Because of the widespread spread of the coronavirus pandemic, a great result of companies in the retail industry were forced to shut down their operations, while others were forced to severely restrict the products and services they provided. Making ensuring that your organization can still function, even if only in a reduced capacity, should be a top priority if you want to continue working toward the goals it has set for itself. With the passage of the CARES Act in March of 2020, the government has shown its support for the retail industry and the continuance of their services. This assistance comes in the form of the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC). Companies were permitted by the CARES Act to take advantage of either the PPP or the ERC, but not both at the same time. The Consolidated Appropriations Act of December 2020 (Relief Act) and the American Rescue Plan Act, H.R. 1319 retroactively eliminates this limitation, and also extends and strengthens the ERC until the end of 2021. This is great news for retail companies.
The ERC is one of the most advantageous elements of the Relief Act that are applicable to retail companies. If you did not consider the ERC in 2020 or were not eligible to consider the ERC because you took out a PPP loan, the retroactive ability to benefit from both PPP loans and the ERC is a compelling reason to consider the ERC for 2020. This is because the ERC will allow you to benefit from both PPP loans and the ERC. When looking ahead to the year 2021, the increased amount of the credit for wages earned across all four quarters of 2021 gives another another compelling reason to take into consideration the ERC.
What precisely 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 credit is available to employers 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. To assist in offsetting the costs of keeping employees, the ERC can be claimed on a quarterly basis. ERCs can be used as a form of offsetting for federal payroll tax deposits made by employers. This includes the employee FICA and income tax withholding components of the employer’s federal payroll tax payments. In contrast to the PPP, which operated on the principle of “first come, first serve,” the ERC can be claimed at any time up to three years after the date on which your most recent quarterly payroll report was submitted.
Who may apply for membership in the ERC?
Retail companies need to claim one of the following requirements during the relevant calendar quarter in order to be eligible for the ERC in that quarter:
- Operations were fully or partially interrupted as a result of restrictions issued by a governmental entity restricting trade, travel, or group gatherings owing to COVID-19; or
- When compared to 2019, the organization’s total quarterly gross receipts witnessed a considerable decrease during the current calendar quarter. To be more specific, gross receipts for the 2020 quarter are projected to fall by more than fifty percent when compared to the same 2019 quarter. The window of opportunity to claim the credit remains open until the end of the 2020 quarter in which gross receipts are higher by more than 80 percentage points than they were in the comparable 2019 quarter.
- Beginning in 2021, the gross receipts eligibility threshold for employers will drop from a decline of 50 percent to a decline of 20 percent in gross receipts for the same calendar quarter in 2019, and a safe harbor will be provided that will allow employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility. Previously, this threshold was set at a decline of 50 percent.
- In order to evaluate eligibility, employers who did not exist in 2019 may use the gross receipts from the 2020 quarters as a comparison to the gross receipts from the 2021 quarter.
If you obtain a loan from the PPP, are you still eligible for the ERC?
Yes! As was just covered, one of the most advantageous aspects of the new law is that it enables taxpayers to simultaneously obtain PPP loans and claim the ERC. This overlap was not allowed when the CARES Act was initially implemented, and throughout the year 2020, companies that required cash infusions more commonly turned to PPP loans as a source of funding rather than the ERC. Importantly, the new law gives the capacity to claim the ERC and receive PPP loans retroactive to March 12, 2020. This change in the law was made possible by the new legislation. As a result of this, companies who were granted PPP loans in 2020 (and/or will be granted fresh loans in 2021) are now eligible to investigate the possibility of receiving ERC credits in 2020 and 2021.
What kinds of wages are acceptable for the ERC?
The answer is dependent on the total number of employee members that an organization has. The Employment and Retraining Credit (ERC) may only be claimed by eligible companies that are regarded as significant employers for the wages provided to employees during the period that the employees are not delivering services. This is consistent with the goal of the ERC, which is to encourage employers to retain employees and reward them at times when the businesses are not operating at full capacity.
Companies who are qualified but are on the smaller side may be able to claim a credit for the full amount of wages paid to their employees. The Relief Act raises the threshold that is utilized to assess whether or not an employer is considered a large one for employee purposes in 2021 to a count of more than 500 workers (for 2020 it is more than 100). Because of this beneficial adjustment, the number of qualified retail companies that are entitled to claim the ERC for all wages paid to employees, including wages paid to employees who are delivering services, has been expanded. It is important to note that certain healthcare costs might qualify as wages.
You are eligible to file a claim for the ERC if you have furloughed your workers but have continued to pay for their health insurance coverage. Employees who are furloughed are not required to receive wages, and the ERC considers health care expenditures to be equivalent to wages in and of themselves.
How is it decided whether or not an employer qualifies as a Large Employer?
The position of a company as a Large Employer is established by calculating the annual average number of full-time employees employed throughout 2019.
For the purposes of this discussion, the term “full-time employee” refers to an employee who, during any calendar month in 2019, worked an average of at least 30 hours per week or 130 hours throughout the month combined. This definition is the one that is applied for analyzing compliance with the Affordable Care Act. Importantly, aggregation criteria must be followed in order to arrive at the correct number of full-time employees. If an organization is part of a controlled group of corporations, is controlled by the same entity, or is aggregated for the purposes of a benefit plan, then it is generally deemed to be a single employer.
