Employee Retention Credit

Article 06.24.2024 Autumn Hines

The moratorium on processing new Employee Retention Credit (ERC) claims, which began last September, will continue for the foreseeable future. The IRS announced this information in a June 20 news release, which also provided an update on the status of its ERC processing.

The IRS’s announcement provides little solace to taxpayers with legitimate claims that have waited months for those claims to be processed. The IRS has emphasized that taxpayers with pending claims do not need to take any action at this time and should await further notification from the agency. The agency emphasized those with ERC claims should not call IRS toll-free lines because additional information is generally not available on these claims as processing work continues.

According to the IRS, it analyzed more than one million ERC claims following last fall’s moratorium, which indicated an extremely high rate of improper claims. As a result of this review, the IRS intends to deny tens of thousands of high-risk claims in the coming weeks. These claims, which constitute 10-20% of the total claims analyzed, show clear signs of falling outside the guidelines for the credit established by Congress. Another 60-70% of claims show an unacceptable level of risk, and the IRS intends to gather more information on claims falling in this category.

The remaining 10-20% of claims show a low risk. The IRS, committed to a thorough and fair process, and will begin “judiciously” processing claims received before the moratorium that show no warning signs. It anticipates that the first payments to these taxpayers will go out later this summer. The IRS, however, cautioned that its processing speed will be “dramatically slower” than during the pandemic, given the need for increased scrutiny.

Meanwhile, no claims submitted during the moratorium, which began on September 15, 2023, will be processed at this time. IRS Commissioner Danny Werfel stated that ending the moratorium might trigger a flood of new claims from ERC promoters. The IRS intends to consult with Congress on potential legislative action before deciding on the future of the moratorium, including possibly ending new claims entirely and seeking an extension of the statute of limitations to give the agency more time to pursue improper claims. According to the IRS, ERC claims have continued to be submitted at the rate of more than 17,000 per week since the start of the moratorium, resulting in a current ERC inventory of 1.4 million.

The IRS, understanding the complexity of ERC claims, has continued to urge taxpayers to work with a trusted tax professional when evaluating their eligibility for the ERC. This guidance is to ensure that employers are supported and guided through the process. The agency is also considering reopening its Voluntary Disclosure Program, which ended in March, at a reduced rate for taxpayers with previously processed claims who wish to avoid future compliance action by the IRS.

Article 03.18.2021 Dean Dorton

Written by Kaydee Ruppert, Accounting & Financial Outsourcing Manager at Dean Dorton

The Employee Retention Tax Credit (ERTC), often referenced to as just ERC, is confusing a lot of nonprofit employers. If it’s confusing to you, you’re not alone! There are many nuances to this credit, but the following outline will assist you in navigating and maximizing the opportunity presented by ERTC.

The version of ERTC applicable to 2020 is slightly different than the version adopted for 2021, so they are addressed separately below for greater clarity. Also note that receipt of a Paycheck Protection Program (PPP) loan in either round does NOT prohibit your organization from taking advantage of the ERTC if you otherwise qualify, although any wages used for the ERTC cannot be used for PPP loan forgiveness.

2020 ERTC

Organizations that qualify for ERTC in 2020 may still apply for a refund or tax abatement applicable to the credit.

Determine Qualified Time Period
There are two methods for determining your organization’s qualified time period for 2020 ERTC. If both apply, you should select the one that covers the greater number of days. If neither apply, your organization is not eligible for ERTC for 2020.

If applicable, your organization’s qualified time period matches the dates during which operations in 2020 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The starting date for suspended operations cannot be before March 13, 2020. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.

If applicable, gross receipts for your organization must have significantly declined for one or more quarters in 2020 as compared to 2019. To determine eligibility under this method, first determine total gross receipts by quarter for 2019 and 2020. Divide the 2020 quarter totals by the respective 2019 quarter totals. If the result is less than .5, note the first day of that quarter per the chart below. That is the start of your significant decline in gross receipts. Compare subsequent quarters until you reach a result that is greater than .8. Note the last day of that quarter per the chart below. That is the end date of your significant decline in gross receipts.

