Breaking Down the Employee Retention Credit (ERC) & Proposed Stimulus Legislation - February 24, 2021
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Breaking Down the Employee Retention Credit (ERC) & Proposed Stimulus Legislation February 24, 2021
To Receive CPE Credit
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Presenters
Tad Goodenbour, CPA Craig Kuechenberg, CPA Jesse Palmer, CPA
Partner Partner Partner
tgoodenbour@bkd.com ckuechenberg@bkd.com Director of Tax Quality Control
jpalmer@bkd.comEmployee Retention Credit
2020 Employee Retention Credit
› Credit equals 50% of qualified wages up to $10,000 (maximum credit
of $5,000 per employee)
› Qualified wages
• Wages as defined in Section 3121(a) & compensation as defined in Section
3231(e) paid after March 12, 2020, & before January 1, 2021
• Includes qualified health plan expenses allocable to the wages
• For eligible employers that averaged more than 100 full-time employees in
2019, wages paid to an employee for time that the employee is not providing
services during qualified period
• For eligible employers that averaged 100 or fewer full-time employees in
2019, all wages paid during qualified period2020 Employee Retention Credit
› Credit is against the employer’s share of Social Security tax
› Fully refundable credit
• If the credit exceeds the employer’s share of Social Security tax on all
wages, the excess is treated as an overpayment & refundedEligible Employers › No limit for number of employees, although credit is much more lucrative for employers with 100 or fewer full-time employees (100 for 2020, increased in 2021) › Trade or business requirement › Governmental entities not eligible (for 2020, some are in 2021) › Tax-exempt organizations under Section 501(c) are eligible
Eligible Employers
› Experienced one of the following
• Full or partial suspension of operations during any calendar quarter in
2020 due to orders from an appropriate governmental authority
• A significant decline in gross receipts during the calendar quarterOrders from an Appropriate Governmental Authority › Orders, proclamations, or decrees from the federal government, or any state or local government if they limit commerce, travel, or group meetings due to COVID-19 › Statements from a governmental official do not rise to the level of a governmental order › CDC recommendations not a governmental order › Important to understand & document the relevant governmental orders, look to the most restrictive order if multiple orders
Full or Partial Suspension of Operations
› Essential versus nonessential business
• Facts & circumstances as to whether essential business may have a
partial suspension of operations
• More than a nominal portion of business operations must be
suspended by a governmental order to qualify
› Remote workExample: Grocery Store › Employer I, a grocery store, is operating an essential business under a governmental order. However, the governmental order requires grocery stores to discontinue their self-serve offerings, such as salad bars, though they may offer prepared or prepackaged food. › Employer I modifies its operations to close its salad bar and other self-serve offerings and instead offers prepackaged salads and other items. The governmental order requiring Employer I to discontinue its self-serve offerings does not have more than a nominal effect on Employer I's business operations under the facts and circumstances, even though Employer I was required to modify its business operations. › Employer I's business operations are not considered to be partially suspended because the governmental order requiring closure of self-serve offerings does not have more than a nominal effect on its business operations.
Example: Restaurant › Employer F, a restaurant business, must close its restaurant to on- site dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. Employer F is allowed to continue food or beverage sales to the public on a carry- out, drive-through, or delivery basis. › Employer F's business operations are considered to be partially suspended because a portion of its business operations – its indoor and outdoor dining service – is closed due to the governmental order.
