipts (20% or greater decline).

Perhaps the most complicated facet of determining eligibility under ERC relates to how its provisions interact with the Internal Revenue Code’s special aggregation rules for businesses. Under the aggregation rules, multiple businesses may be combined into an ‘aggregated group’ based on common ownership, where all employees of an aggregated group will be treated as employed by a single employer. The members of an aggregated group are determined based upon the stock or membership interest ownership of a business entity. If multiple businesses are comprised of similar ownership, those businesses might be combined into an aggregated group.

The ownership of a business might be comprised of individuals, trusts, partnerships, or corporations. The ownership composition of a potential aggregated group must be closely examined because the aggregation rules and thresholds will differ based on whether the group consists of corporations, LLCs, or partnerships. Further, the relationship of individuals to one another will also impact how the aggregations rules operate.

By way of example, imagine three individuals: Alice, Brady, and Carol. Each own a one-third interest in each of Alpha LLC, Bravo LLC, and Charlie LLC. Under the aggregation rules, the three LLCs would form an aggregated group, known as a ‘brother-sister controlled group,’ based on their common ownership structure. All employees of all three LLCs would be treated as employed by a single employer. As another example, now assume that Alice and Brady own a one-half interest in Alpha LLC, Brady and Carol own a one-half interest in Bravo LLC, and Carol and Alice own a one-half interest in Charlie LLC. Under the aggregation rules, none of the LLCs would form an aggregated group with each other because any potential aggregated group would not meet the requisite ownership threshold requirements.

An aggregated group will impact how the members of such group are treated under the ERC provisions. Most notably, the aggregation rules affect the determination of a business’ average number of full-time employees, as well as what constitutes a ‘significant decline’ in gross receipts among members in an aggregated group. The aggregation rules also impact how suspensions due to governmental orders are enforced among members of an aggregated group. Businesses should consider carefully examining their ownership compositions so beneficial business aggregations are not missed.

And remember, if it sounds too good to be true, it likely is.

 

Scott Foster chairs Bulkley Richardson’s Business/Finance Department, and Jacob Kosakowski is an associate in the firm’s Trusts & Estates Department.

An Educational Assistance Program Can Bring Many Benefits

By Contributor
Education

A Class Act

By Keara Moulton

 

Educational assistance programs provide access to learning opportunities for staff members to gain new skills and maintain up-to-date knowledge in their field with financial assistance from their employer.

This is a commonly offered employer benefit, but not all business owners might be aware of the current opportunity to expand this offering.

Keara Moulton

Keara Moulton

“Whether your business already has an educational assistance program in place or you are considering providing one as a benefit soon, this can be a great recruitment and retention program.”

The CARES Act of 2020 included an expansion of Section 127, which allows employers to expense payments to employee student loans in addition to previously allowed payments on tuition, fees, books, and supplies. This expansion was extended through Dec. 31, 2025 by the Taxpayer Certainty and Disasters Tax Relief Act.

Whether your business already has an educational assistance program in place or you are considering providing one as a benefit soon, this can be a great recruitment and retention program. With the expansion to include public and private student-loan payments toward both principal and interest, employers have the potential to provide educational assistance not only to employees currently enrolled in courses, but also to recent graduates who are already making monthly payments using their post-tax income.

To qualify as an educational assistance program, the plan must be written, accessible to all employees, and spell out what the money can be used for. The business can either directly pay the educational institution or student-loan servicer on behalf of the employee, or they can pay the employee directly and then potentially request a receipt of employee payments if their specific written plan requires it.

If the total payments for educational assistance are under $5,250, the employee will not be taxed on this additional benefit. However, if the payments for tuition and loan assistance exceed $5,250, the employee would then pay taxes on the overage as it would now be included in box 1 of their W-2.

Recently, we had a local business reach out to inquire about the potential implementation of an educational assistance program that takes advantage of this expansion of Section 127. One of their key questions was ‘is this something you think we should offer to employees, knowing that we handle payroll in house using QuickBooks?’ Ease of implementation to process this pre-tax contribution will vary with the type of QuickBooks product the business uses (i.e. desktop or online).

QuickBooks payroll will need to be set up to accept and track the payments by going through the CARES Act section to check off the applicable pay items to include. With this expansion available through 2025, your employees can benefit from it for more than three years if your bookkeeper can adapt your program to your payroll system now.