Start and End Date for ERTC		Sample Periods: 2020 ÷ 2019
Q1	3/13/2020 – 3/31/2020	<.5	>.5	>.5
Q2	4/1/2020 – 6/30/2020	<.8	<.5	>.5
Q3	7/1/2020 – 9/30/2020	>.8	>.8	<.5
Q4	10/1/2020 – 12/31/2020	>.8	>.8	>.8
Sample Period of Significant Decline in Gross Receipts		3/13/2020 – 9/30/2020	4/1/2020 – 9/30/2020	7/1/2020 – 12/31/2020

Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 100 or fewer full-time employees in 2019. If your organization averaged more than 100 full-time employees in 2019, be aware that your calculation of qualified wages is different.

Qualified Time Period in 2020				Complete individually for each employee.
Q1	Q2	Q3	Q4
				Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2020. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base.
				Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions.
				Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act.
				The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter.

Calculate Credit and Request Refund or Abatement
Multiply each employee’s qualified wages, by quarter, by 50%. The result is the ERTC applicable to the employee for that quarter until the total year-to-date cumulative amount for the employee reaches $5,000. At that point, no additional credit can be claimed for the individual.

The maximum credit of $5,000 per employee may be realized in just one quarter for some employees, while other employees may not have sufficient qualified wages in the entire qualified time period to reach $5,000. Determine which quarters in 2020 are impacted by the credit for your organization. Then complete IRS Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) for those quarters to claim your refund or abatement.

2021 ERTC

The ERTC is available for qualifying organizations until December 31, 2021 and should be claimed on the quarterly 941 Forms for 2021. These forms are due in April, July, October, and January 2022 so there is still time to determine whether or not you are eligible to include the credit on your return. Once you are confident that your organization is eligible, you may also choose to reduce your employment tax deposits for anticipated credits or submit IRS Form 7200 to request advance payment of employer credits. For the 2021 ERTC, only employers that averaged 500 or fewer full-time employees during 2019 are eligible to request an advance payment of the credit.

Determine Qualified Time Period
There are three methods for determining your organization’s qualified time period that result in two possible time periods for the calculation of the 2021 ERTC. If more than one method applies, you should select the one that covers the greater number of days. If none apply, your organization is not eligible for ERTC for 2021.

If applicable, your organization’s qualified time period matches the dates during which operations in 2021 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.

If applicable, your organization’s gross receipts for one or all of the quarters in 2021 must significantly decline as compared to the same quarters in 2019. To determine eligibility under this method of qualification, first determine total gross receipts for the quarters being considered for 2019 and 2021. Divide the 2021 quarter total by the respective 2019 quarter total. If the result is less than .8 for the quarter, that full quarter is a qualified time period due to a significant decline in gross receipts.

If applicable, your organization’s gross receipts for the quarters immediately preceding the quarters being considered in of 2021 must reflect a significant decline as compared to the same quarters in 2019. A qualified time period of 1/1/2021 – 3/31/2021 requires that gross receipts for the fourth quarter of 2020 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 12/31/2020 by the same quarter in 2019. If the result is less than .8, the first quarter of 2021 is a qualified time period due to a significant decline in gross receipts.

Likewise, a qualified time period of 4/1/2021 – 6/30/2021 requires that gross receipts for the first quarter of 2021 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 3/31/2021 by the same quarter in 2019. If the result is less than .8, the second quarter of 2021 is a qualified time period due to a significant decline in gross receipts. The same methodology then applies to quarters 3 and 4 of 2021.

If this method is used to determine eligibility for a time period, you must elect to do so. Although the method for election has not been clarified yet by the IRS, there is an assumption that Form 941 will be updated to reflect this requirement.

Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 500 or fewer full-time employees in 2019. If your organization averaged more than 500 full-time employees in 2019, be aware that your calculation of qualified wages will be different.

Qualified Time Period in 2021				Complete individually for each employee.
Q1	Q2	Q3	Q4
				Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2021. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base.
				Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions.
				Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act.
				The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter.