Full or Partial Suspension of Operations
› Orders impacting suppliers
• Example: Employer A operates an auto parts manufacturing business
that is considered an essential trade or business in the jurisdiction
where it operates. Employer A's supplier of raw materials is required to
shut down its operations due to a governmental order. Employer A is
unable to procure these raw materials from an alternate supplier. As a
consequence of the suspension of Employer A's supplier, Employer A is
not able to perform its operations. Under these facts and
circumstances, Employer A would be considered an Eligible Employer
because its operations have been suspended as a result of the
governmental order that suspended operations of its supplier.Full or Partial Suspension of Operations › Restrictions on hours of operation › Multiple locations › Aggregated group considerations › Claim credit during time under the governmental order causing the suspension of operations
Significant Decline in Gross Receipts › Gross receipts in a 2020 calendar quarter < 50% of gross receipts in the comparable 2019 calendar quarter › Qualification ends with the first calendar quarter that follows the first calendar quarter in which quarterly gross receipts are > 80% of the comparable 2019 calendar quarter › Not required to prove decline is related to COVID-19 › Aggregated group considerations › Special rules for startup businesses & acquisitions
Gross Receipts
› Taxable entity › Tax-exempt entity
• Total sales net of returns & • Gross receipts from all operations, not just trades
allowances or businesses
• All amounts for services • Interest
• Dividends
• Interest
• Rents
• Dividends
• Royalties
• Rents
• Annuities
• Royalties
• Contributions, grants, & similar amounts
• Annuities
• Gross amounts for sale of assets & securities
• Gross amounts received as dues or assessmentsFull-Time Employees › Average of at least 30 hours of service per week or 130 hours of service in the month › Aggregation rules apply › If 100 or fewer, take credit on all wages up to $10,000 per employee › More than 100, take credit only on amounts paid to employees not providing services • Increase in pay while providing services does not qualify › Threshold increased for 2021 ERC
Qualified Wages
100 or Fewer Full-Time More than 100 Full-Time
Employees Employees
› Take credit on all wages up to $10,000 › Take credit on wages paid up to $10,000
per employee per employee while not providing services
› Do not include severance payments › Increase in pay while providing services
regardless of number of full-time does not qualify
employees › Include wages paid to hourly, exempt, &
› Wages paid to employees who are nonexempt salaried employees while not
related individuals of the employer are providing services
not qualified regardless of number of full- › Do not include wages paid pursuant to
time employees pre-existing vacation, sick, & other
› Include allocable health plan expenses personal leave policies
› Include allocable health plan expensesExample: Restaurant › Employer Q, a local chain of full-service restaurants in State X that averaged more than 100 full-time employees in 2019, is subject to a governmental order for restaurants to discontinue sit-down service to customers inside the restaurant but may continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. › Employer Q continues to pay wages to kitchen staff and certain wait staff needed to facilitate fulfillment of carry-out orders. › Wages paid to these employees for the time that they provide carry- out service are not qualified wages.
Example: Manufacturing Business › Employer T, a manufacturing business, that averaged more than 100 full-time employees in 2019, has several locations that are closed during the second quarter of 2020 due to a governmental order. Employer T continues to pay hourly employees who are not providing services at the closed locations 50 percent of their normal hourly wage rates. Employer T also reduced headquarters' administrative staff hours by 40 percent but continues to pay them at 100 percent of their normal hourly wage rates. › For employees who are not providing services due to the closure of their location but are receiving 50 percent of their normal hourly wage rates, Employer T may treat the wages paid as qualified wages for purposes of the Employee Retention Credit. › For the administrative staff whose hours were reduced by 40 percent, but who are paid for 100 percent of the normal wage rate, Employer T may treat the 40 percent of wages paid for time that these employees are not providing services as qualified wages for purposes of the Employee Retention Credit. › The 60 percent of wages that Employer T pays the administrative staff for hours during which the employees are actually providing services is not considered qualified wages for purposes of the Employee Retention Credit.
Example: Fitness Club › Employer V, a large fitness club business that employed an average of more than 100 full-time employees in 2019, closed all of its locations in City B by order of City B's mayor. Employer V continues to pay its exempt managerial employees their regular salaries. While the clubs are closed and there is not sufficient administrative work to occupy the managerial employees full-time, they continue to perform some accounting and similar administrative functions. › Employer V has determined, based on the time records maintained by employees, that they are providing services for 10 percent of their typical work hours. In this case, 90 percent of wages paid to these employees during the period the clubs were closed are qualified wages.