This fringe benefit does mean that employees who receive this money will not be able to claim any of the tax-free education expenses (the amount received under $5,250) as the basis for another deduction or credit on their 1040 tax return. This includes the Lifetime Learning Credit and Student Loan Interest Deduction. However, the Lifetime Learning Credit is limited to a maximum of $2,000 per return and is non-refundable. In other words, the employee could use the credit to pay any tax owed, but they wouldn’t receive any of the tax credit back as a refund.

This credit is also phased out completely if the employee has an adjusted gross income over $69,000 as a single filer or $138,000 if married filing jointly. Moreover, the Student Loan Interest Deduction is limited to $2,500 and is eliminated by a phaseout if adjusted gross income is more than $85,000. With the income limits in place on the credits and deductions currently available to individual students and student-loan borrowers, this expansion to Section 127 has the potential to benefit a broader base of employees than the credits and deductions.

If you have any questions about how this might affect your educational assistance program or any other programs, deductions, or credits, please feel free to reach out for detailed tax advice. u

 

Keara Moulton is an associate at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.

CARES Act Provides Numerous Tax-planning Opportunities

By Contributor
Tax-Incentives
Banking and Financial Services

Seeking Relief

By Lisa White and Malik Javed

 

On March 27, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law. The Act has provided taxpayers with much-needed relief during this pandemic by establishing additional funding sources, such as the Paycheck Protection Program (PPP); by creating new tax credits, such as the Employee Retention Credit; and by significantly changing several existing tax provisions.

Lisa White

Lisa White

Malik Javed

Malik Javed

When reviewing what relief is available, taxpayers should consider all possible opportunities, including cost-segregation studies, which help identify misclassified Qualified Improvement Property (QIP); by reviewing current- and prior-year capital expenditures for retirements, dispositions, or repair deductions; and by considering accounting-method changes necessary to take full advantage of the new provisions in the tax law.

Two key changes to existing tax law within the CARES Act that provide cash flow for taxpayers include changes to the cost-recovery period for QIP and changes to the application and recognition of Net Operating Losses (NOLs).

 

Qualified Improvement Property

Qualified Improvement Property (QIP) is defined as any improvement made by the taxpayer to an interior portion of a commercial building as long as the improvement is placed into service after the building was first placed into service by any taxpayer. Additionally, QIP specifically excludes expenditures for the enlargement of a building, elevators or escalators, and the internal structural framework of a building.

Prior to the CARES Act, a drafting error in the tax law required QIP placed in service after Dec. 31, 2017 to use a 39-year tax life, making it ineligible for bonus depreciation. The CARES Act retroactively changed the recovery period for QIP to 15 years, thus making it eligible for bonus depreciation through 2026 (100% through 2022).

Taxpayers who want to take advantage of deducting the cost of improvements to real estate must segregate between interior and exterior improvements, as well as identify items excluded from QIP. Since budgets and design plans should be reviewed to identify these items, cost-segregation engineers can be engaged to assist with this analysis.

Tenant improvements often include items that are not eligible for QIP treatment. For example, HVAC costs in a retail shopping center might include both ductwork inside the building that is eligible for QIP and package units on the roof that are not eligible. Other examples include certain storefronts and interior seismic retrofits. When evaluating QIP, taxpayers should not assume all tenant improvements automatically qualify. Although QIP is now eligible for 100% bonus depreciation for federal income taxes, many states do not conform to bonus deprecation and require a 39-year tax life. For higher-taxed states, cost segregation can still make sense when interior improvements are significant.

Taxpayers who elected out of the business interest expense limitation under 163(j) are required to use a 20-year ADS life for QIP and are not eligible for bonus depreciation. In these cases, a cost-segregation study is greatly beneficial because the items segregated into personal-property categories do not get ADS treatment and are therefore eligible for bonus depreciation.

There is also an additional interplay with the business interest expense limitation provision. Part of the calculation to determine the amount of limited business interest expense for a given year includes determining the adjusted taxable income (ATI). This calculation favorably considers tax depreciation, but only for one more year. For tax years beginning after 2021, the deduction for depreciation, amortization, or depletion are not taken into account in calculating ATI. Thus, any bonus depreciation recognized on assets identified through a cost-segregation study will incrementally increase the ATI.

 

Net Operating Losses

Prior to the CARES Act, the Tax Cuts and Jobs Act (TCJA) and other legislation severely constrained the ability to use net operating losses to lower tax liabilities. TCJA restricted carrybacks of NOLs generated in tax years after Dec. 31, 2017 and limited carryforwards to 80% of taxable income.

