5 Important Things You Should Know About the US Employee Retention Credit

Employee Retention Credit
If you have any questions or need help, please email Allan RooneyTim DavisElannie Damianos, or Abbey Docherty or call +1 212 545 8022.

In December 2020, the US government launched the next wave of the Paycheck Protection Program or the second draw (PPP) and passed the Consolidated Appropriations Act (CAA), which included significant extensions and enhancements to the Employee Retention Credit (ERC). Under the CARES Act, the ERC encourages businesses to keep employees on their payroll by offering a refundable tax credit for quarterly payroll tax that may benefit companies in 2020 and 2021.

However, businesses around the country have been slow to evaluate or quick to assume they are ineligible for the 2021 ERC.  The result is a significant amount of cash is still being paid to the Federal government when it could remain with companies that need it.

Here’s a review of some of the most common misunderstandings:

If my business is eligible for the second draw PPP, I won’t also benefit from the ERC.

While it is true that the same dollar of payroll can’t be used for both PPP debt forgiveness and the ERC, it is still possible to have sufficient payroll to allow an employer to receive both the 2021 ERC and Second Draw PPP debt forgiveness.

I don’t qualify for the ERC because I don’t have a significant decline in gross revenue.

 To apply the ERC, an employer must show that either the business had operations that were fully or partially suspended or experienced a significant decline in gross revenue. For an employer to be eligible for the ERC, they must only meet one of these tests.

My business is fully operating, so I can’t qualify as having a full or partial shutdown due to governmental authority.

There are many ways a business could be considered subject to a partial shutdown. Two of the most common examples often missed are instances where operational hours are limited or where suppliers of an essential business are suspended due to governmental orders.

This includes an order from a local government official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period. Any sports fan who used to watch games at the local sports bar where the imposed closing time was 10 pm (in New York State at least) is well aware of this rule. The hours restriction must be due to a Federal, State, or local government mandate. A voluntary change in business hours would not be considered a partial suspension.

While the general rule surrounding ERC for eligible employers states that essential businesses do not qualify, a significant exception to this rule is if the suppliers of the essential company are unable to make deliveries of critical goods or materials due to a governmental order that requires the supplier to suspend its operations.

 I have to wait for my first quarter of 2021 to be completed to certify the company can qualify for ERC.

 The most recent ERC legislation includes a prior calendar quarter test when assessing if a significant decline in gross revenue took place. This means every business can determine whether they qualify for the 2021 Q1 ERC today.

 Only companies with fewer than 500 employees can qualify for the 2021 ERC. 

An eligible employer must prove that they have a significant decline in gross revenue or their operations have been fully or partially suspended. If either of those stipulations is met, the employer is eligible for the ERC. The number of employees will determine the amount of qualified wages the employer can consider when calculating the credit.

Here’s a quick recap of the changes and enhancements to the ERC impacting wages paid in 2020 and 2021:

From March 13, 2020, through December 31, 2020:

  • PPP loan recipients can now benefit from ERC
  • PPP loan forgiveness and ERC are not available for the same wages
  • Eligible employers include companies impacted by full or partial government-ordered shutdowns or companies with a significant decline (greater than 50%) in gross revenue
  • Enhanced benefits to small employers (100 or fewer full-time employees)
  • Maximum benefit of $5,000 per employee

From January 1, 2021, through June 30, 2021:

  • PPP loan recipients can now benefit from ERC
  • PPP loan forgiveness and ERC are not available for the same wages
  • Eligible employers include companies impacted by full or partial government-ordered shutdowns or companies with a significant decline (greater than 20%) in gross revenue
  • Enhanced benefits to small employers (500 or fewer full-time employees)
  • Maximum benefit up to $14,000 per employee (total for Q1 and Q2 2021)

If you have any questions or need help, please email Allan RooneyTim DavisElannie Damianos, or Abbey Docherty or call +1 212 545 8022.

 

 This article is one of a series intended to de-mystify common legal issues for the non-lawyer and entrepreneur audience – they are designed to foster discussion and is by no means exhaustive. These materials are for informational purposes only. Nothing herein is intended nor should be regarded as legal advice. The distribution of this article to any person does not establish an attorney-client relationship with our firm. Rooney Nimmo assumes no liability in connection with the use of this publication. This bulletin is considered attorney advertising under the applicable rules of New York state. Rooney Nimmo UK is regulated by the Law Society of Scotland and Rooney Nimmo US by the New York rules of professional conduct. All attorneys and solicitors listed in this firm stipulate their jurisdictional limitations. Rooney Nimmo in the USA is a law firm registered as a New York State professional corporation.

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