Qualified Health Plan Expenses › Includes employer portion & employee pretax salary reduction › Includes health plan expenses paid for furloughed employees › Fully insured group plans › Self-insured group plans › Health savings account, Archer Medical Saving Account, high- deductible health plans, & other plans
Aggregation Rules
› Aggregation rules important in making several determinations
• Whether the employer has a trade or business that was fully or partially
suspended
• Whether the employer has a significant decline in gross receipts
• Whether the employer has more than 100 full-time employees
› All members of aggregated group are eligible employers if one
member of the group has business operations fully or partially
suspended due to governmental orderAggregation Rules › Section 52(a) – parent-sub or brother-sister controlled group, or combined group corporation rules generally based on > 50% ownership › Section 52(b) – similar aggregation rules to partnerships, trusts, estates, sole proprietorships › Section 414(m) or (o) – normally used to determine related entities for purposes of qualified retirement plans & other employee benefits
2021 ERC Extension & Enhancements
› Extended to include first two quarters in 2021
› Employers receiving a PPP loan (in 2020 or 2021) may now also
qualify for ERC
• Cannot use the same wages for PPP loan forgiveness & for ERC (no double
dipping)
› Credit percentage increased from 50% to 70%
› Increases per-employee wage limit to $10,000 per quarter
› Increases 100 full-time employee threshold for determining qualified
wages to 500 full-time employees2021 ERC Extension & Enhancements
› Changes to significant decline in gross receipts
• Quarterly reduction in gross receipts requirement is reduced from 50%
to 20%
• Election to determine gross receipts test based on prior quarter
› Newly eligible governmental employers
• Colleges & universities
• Entities with the principal purpose or function of providing medical or
hospital care2020 vs. 2021 ERC Summary
2020 ERC 2021 ERC
Significant decline in gross receipts threshold 50% 20%
Applicable dates 3/13/20–12/31/20 1/1/21–6/30/21
Credit percentage applied to qualified wages 50% 70%
Per-employee wage limit $10,000 for the year $10,000 per quarter
Maximum credit per employee $5,000 $14,000
Maximum number of full-time employees 100 500
allowed to claim credit on all wages paid
Certain governmental employers eligible? No Yes
Eligible if obtaining PPP loan? Yes, retroactively Yes2020 vs. 2021 ERC Example › 2020: Employer pays employee $8,000 between April & June 2020 & $8,000 between July & September 2020. The maximum credit with respect to those wages should be $4,000 for Q2 & $1,000 for Q3 (for a total of $5,000) › 2021: Employer pays employee $8,000 between January & March 2021 & $8,000 between April & June 2021. The maximum credit with respect to those wages should be $5,600 for Q1 & $5,600 for Q2
Claiming the Credit › Report each quarter on Form 941 › Fund credit by • Accessing federal employment taxes • Requesting an advance by filing Form 7200 › Amend prior Form 941 by filing 941-X › Do not report credit on first quarter 2020 Form 941
Interaction with Other Credit & Relief
Provisions
› Paycheck Protection Program
• PPP loan recipients now qualify for the ERC on qualified wages not used for
loan forgiveness, e.g., PPP borrowers with qualified wages not used to
receive loan forgiveness, can amend the prior Forms 941 to claim the credit
• Evaluate potential ERC benefit compared to a PPP 2 loan & to take
advantage of the ability to use up to 40% of qualifying nonpayroll costs for
purposes of the PPP loan forgiveness calculation
› Paid Family & Medical Leave Credit
› Work Opportunity Tax CreditAction Items › Determine what governmental orders were in place & the dates they were effective › Summarize quarterly gross receipts for 2019, 2020, & the first two quarters in 2021 as they are completed › If you believe your organization will qualify, determine the number of full-time employees › If more than 100/500 full-time employees, gather information about employees that may have been paid while not providing services
Legislative Developments
Legislative Developments
› Congress currently negotiating a $1.9 trillion COVID-19 stimulus & relief package
using budget reconciliation process
› Proposed bill includes
• 2021 recovery rebates to individuals (amounts subject to change during negotiations)
› $1,400 for single ($2,800 for joint filers) + $1,400 per dependent