The CARES Act made two significant changes to NOLs that provides cash flow for businesses:

• Net operating losses (NOLs), which are generated in 2018, 2019, or 2020, can now be carried back five years. Businesses that paid federal income taxes in 2013 to 2017 may be able to claim a tax refund as a result of 2018, 2019, or 2020 NOLs. Procedurally, NOLs are carried back to the earliest of their five-year period and then to subsequent tax years. But taxpayers may elect to forgo the five-year carryback and carry NOLs forward.

• The CARES Act suspends the 80% limit on carryforwards, allowing NOLs to fully offset taxable income until the end of 2020. An NOL carryback can also free up unclaimed federal tax credits and other tax attributes from closed tax years. If the NOL carryback results in credits no longer being used in the closed year, these items are eligible to be carried forward. In addition, if credits or other tax attributes were missed on the original return (e.g. unclaimed Research Tax Credit), the taxpayer may determine the unclaimed credits in the closed year and carry them forward without having to amend returns.

The calculation of NOLs for tax years beginning in 2019 and 2020 may be greater because of changes in the CARES Act to Section 163(j). The changes allow certain taxpayers to increase their business interest expense deduction based on a higher percentage of adjusted taxable income. Taxpayers should also consider the impact of additional tax depreciation on shorter-lived assets eligible for bonus depreciation, such as QIP, that can be identified from a cost-segregation study. For tax years beginning in 2020, the CARES Act also allows taxpayers to substitute their 2020 ATI with 2019 ATI if it results in a more favorable NOL calculation.

In these unprecedented times, taxpayers should take advantage of the many tax opportunities provided in the CARES Act to maximize tax deductions. Reach out to a tax specialist to discuss how these changes may impact your tax situation.

 

Lisa White, CPA is a tax manager at Meyers Brothers Kalicka, focusing primarily on federal and state income-tax compliance and planning within the construction and real-estate industries. Malik Javed, CCSP is a principal at KBKG and oversees engineering operations for cost-segregation projects from KBKG’s Northeast practice.

State Allocates $50 Million in CARES Act Funding to Schools and Colleges

By
Daily News

BOSTON — The Baker-Polito administration announced last week it will allocate more than $50 million in federal CARES Act funds to benefit education in elementary and secondary schools, as well as colleges and universities. The funding from the federal Governor’s Emergency Education Relief (GEER) Fund will improve early literacy, expand remote learning opportunities, and cover costs associated with reopening certain schools and colleges, as well as boost financial aid for college students in greater need of financial assistance.

As part of the federal CARES Act, governors in each state were granted a share of discretionary dollars to ensure continuity of educational services during the COVID-19 crisis. The Baker-Polito administration previously allocated nearly $1 billion in federal funds to help municipalities, school districts, and colleges and universities in the Commonwealth address COVID-related expenses.

The latest funding will support the following initiatives:

• Up to $10 million for early-literacy programs that provide extra help to students through grade 3, aimed at remediating learning loss children may have experienced since schools closed in March, as well as accelerate reading skills of children in high-need communities;

• Up to $7.5 million to expand access to online courses, including advanced-placement, early-college, or dual-enrollment courses;

• Up to $25 million to cover COVID-related expenses associated with reopening colleges and universities, as well as certain non-public elementary and secondary schools. Funds will be allocated based on the number and percentage of low-income students these schools enroll;

• Up to $2.5 million in financial aid for low-income college students attending public colleges to ensure they can cover emergency expenses to continue their education; and

• Up to $5 million set aside in an emergency reserve fund.

“Our administration is committed to supporting every student in our schools as districts and universities prepare for the start of the school year,” Gov. Charlie Baker said. “This $50 million investment represents flexible funding that can be used for a variety of critical resources for schools and colleges as they begin to reopen and bring kids back into the classroom, especially in our most vulnerable communities.”

Measure Brings Technical Correction for QIP, Other Benefits

By Contributor
Banking and Financial Services

More Relief from the CARES Act

By Lisa White

On March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. Since its inception, much of the focus has been on the establishment of additional funding sources, such as the Paycheck Protection Program (PPP), or on the creation of new tax credits, such as the Employee Retention Credit.

