A business operating during January 1, 2021 through June 30, 2021 may be eligible for the Employee Retention Credits (“ERCs”), which would be an immediate source of liquidity for a qualifying business.
The ERCs are available to business that experienced either:
A full or partial suspension of operation of the business due to government orders limiting commerce, travel or group meetings as a result of Covid-19.
A quarter over quarter reduction in gross receipts when comparing 2019 to 2021. The threshold measurement is that calendar quarter receipts must be less than 80% of receipts during the same quarter in 2019.
The ERC amount reduces the amount employers must pay to the IRS under their 941 filings. And, small businesses, defined as those with 500 or fewer FTEs in 2019, may request refunds of amounts already paid to the IRS during the first half of 2021 using IRS form 7200 “Advance of Employer Credits Due to Covid-19”. Advances of refunds are not available to employers larger than 500 employees in 2019, though the business may still qualify for the ERC which would reduce the amount of payments required under IRS form 941.
If the business meets either of the two ERC requirements, the business would qualify for up to $7,000 per employee per quarter, or $14,000 in 2021. The qualified wages are limited to $10,000 per employee per calendar quarter with a 70% factor applied to arrive at a maximum of $7,000 per employee per quarter.
For example, if a business has experienced a decline in gross receipts during a quarter in 2021 compared to 2019, and meets the 80% or less receipts threshold, the business qualifies for the ERC. If the business is paying 100 employees at least $10,000 per quarter in 2021, the business would qualify for $1,400,000 of ERCs (100 employees X $14,000 = $1.4 million). A business with 25 employees could qualify for $350,000 of ERCs (25 employees X $14,000 = $350,000). These dollars could provide a significant liquidity boost for a business. If the business qualifies for all four quarters of 2021 compared to 2019, the amounts calculated could be doubled.
The amount of the ERC a business is eligible for would be reduced by the amount of PPP loan funds attributed to being used to pay wages.
There are additional rules related to businesses not in existence in 2019, and for businesses with more than 500 employees.
The potential liquidity for a business is significant and warrants discussions with tax accountants and payroll providers to ensure all available sources of liquidity are being tapped.
The links below provide access to the IRS form 7200 and instructions to complete the form.
Instructions: https://www.irs.gov/instructions/i7200
Frequently asked questions prepared by the IRS for qualified wages paid after March 12, 2020 and before January 1, 2021 are found here:
Frequently asked questions prepared by the IRS for qualified wages paid after December 31, 2020 and before July 1, 2021 are found here:
These are complex programs but the dollar amount of potential liquidity is significant enough that every business should test its 2021 receipts to its 2019 receipts by quarter and contact its payroll provider and tax accountants if the drop in receipts meets the threshold – 2021 revenues are 80% or less compared to 2019 receipts. These programs should be evaluated in conjunction with the business’ tax advisors, to consider all potential tax impacts, and payroll providers.