SMALL BUSINESS OWNERS & TAX EXEMPTS ALERT!
SMALL BUSINESS OWNERS & TAX EXEMPTS ALERT!
Intent … Confusion … Clarification …Payoffs
The Employee Retention Credit (ERC) is an $80 billion dollars tax savings program that promises financial relief for hundreds of thousands of small and medium businesses as well as tax-exempt entities. The ERC, as part of the CARES Act offers tax credits to encourage employers to retain employees at the height of the COVID-19 pandemic in March 2020.
Regrettably, many of those benefit candidates are ignoring the program … to the detriment of employee retention and job creation. That triggers a major loss to willing workers who have been displaced or are about to be. Likewise, employers suffer when they are unable to maintain their pre-pandemic payroll which further impairs their success to recover from the financial ravages of C-19 and prevail as viable enterprises.
In this article, please consider the facts that likely are limiting employer participation in applying for the ERC:
- Misunderstanding congressional intent for the credit;
- Confusion as to qualification requirements and application procedures; and
- Clarification of status.
Congressional Intent
For Congress … it’s all about the jobs. The driving principle for adoption of the incentive by Congress was to help pandemic-impaired businesses and tax-exempts to retain jobs. Additionally, the intent was to provide a financial platform to expand the U.S. workforce by helping businesses across the board to recover and trigger job creation.
Confusion & Qualification
As noted above, the ERC was included last year as part of the CARES Act. Likewise, the Paycheck Protection Program (PPP) was enacted in that legislation as well. Confusion on the part of employers became an unintended consequence as many believed it was an either/or choice … ERC or PPP.
At inception of the CARES Act, the reality was that the programs were mutually exclusive … qualified employers were eligible to apply for either one, but not both. Revised legislation passed last December reversed that provision and allowed employers a more accommodating set of rules to access the benefits of both the PPP and the ERC.
That said, the PPP proved to be the more popular route for businesses to avail themselves of federal financial support. The chief attraction was the promise of loans becoming forgivable by the Small Business Administration. Additionally, most executives chose to deal with their banker and apply for the PPP rather than contend with the anticipated complexities of IRS compliance.
Expansion of the ERC has been extended twice … making it much easier for businesses and tax-exempts to qualify for increased benefits. Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021.
For the third and fourth quarters of 2021, eligible employers claim the credit against the employer’s share of Medicare tax rather than its share of Social Security tax … (more on that in a bit).
Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.
A second area of qualification-confusion surfaced. Many business owners and tax-exempt managers incorrectly interpreted the rules. The first misconception was that to qualify an enterprise must have suffered a 50 percent reduction in revenues … not so. There are two alternate tests to qualify:
- a revenue test, or
- demonstration that your operating entity was significantly, negatively impacted by government order, e.g. a partial or full shutdown due to a government order at the federal, state, municipality, county or other local level authority.
With this knowledge of qualification criteria, hundreds of businesses and tax-exempt organizations have applied for and been approved for ERC assistance … under one or another of the above tests.
Where Things Stand at This Writing
Within the last few weeks, the IRS and the Treasury issued amplified guidance in Notice 2021-49 relating to various issues that apply to the ERC in both 2020 and 2021. The new notice explains changes made by the American Rescue Plan Act of 2021 to the employee retention credit that are applicable to the third and fourth quarters of 2021.
Note: The above guidance comes as the Senate is debating a bipartisan infrastructure package that would end the credit three months early, on Sept. 30. If passed as drafted, the infrastructure bill would render wages paid after Sept. 30, 2021, ineligible for the credit … except for wages paid by an eligible recovery startup business that began carrying on a trade or business after Feb. 15, 2020, had less than $1 million in annual gross receipts and meet several other conditions.
Additionally, the notice offers guidance on ERC related questions posed to the IRS regarding whether wages paid to majority owners and their spouses may be treated as qualified wages …a frustrating provision for some family-owned companies.
The National Conference of CPA Practitioners has issued a call to action requesting its members to petition Congress to remedy this interpretation. Specifically, NCCPAP registers its objection that under the guidance the wages of small-business owners and their spouses do not qualify for the ERC if either the owner or their spouse has any living relatives.
The open letter signed by the co-chairs of the NCCPAP tax policy committee states that enforcement of the current guidance text, … “may make the difference between closing the doors or enabling those businesses to remain open and continue employing their staff for years to come. The loss of these funds could destroy an already struggling small business at a time when our economy is trying to mount a recovery.”
The Treasury and the IRS announced it “will continue to monitor potential legislation related to the employee retention credit,”. Stay tuned … we’ll keep you posted!
If any of the foregoing seems unclear as to how it applies to your specific circumstances, please keep in mind that Pearson & Co. will help. Give us a call or drop an email.