However, the act also made some significant revisions to existing tax law to provide additional relief to affected businesses. This article takes a closer look at two of these provisions and delves into how the related benefits associated with the changes might be derived.

Technical Correction for Qualified Improvement Property

The Protecting Americans from Tax Hikes (PATH) Act of 2015 created a new category of asset called ‘qualified improvement property’ or QIP. This term referred to any improvement to an interior portion of non-residential real property, but excluded expenditures for elevators or escalators, enlargements, and interior structural components. Although this category of asset technically had a 39-year cost-recovery period, it was specifically identified as being eligible for bonus depreciation.

When the Tax Cuts and Jobs Act (TCJA) was signed into law at the end of 2017, the intention was to assign a shorter, 15-year recovery life to qualified improvement property, thus ensuring its eligibility for the enhanced 100% bonus depreciation provision also included in the TCJA. Unfortunately, the necessary wording was not included in the final bill, resulting in qualified improvement property retaining its 39-year cost-recovery period, but excluding it from being eligible for bonus depreciation.

Lisa White

Lisa White

“With proper planning and timely tax-advisor consultation, realizing additional relief during these unprecedented times can be achieved.”

Not only did the CARES Act include the technical correction necessary for QIP to have its originally intended 15-year cost-recovery period, but the correction was directed to apply retroactively to all eligible assets placed in service after Dec. 31, 2017.

Then, in mid-April, the IRS provided guidance on how to capture this additional benefit from the change in the depreciable life and the possible eligibility for bonus depreciation. Primarily, the two methods are to either file amended returns for the impacted year(s) or to file a Change in Accounting Method (Form 3115), which allows a ‘catch-up’ for the differences in the recovery periods and applicable depreciation methods.

Here’s an example: A business holds commercial rental property and operates on a Dec. 31 year-end. On July 15, 2018, the business incurred expenses of $150,000 in costs that meet the QIP definition. Assume Section 179 expense was not taken. Due to the technical error in the law, only $1,763 of depreciation expense was allowed in 2018, and $3,846 of depreciation expense would be allowed in 2019. With the technical correction, bonus depreciation can now be taken on the entire amount of the qualified improvement property even though it was placed in service in 2018:

• If the 2019 tax return has already been filed, an amended return should be filed for both the 2018 and 2019 tax years. Taxable income in 2018 will be reduced by the additional $148,237 ($150,000 – $1,763) of accelerated depreciation expense, and taxable income in 2019 will be increased by the removal of the $3,846 of depreciation expense originally recognized.

• If the 2019 tax return has not yet been filed, filing a Form 3115 might provide the easier option. Instead of filing two years of returns, only the 2019 tax return is filed, and the $148,237 of additional accelerated depreciation expense not captured in 2018 is included in the 2019 tax return as a section 481(a) adjustment.

It is important to note that there are certain circumstances where either an amended return or an administrative adjustment request (AAR) must be filed. It is important to consult with your tax advisor to determine the best course of action.

Changes to the Business Interest Limitation

Although most of the provisions enacted as part of the TCJA were intended to be favorable to taxpayers, some new components had the opposite effect. One of these was the revision and expansion of the business-interest-limitation rules. If subject to the new rules, the regulation essentially limited the amount of business interest expense to 30% of taxable income adjusted for, among other things, depreciation.

The interest expense in excess of this 30% threshold would not be deductible in the current year but would instead be carried forward to the following tax years.

The TCJA also included an option for certain businesses to elect out of having this regulation apply. Instead, these businesses that met the definition of a ‘real property trade or business’ could make an irrevocable election to realize a longer recovery period for the cost of real property and to forego any bonus depreciation that would otherwise be allowed on that real property.

Prior to the retroactive change under the CARES Act, the differences in the recovery periods were not substantial, and none of the real property was eligible for bonus depreciation. However, with the CARES Act’s retroactive fix to qualified improvement property, that property is now eligible for bonus depreciation. The loss of being able to take that accelerated depreciation, in addition to another CARES Act provision increasing the limitation threshold from 30% to 50% (for all businesses except partnerships) for 2019 and 2020, might now result in the impact of the irrevocable election having an undue, unfavorable result.

To provide relief to those businesses that made the irrevocable election and that could now benefit from the shorter recovery period, and the applicable depreciation methods, the IRS has issued guidance that provides for the irrevocable election to be rescinded for tax years 2018 or 2019. This is accomplished by filing an amended return for the year the election was made. If 2018 was the election year, and 2019 has already been filed, 2019 must be amended as well to reflect any changes to taxable income resulting from withdrawing the election.