Calculate and Report Credit
Multiply each employee’s qualified wages, by quarter, by 70%. The result is the ERTC applicable to the employee for that quarter. The credit is capped at $7,000 per quarter per employee and must be reported on Form 941 for the applicable quarter to receive the respective offset to employment taxes due.

Dean Dorton’s nonprofit team has been closely monitoring the changing relief opportunities available to nonprofit organizations in this time of crisis. We are here to provide consultation, collaboration, or confirmation as needed in your journey back to sustainability.

Click the button below to learn more about Kaydee Ruppert, the newest nonprofit expert to join the Dean Dorton team:

Meet Kaydee Ruppert

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COVID-19 Resources

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covid19solutions@deandorton.com

Article 03.15.2021 Dean Dorton

On Friday, March 12, 2021, the Kentucky General Assembly passed House Bill 278 (HB 278), providing deductibility for Kentucky tax purposes of expenses paid with Paycheck Protection Program (PPP) loans. The same bill provides for the exclusion from taxable income and deductibility of expenses paid with Economic Injury Disaster Loan advances.

The CARES Act, passed in March 2020, launched PPP loans and Economic Injury Disaster Loan (EIDL) advances or grants. The Act provided that the cancellation of indebtedness income from a forgiven loan would not be taxable income. The CARES Act was silent on the deductibility of expenses paid with loan proceeds and made no provision for EIDL advances.

The Consolidated Appropriations Act, 2021 (Appropriations Act) made expenses paid with PPP loan funds deductible for federal income taxes and provided that EIDL advances would be treated in the same manner as PPP loans. With the Appropriations Act, Congress reversed the Internal Revenue Service’s decision that expenses paid with PPP loan proceeds would not be deductible. A collective sigh of relief could be heard across the country. Then, business owners and their advisors realized that deductibility of expenses at the state level would depend on each state’s laws.

The Kentucky Department of Revenue announced that Kentucky law did not permit the deductibility of expenses associated with income not subject to tax. Thus, Kentucky taxpayers were back at square one for at least a portion of their 2020 tax liability. With the passage of HB 278, expenses paid with PPP loan proceeds are deductible, and EIDL advances are treated the same as for federal income tax; that is, the amount of the advance is not subject to tax and amounts paid with the proceeds of the advance are tax-deductible. The General Assembly’s action is welcome, needed relief for most of Kentucky’s small businesses. Governor Beshear has stated that he will sign the bill when it arrives on his desk.

For more information on COVID-19 relief efforts, visit our coronavirus relief resources page:

COVID-19 Resources

Do you have questions about House Bill 278? Contact your Dean Dorton advisor, or contact us at:

covid19solutions@deandorton.com

Article 03.12.2021 Dean Dorton

The Consolidated Appropriations Act, 2021 established the Shuttered Venue Operator Grant (SVOG) program. The Small Business Administration announced it expects to begin accepting applications in early April. The American Rescue Plan (ARP) amends a key element of the SVOG program and provides some relief for venue operators that have been waiting for funding.

Previously, an eligible entity could not receive both an SVOG and a Paycheck Protection Program (PPP) loan. With the looming March 31, 2021 deadline for PPP applications and the delays in getting the SVOG program up and running, many entities were left deciding whether they should apply for a PPP loan before the deadline, making them ineligible for an SVOG when it becomes available.

With the ARP, eligible entities can now apply for and receive both a PPP loan and an SVOG—with a caveat. Any PPP loan received will be deducted from an SVOG received by the same entity. Consider the example of an eligible entity that receives a First Draw PPP loan for $30,000 on March 23, 2021. When the SVOG program is up and running, the same eligible entity applies for an SVOG and calculates its potential grant amount to be $100,000. Rather than receiving the full $100,000 grant, the entity will now only receive $70,000.

