Kathy Speaker MacNett
July 26, 2020
Following Pandemic relief for individuals and businesses is enough to give anyone a headache! A little publicized amendment to the federal CARES Act, as amended by the federal Relief Act, may provide significant relief to small private businesses, which have yet to bounce back after COVID-19. This relief is known as the Employee Retention Credit (ERC), and its availability has been expanded for 2021.
Small private businesses for purposes of the 2021 ERC are those with 500 or fewer employees. Generally, governmental entities (other than hospitals and some colleges and universities) not eligible for ERC credits.
If you are a small private business considering the ERC, start by reviewing your gross receipts for each quarter in 2019 and comparing to your gross receipts for the corresponding quarter of 2021.
The term “gross receipts” means gross receipts of the taxable year in which such receipts are properly recognized under the taxpayer's accounting method used in that taxable year (determined without regard to this section) for federal income tax purposes. For this purpose, gross receipts include total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax exempt interest within the meaning of section 103), dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer's trade of business. Gross receipts are not reduced by cost of goods sold but are generally reduced by the adjusted basis of capital assets sold.
Gross receipts may or may not exclude amounts received by the taxpayer with respect to sales tax or other similar state and local taxes.
If you determine that your gross receipts for any quarter in 2021 were 20% less than your gross receipts from the same quarter in 2019, and you have 500 or fewer employees, you may be eligible for the ERC. The ERC amounts to 70% of qualified employee “wages” (including qualified health plan expenses) up to a $10,000 wage threshold per employee per quarter. Accordingly, the maximum credit for each employee per quarter of 2021 is $7,000 (or a total of $14,000 per employee for the first two quarters of 2021). For example, an eligible small private employer with 20 employees may receive a tax credit of up to $140,000 for each quarter of 2021 for which it qualifies for the ERC. Obviously, this is sizable money for a small private business.
Secondly, if you believe your business is eligible for ERC, you must file the required forms containing the correct information with the IRS. We suggest a conversation with your accountant or other tax advisor to assist with that filing. The following link contains helpful information: https://www.irs.gov/newsroom/irs-provides-guidance-for-employers-claiming-the-employee-retention-credit-for-first-two-quarters-of-2021
BOTTOM LINE: Our goal is to alert you to the possibility of the ERC. The ERC may be the difference between continued operation and closure for an eligible small private business. Consider its applicability to your business. Remember, however, that the ERC is a tax credit, so the nuances of the tax law are extremely important. We recommend you address your specific questions about the ERC to an appropriate tax advisor.
As with everything related to COVID-19, stay tuned as well for further changes in law and interpretation. This communication contains only general information and does not take the place of specific legal advice applied to specific factual settings. Nothing in this communication should be construed to create an attorney-client privilege.