So, What Now?

The CARES Act provides several relief provisions, including a number that can be realized through proper tax planning. Owners of non-residential (i.e. commercial) real property should review any expenditures that were capitalized in 2018 and 2019 to see if any of these costs can be realized now under the new qualified improvement property measures.

Also, it would be prudent to review any elections made during those tax years that might need to be revisited to make sure those elections still result in the most favorable tax position.

As with most things related to the tax code, the final answer is usually complex and nuanced and somewhere in the grey. But with proper planning and timely tax-advisor consultation, realizing additional relief during these unprecedented times can be achieved.

Lisa White, CPA is a tax manager at Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.

Understanding the Employee Retention Credit

By Contributor
Accounting and Tax Planning Special Coverage

This Tax-relief Provision of the CARES Act Brings Advantages to Employers

By Carolyn Bourgoin, CPA

Businesses that either repaid in a timely fashion or did not receive a loan pursuant to the Paycheck Protection Program (PPP) should explore their eligibility for the new Employee Retention Credit, one of the tax-relief provisions of the CARES Act passed on March 27.

Like the PPP loan program, the Employee Retention Credit (ERC) is aimed at encouraging eligible employers to continue to pay employees during these difficult times. Qualifying businesses are allowed a refundable tax credit against employment taxes equal to 50% of qualified wages (not to exceed $10,000 in wages per employee).

Let’s take a look at who is eligible and how to determine the credit.

Who Is an Eligible Employer?

All private-sector employers, regardless of size, that carry on a trade or business during calendar year 2020, including tax-exempt organizations, are eligible employers for purposes of claiming the ERC. This is the case as long as the employer did not receive, or repaid by the safe-harbor deadline, a PPP loan. The IRS has clarified that self-employed individuals are not eligible to claim the ERC against their own self-employment taxes, nor are household employers able to claim the credit with respect to their household employees.

Carolyn Bourgoin

Carolyn Bourgoin

First Step: Determine Eligible Quarters to Claim the Credit

Eligible businesses can claim a credit equal to 50% of qualified wages paid between March 12 and Dec. 31, 2020 for any calendar quarter of 2020 where:

• An eligible employer’s business was either fully or partially suspended due to orders from the federal government, or a state government having jurisdiction over the employer limiting commerce, travel, or group meetings due to COVID-19; or

• There is a significant decline in gross receipts. Such a decline occurs when an employer’s gross receipts fall below 50% of what they were for the same calendar quarter in 2019. An employer with gross receipts meeting the 50% drop will continue to qualify thereafter until its gross receipts exceed 80% of its gross receipts for the same quarter in 2019. Exceeding the 80% makes the employer ineligible for the credit for the following calendar quarter.

This is an either/or test, so if a business fails to meet one criteria, it can look to the other in order to qualify. An essential business that chooses to either partially or fully suspend its operations will not qualify for the ERC under the first test, as the government did not mandate the shutdown. It can, however, check to see if it meets the significant decline in gross receipts for any calendar quarter of 2020 that would allow it to potentially claim the ERC.

The gross-receipts test does not require that a business establish a cause for the drop in gross receipts, just that the percentage drop be met.

Second Step: How Many Employees?

Determining the wages that qualify for the ERC depends in part on whether an employer’s average number of full-time-equivalent employees (FTEs) exceeded 100 in 2019. An eligible employer with more than 100 FTEs in 2019 may only count the wages it paid to employees between March 12, 2020 and prior to Jan. 1, 2021 for the time an employee did not provide services during a calendar quarter due to the employer’s operations being shut down by government order or due to a significant decline in the employer’s gross receipts (as defined previously).

“All private-sector employers, regardless of size, that carry on a trade or business during calendar year 2020, including tax-exempt organizations, are eligible employers for purposes of claiming the ERC.”

In addition, an employer of more than 100 FTEs may not count as qualifying wages any increase in the amount of wages it may have opted to pay employees during the time that the employees are not providing services (there is a 30-day lookback period prior to commencement of the business suspension or significant decline in gross receipts to make this determination).

In contrast, qualified wages of an employer that averaged 100 or fewer FTEs in 2019 include wages paid to any employee during any period in the calendar quarter where the employer meets one of the tests in step one. So even wages paid to employees who worked during the economic downturn may qualify for the credit.