The following actions should be taken by companies that were operational during the entirety of the year 2019 in order to calculate the average number of full-time employees employed during 2019:
First, determine the total number of employees working a full-time schedule for each month of the calendar year 2019. Include just those workers who regularly put in at least 30 hours in a week or 130 hours in a month, as this is the minimum requirement.
In the second step, you will take the total employee count from the first step and divide it by 12.
When determining whether or not an organization is considered a significant employer, part-time employees who work, on average, fewer than 30 hours per week are excluded from the determination. If part-time employees aren’t factored into the calculation, then more retail companies should be able to meet the threshold of having 500 or fewer full-time employees and, as a result, be eligible to claim the ERC for all wages given to employees in each of the four quarters of 2021. (assuming eligibility criteria are met).
Is it possible to utilize the same wages for calculating the Earned Revenue Credit (ERC) as well as the amount of PPP debt forgiveness?
No. To put it another way, there is no such thing as double-dipping. Wages that are used to claim the ERC cannot also be treated as “payroll expenses” for the purposes of estimating the amount of PPP loan forgiveness, thus companies that want to benefit from the ERC and have their PPP loans fully forgiven will need to have sufficient wages to cover both of these costs. If a company does not have adequate wages, strategic planning will be required in order to create the greatest possible amount of benefits.
Insights from Us
Employers that had previously surpassed the credit limit on certain of their employees in the year 2020 may continue to claim the ERC for those employees in the year 2021, provided that the employer is still qualified to receive the ERC.
The qualification for employers in 2021 based on the decrease in gross receipts test may create new prospects for businesses operating in industries that are impacted.
Although employees at retail companies normally have a lower participation rate in health insurance plans, the increase in the threshold for qualifying as a “big employer” to 500 for 2021 may provide major benefits for individuals who fall below the barrier.
Employers who meet the requirements and have 500 employees or less can now claim up to $7,000 in credits every quarter. These credits must be distributed equally among all employees, regardless of the level of service they provide. Previously, employers could only claim a maximum of $5,000 in tax credit for each employee each year, and this regulation only applied to companies with less than 100 employees. When determining whether or not many entities under the same control should be classified as a single employer, aggregation criteria are applied.
The Internal Revenue Service has announced relief for employers who used the employee retention credit for wages paid in the fourth quarter of 2021.
The Internal Revenue Service (IRS) on December 6 announced guidance that provides penalty relief for some employers that took advantage of the employee retention credit (ERC) on fourth quarter 2021 profits. This guidance was provided in response to a request made by the employer community. As a result of the recently passed Infrastructure Investment and Jobs Act, the ERC will be discontinued as of the 30th of September in 2021, which is three months sooner than was originally anticipated (IIJA). (For previous coverage, please visit our story on the passage of the IIJA and our story on the ERC.)
History of the ERC
The CARES Act of 2020 was responsible for the establishment of the ERC; the Consolidated Appropriations Act of 2021 (CAA) was responsible for its expansion; and the American Rescue Plan Act of 2021 was responsible for its extension (ARPA). During the epidemic caused by the coronavirus, it was intended to encourage employers (including tax-exempt corporations) to continue providing health benefits to their employees and to retain those employees on their payroll.
As a result of the CAA and ARPA expansions, it was anticipated that the ERC would be accessible during the year of 2021. However, due to the passage of the IIJA on November 15, which was signed by Vice President Joe Biden, the ERC was terminated retroactively for most employers as of September 30, 2021. This was three months earlier than the original termination date of December 31, 2021. Due to the fact that the IIJA measure won’t take effect until calendar quarters beginning after September 30, 2021, employers won’t be able to utilize any earnings from the fourth quarter of 2021 to fund the ERC.
Employers who meet the requirements to be considered a “recovery beginning business” are exempt from the retroactive termination date requirements. The ERC will continue to be available to be taken by those employers until the 31st of December in 2021.
Fresh Instructions
Employers who have previously claimed an advance payment of the credit for wages paid after September 30 and have received an erroneous refund on fourth quarter wages are required to repay any erroneous refunds by the due date for the applicable employment tax return that includes the fourth quarter of 2021, as outlined in the newly issued guidance known as Notice 2021-65. (e.g., January 31, 2022 for Form 941 filers).
Employers that delayed making deposits of payroll tax on wages received during the fourth quarter of 2021 in preparation for the employee retention credit are required to make payments of the amounts that were initially withheld on or before the due date applicable to wages earned on December 31, 2021. (regardless of whether the employer actually pays wages on that date). The date that is considered to be relevant will change depending on the amount of the overdue tax payment. On the employment tax return that is appropriate, the employer is additionally required to record the amount of tax liability that is related to the termination of the employer’s employee retention credit.
Employers who cut deposits in anticipation of the employee retention credit after December 20, 2021 are not eligible for the relief granted by Notice 2021-65, which prevents failure-to-deposit fines from being assessed.
Employers also have the option of submitting a claim for penalty relief based on reasonable cause, in the event that they are not qualified for the relief given by Notice 2021-65.
During the fourth quarter of 2021, recovery starting businesses will still be eligible for employer retention credits.