› Phases out between $75,000 & $100,000 AGI ($150,000 to $200,000 for joint filers)
• Makes child tax credit fully refundable for 2021 & increase amount to $3,000 per qualifying
child ($3,600 for a child younger than age 6)
• Modifies child & dependent care tax credit for 2021
› Makes credit fully refundable & increases maximum credit rate to 50%
› Amends phaseout threshold to begin at $125,000 instead of $15,000 (plateaus at 20%)
› 20% credit rate phases out for taxpayers whose AGI is in excess of $400,000
› Exclusion for employer-provided dependent care assistance increases from $5,000 to $10,500Employee Retention Credit › Proposes to extend ERC through December 31, 2021 › Modifies the credit such that, beginning after June 30, 2021, the credit will be structured as a refundable payroll tax credit against the hospital insurance tax
Credits for Paid Sick & Family Leave › Proposes to extend paid sick time & paid family leave credits from March 31, 2021, through September 30, 2021 › Increases amount of wages from $10,000 to $12,000 per employee per year & increases number of days for which self- employed individuals can claim the credit from 50 to 60 › Expands paid sick time & paid family leave credits to include leave taken to obtain a COVID-19 vaccine or to recover from an injury, disability, illness, or condition related to a COVID-19 immunization
Credits for Paid Sick & Family Leave
› Resets ten-day limitation on the maximum number of days for which an
employer can claim the paid sick leave credit
• Current ten-day limitation runs from the start of the credits in 2020 through March 31,
2021
• New ten-day limitation would apply to sick days after March 31, 2021
› Proposes to structure credits as a refundable payroll tax credit against the
hospital insurance tax beginning after March 31, 2021
› Gross up of credit in lieu of exclusion from tax
• Increases value of credits by the amount equal to OASDI & HI employer-share tax
imposed on qualified paid family & medical leave wages for purposes of this creditPaycheck Protection Program (PPP)
› Provides additional $7.25 billion of funding (bringing total PPP
program level to $813.7 billion)
› Expanded eligibility
• Larger nonprofit entities that don’t employ more than 500 employees
per physical location
• Other 501(c) groups including (c)(5) labor organizations, (c)(7) social &
recreational clubs, & (c)(8) fraternal benefit societies (subject to 300
employees per location & minimal lobbying activity)
• Internet publishing organizationsRestaurant Revitalization Grants › $25 billion grant program for restaurants & other food & drinking establishments • $5 billion set aside for businesses with less than $500K in 2019 revenue › Restaurant groups with more than 20 locations (including affiliates), state or local government-operated, publicly traded, or received (or applied for) a shuttered venue grant are not eligible › Grant amount based on difference in annual revenue between 2020 & 2019 with max grant of $10M (limited to $5M per physical location) › Maximum value of grant is reduced by any PPP funds previously received
Restaurant Revitalization Grants
› Extensive list of eligible expenditures to spend grant on (payroll,
rent, utilities, supplies, food, maintenance, debt obligations,
etc.)
• Funds must be spent by December 31, 2021, or date determined by
SBA no later than two years after date of bill’s enactment
› Remain eligible for ERC (with similar rules as PPP on qualified
wages for ERC purposes)
› Applicant must certify need for funds due to uncertainty of
current economic conditions (similar to PPP certification)Miscellaneous Proposed Provisions › Repeal election to allocate interest on a worldwide basis in calculating foreign tax credit limitation › Exempts Economic Injury Disaster Loan (EIDL) & Restaurant Revitalization grants from tax & provides that such exclusion shall not result in a denial of deduction, reduction of attributes, or denial of increase in basis by reason of this exclusion from income
Resources › IRS FAQ: https://www.irs.gov/newsroom/faqs-employee- retention-credit-under-the-cares-act › Form 7200: https://www.irs.gov/pub/irs-pdf/f7200.pdf › BKD COVID-19 Resource Center: https://www.bkd.com/covid- 19-resource-center › BKD ERC Flowchart: https://www.bkd.com/media/nfp- employee-retention-creditpdf
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bkd.com | @BKDLLP The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered
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