Due to the potential difference in qualifying wages, it is important to properly calculate an employer’s ‘full-time’ employees for 2019. For purposes of the ERC, an employee is considered a full-time employee equivalent if he or she worked an average of at least 30 hours per week for any calendar month or 130 hours of service for the month. Businesses that were in operation for all of 2019 then take the sum of the number of FTEs for each month and divide by 12 to determine the number of full-time employee equivalents. Guidance has been issued by the IRS on this calculation for new businesses as well as those that were only in business for a portion of 2019.

Third Step: Calculate the Credit Based on Qualifying Wages

As mentioned earlier, the Employee Retention Credit is equal to 50% of qualifying wages paid after March 12, 2020 and before Jan. 1, 2021, not to exceed $10,000 in total per employee for all calendar quarters. The maximum credit for any one employee is therefore $5,000.

Wages that qualify toward the $10,000-per-employee cap can include a reasonable allocation of qualified healthcare costs. This includes an allocation of the employer portion of health-plan costs as well as the cost paid by an employee with pre-tax salary-reduction contributions. Employer contributions to health savings accounts or Archer Medical Savings Accounts are not considered qualified health-plan expenses for purposes of the ERC.

Qualifying wages do not include:

• Wages paid for qualified family leave or sick leave under the Family First Coronavirus Relief Act due to the potential payroll tax credit;

• Severance payments to terminated employees;

• Accrued sick time, vacation time, or other personal-leave wages paid in 2020 by an employer with more than 100 FTEs;

• Amounts paid to an employee that are exempt from Social Security and Medicare taxes (for example, wages paid to statutory non-employees such as licensed real-estate agents); or

• Wages paid to an employee who is related to the employer (definition of ‘related’ varies depending on whether the employer is a corporation, a non-corporate entity, or an estate or trust).

Eligible employers who averaged more than 100 FTEs in 2019 will then be potentially further limited to the qualifying wages paid to employees who were not providing services during an eligible calendar quarter.

How to Claim the ERC

An eligible business can claim the Employee Retention Credit by reducing its federal employment-tax deposit (without penalty) in any qualifying calendar quarter by the amount of its anticipated employee retention credit. By not having to remit the federal employment-tax deposits, an eligible business has the ability to use these funds to pay wages or other expenses. In its FAQs, the IRS clarified that an employer should factor in the deferral of its share of Social Security tax under the CARES Act prior to determining the amount of employment-tax deposits that it may retain in anticipation of the ERC. The retained employment taxes are accounted for when the Form 941, Employer’s Quarterly Federal Tax Return, is later filed for the quarter.

If the ERC for a particular quarter exceeds the payroll-tax deposits for that period, a business can either wait to file Form 941 to claim the refund, or it can file the new Form 7200, Advance Payment of Employer Credits Due to COVID-19, prior to filing Form 941 to receive a quicker refund.

If an employer later determines in 2021 that they had a significant decline in receipts that occurred in a calendar quarter of 2020 where they would have been eligible for the ERC, the employer can claim the credit by filing a Form 941-X in 2021.

Additional Rules

For purposes of determining eligibility for the credit as well as calculating the credit, certain employers must be aggregated and treated as a single employer.

Also, as a result of claiming the Employee Retention Credit, a qualifying business must reduce its wage/health-insurance deduction on its federal income-tax return by the amount of the credit.

In summary, the Employee Retention Credit is one of several tax-relief options provided by the CARES Act. As it is a refundable credit against federal employment taxes, it is advantageous to all employers, even those who will not have taxable income in 2020. Employers who did not receive PPP funding should check to see if they meet the eligibility requirements and take advantage of this opportunity.

Please note that, at the time this article was written, Congress was considering additional relief provisions that may or may not have impact on the information provided here. u

Carolyn Bourgoin, CPA is a senior manager at Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; [email protected]

SBA Issues New Guidance Regarding PPP Loan Forgiveness

By
Coronavirus Features

The Questions Keep Coming

The Paycheck Protection Program (PPP) was created by the CARES Act to provide forgivable loans to eligible small businesses to keep American workers on the payroll during the COVID-19 pandemic. The SBA recently provided updates to its PPP guidance and also released the form application for PPP loan forgiveness, which will help small businesses seek forgiveness at the conclusion of the eight-week covered period, which begins with the disbursement of their loans.

