Clearing up the confusion of ERC Refunds, PPP and the Cares Act
Many companies were forced to close their operations as a result of the coronavirus pandemic while others were forced to severely limit their offerings. One way to continue to pursue your organization's objectives is to ensure that you are still able to function, even if only in a limited capacity. The government has supported auto dealerships, restaurant owners, dental offices, day care centers and other companies. The government has done this with the continuation of the passage of the CARES Act in March 2020. This includes the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC).
Under the CARES Act, companies could take advantage of either the PPP or the ERC, but not both. In welcome news for auto dealers and other industries, the Consolidated Appropriations Act of December 2020 (Relief Act) and American Rescue Plan Act, H.R. 1319 retroactively eliminates the limitation and extends and enhances the ERC through the end of 2021.
The ERC is one of the most beneficial provisions of the Relief Act relevant. If you did not consider the ERC in 2020, or were not eligible to consider the ERC because you took a PPP loan, the retroactive ability to benefit from both PPP loans and the ERC is a powerful reason to consider the ERC for 2020. Looking ahead to 2021, the enhanced amount of the credit for wages paid for all four quarters of 2021 provides yet another strong reason to consider the ERC.
What is the ERC?
The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts. The ERC can be claimed quarterly to help offset the cost of retaining employees. Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits. Unlike the PPP, which was on a first come first serve basis, the ERC can be claimed up to three years from the date in which your quarterly payroll return was filed.
Who is eligible for the ERC?
To claim the ERC in any given calendar quarter, restaurants, auto dealers, dental offices, etc., must meet one of the following criteria during that quarter:
Insight: Aggregation rules apply to determine whether entities under common control are treated as a single employer. The ERC has not adopted the same affiliation waivers as the Paycheck Protection Program. For example, auto dealers with more than one location may have to aggregate gross receipts across the group when determining whether they can demonstrate the necessary reduction.
Can you claim the ERC if you receive a PPP loan?
Yes! One of the most favorable provisions in the new law allows taxpayers to both receive PPP loans and claim the ERC. This overlap was not permitted when the CARES Act was originally enacted, and companies in need of cash infusions during 2020 more frequently turned to PPP loans as a source of funds rather than the ERC. Importantly, the new law makes the ability to claim the ERC and receive PPP loans retroactive to March 12, 2020. As a result, companies that received PPP loans in 2020 (and/or will receive new loans in 2021) can now explore potential ERC credits for 2020 and 2021.
What wages qualify for the ERC?
The answer depends on an organization's employee count. Eligible companies that are considered large employers can only claim the ERC for wages paid to employees for the time they are not providing services. This aligns with the purpose of the ERC, which is to encourage employers to retain and compensate employees during periods in which businesses are not fully operational.
Smaller eligible companies may claim a credit for all wages paid to employees. The Relief Act increases the threshold used to determine large employer status for 2021 claims to an employee count of more than 500 (for 2020 it is more than 100). This favorable change broadens the number of eligible companies that can claim the ERC for all wages paid to employees, including wages paid to employees who are providing services. Importantly, qualified healthcare expenses count as wages.
Insight: If you furloughed your employees but continue to pay their health insurance, you can claim the ERC. Furloughed employees do not have to receive wages—health care expenses alone qualify as wages for purposes of the ERC.
How is the determination of Large Employer status made?
Large Employer status is determined by counting the average number of full-time employees employed during 2019.
For this purpose, “full-time employee” means an employee who, with respect to any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours in the month. This is the same definition used for purposes of the Affordable Care Act. Importantly, aggregation rules apply when determining the number of full-time employees. In general, all entities are considered a single employer if they are a controlled group of corporations, are under common control, or are aggregated for benefit plan purposes.
Companies that operated for the entire 2019 year compute the average number of full-time employees employed during 2019 by following the following steps:
Step 1: Count the number of full-time employees in each calendar month in 2019. Include only those employees that worked an average of at least 30 hours per week or 130 hours in the month.
Step 2: Add up each month’s employee count from Step 1 and divide by 12.
Insight: Aggregation rules apply to determine whether entities under common control are treated as a single employer. The ERC has not adopted the same affiliation waivers as the Paycheck Protection Program, so auto dealers with more than one location may have to aggregate the number of employees across the group to determine whether they meet the employee threshold.
Insight: Part-time employees that work, on average, less than 30 hours per week are not counted in the determination of large employer status. Omitting part-time employees from the computation should result in more retail companies having 500 or less full-time employees and therefore being able to claim the ERC for all wages paid to employees in all four quarters of 2021 (assuming eligibility criteria are met).
Can the same wages be used for the computation of both the ERC and the amount of PPP loan forgiveness? No. Simply put, there is no double-dipping. Wages used to claim the ERC cannot also be counted as “payroll costs” for purposes of determining the amount of PPP loan forgiveness, and companies that want to benefit from the ERC and have their PPP loans fully forgiven will need to have sufficient wages to cover both. To the extent an organization does not have sufficient wages, strategic planning will be needed in order to generate maximum benefits.
Written by Megan Condon and Brad Poris. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com.