Here are five common questions area attorneys have been hearing from business owners concerned about how PPP funds may be used in order to be forgiven.

Where can I spend my PPP loan in order for it to be forgiven?

“You’ve got to use 75% of what was loaned for payroll purposes,” said Kathryn Crouss, shareholder with Bacon Wilson. “Obviously, that’s salaries and wages, but other money employers spend on payroll costs count as well — vacation pay, parental or family leave, paid sick leave, or if there’s an employer match for plan premiums. So the definition of ‘payroll costs’ is relatively broad.

“The remaining money can be spent on other approved expenses — keeping the lights on or mortgage or rent or utility bills, those sorts of things,” she added. “Assuming you can prove to the government that you have spent 75% of the loan on qualified payroll expenses and the remaining portion on other qualifying expenses, then the loan should be forgiven and becomes a grant rather than a loan.”

In addition, she added, “if an employer brings an employee back on and that employee used to make, say, $3,000 a month, if they pay them less, they have to be within 75% to be forgiven. That’s not true for head count — they still have to have the same number of employees; not necessarily the same people, but the same head count.”

How do you measure whether an employee’s salary or wages were reduced by more than 25%?

“This may be the area that was causing the most angst among business owners, since it seemed mathematically impossible to not have reduced compensation by at least 25% if you were comparing compensation in the first quarter of 2020 — 13 weeks — to the covered period of eight weeks,” said Scott Foster, partner with Bulkley Richardson. “Fortunately, the SBA has opted to focus only on either the annualized salary for exempt employees, or the average hourly wage for non-exempt employees. Also, with respect to the salaried employees making more than $100,000 per year during the first quarter, as long as the annualized salary remains above $100,000 during the covered period, then any reduction in salary is not considered a reduction under this test.”

What about employees that were furloughed or laid off, but now refuse to return to work?

“For any employee the business has offered to re-employ in writing, and the employee (for whatever reason) refuses to accept re-employment, this will not reduce the loan-forgiveness amount,” Foster said.

Amy Royal, CEO of Royal, P.C., noted that she’s had many questions of this type. “They’re asking, ‘if I want to make sure I get loan forgiveness, how do I address a situation where I’ve offered to bring people back and they’ve said, thanks but no thanks?’ Obviously, those people have their own unemployment issues because if they’ve been offered a job and continue to take unemployment benefits, that could, in certain circumstances, be fraudulent.”

As for the employer, “if you make a good-faith offer to rehire someone with PPP money, make sure that offer is in writing,” she added. “If the employee rejects the offer, make sure you, as a business, have documented that. It will help you when you apply for loan forgiveness. That issue has been a real concern.”

Crouss agreed, noting that some employees may have legitimate reservations about returning to work — for instance, because they have a 95-year-old parent and don’t want to infect them.

“Make sure that conversation is in writing,” she said. “If they say they can’t return, get that response in writing as well, save that correspondence, and put those documents in their personnel file. Where we’re heading is, the head-count piece may be forgiven if they have that kind of documentation.”

Interestingly, Foster noted, “the application states that any employee fired for cause during the covered period does not reduce the borrower’s loan forgiveness. Oddly, this could mean that an employee that was fired for cause prior to the covered period would still count as a missing FTE during the covered period.”

My employees have nothing to do until my business is allowed to reopen and ramps back up. What if I want to save the PPP funds for after the eight-week period?

For example, Royal said, “if you’re a restaurant, you’re not open now. Maybe, if you’re lucky, you’re doing takeout, but the bulk of your business is full service. So the timing has presented issues because they can’t be fully ramped up now, but they’ve got to avail themselves of the funds right now before they run out.”

Businesses may absolutely hang onto the money and use it beyond the eight-week window, she explained — but they will have to pay it back over two years with 1% interest.

“That’s a very attractive loan,” Crouss noted. “Many businesses are making that decision — which is a perfectly sound decision. This only goes for eight weeks, and when you get that amount of money, it should cover your payroll for eight weeks, but what happens if the world hasn’t righted itself? So maybe it makes sense to save it for a rainy day and think of it as a loan and not a forgivable grant.”

Do I have to claim the PPP loan as income?

“The good news is, the IRS has spoken and said no,” Royal said. However, expenses paid for with PPP funds are also not deductible. “That makes sense — you can’t double dip. The way I conceptualize this is, it didn’t happen. We’re going to pretend this period didn’t happen for tax purposes.”

—Joseph Bednar

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