Click the button below for further details on eligibility, grant amounts, and general terms of the SVOG program:

SVOG Program Information

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Article 03.12.2021 Dean Dorton

The restaurant industry was targeted within the American Rescue Plan (ARP) by establishing the Restaurant Revitalization Grant (RRG) program. The program has $28.6 billion for grants to eligible entities, including $5 billion earmarked for eligible entities with 2019 gross receipts of $500,000 or less. The SBA is expected to issue guidance and open the program soon.

Restaurant Revitalization Grant Eligibility

Eligible entities are defined broadly as “a place of business in which the public or patrons assemble for the primary purpose of being served food or drink.” The ARP includes a list of specific entities, including:

Food stands and trucks
Caterers
Saloons, inns, or taverns
Bars and lounges
Brewpubs
Tasting rooms and taprooms
Other licensed facilities or premises of a beverage alcohol producer where the public may taste, sample, or purchase products

The following are ineligible entities:

State or local government-operated businesses
An entity that, as of March 13, 2020, owns or operates (together with any affiliated business) more than 20 locations, regardless of whether those locations do business under the same or multiple names
An entity that has a pending application for or received a Shuttered Venue Operator Grant
Publicly-traded companies

During the initial 21-day grant awards period, priority will be given to eligible entities that are small business concerns owned and controlled by women, veterans, or socially and economically disadvantaged individuals.

Restaurant Revitalization Grant Amounts

Grants distributed to eligible entities are expected to be equal to the pandemic-related revenue loss calculated as the difference between 2019 and 2020 gross receipts for each location. Maximum grant amounts are capped at $10 million for an affiliated group and $5 million per physical location and will be reduced for any first or second draw PPP loan received by the entity. An affiliated business is defined as a business in which an eligible entity has an equity or right to profit distributions of not less than 50%, or in which an eligible entity has the contractual authority to control the direction of the business, provided that the affiliation existed as of March 13, 2020.

Restaurant Revitalization Grant Uses

Eligible entities are required to spend the grant money on certain eligible expenses, such as payroll costs, maintenance expenses, supplies (including protective equipment and cleaning materials), operational expenses, utilities, etc. Entities with grant monies that go unused or used for unallowable expenses must return the funds to the U.S. Department of Treasury.

It is anticipated that the SBA will create reporting requirements to ensure grant monies were spent according to program terms and conditions.

For more information on COVID-19 relief efforts, visit our coronavirus relief resources page or browse the articles below:

COVID-19 Resources

Do you have questions about the new American Rescue Plan Act? Contact your Dean Dorton advisor, or contact us at:

covid19solutions@deandorton.com

Article 03.12.2021 Dean Dorton

The latest COVID-19 relief package, dubbed the American Rescue Plan Act of 2021 (Rescue Plan), extends two payroll tax credits created nearly a year ago to help businesses weather the pandemic. The employee retention credit (ERC), designed to encourage businesses to keep employees on their payroll despite experiencing economic hardship, was set to expire July 1. The Rescue Plan extends the ERC through December 31, 2021. The paid sick and family leave tax credits, available to employers providing paid leave to employees for various COVID-19 related reasons, were scheduled to expire March 31. The Rescue Plan extends the credits through September 30, 2021.

In addition to extending the expiration dates, the Rescue Plan makes several changes to these programs. We break down the major changes below, beginning with the ERC.

The ERC

Background

The ERC is a refundable payroll tax credit for eligible employers, calculated as a percentage of qualified wages paid to employees. As created by the CARES Act, the ERC applied to wages paid from March 13, 2020 through December 31, 2020 (the 2020 ERC). The Consolidated Appropriations Act, 2021 (Appropriations Act) extended the ERC into the first and second quarters of 2021 (the 2021 ERC).

The 2021 ERC is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 in wages per employee each quarter. To be eligible, a business must meet one of two criteria during the calendar quarter:

The operation of the business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19; or
The employer experiences a significant decline in gross receipts.

For purposes of the 2021 ERC, an employer experiences a significant decline in gross receipts if its gross receipts for the relevant calendar quarter in 2021 are less than 80% of its gross receipts for the same calendar quarter in 2019. An employer also can elect to determine eligibility by comparing its gross receipts for the immediately preceding calendar quarter to the corresponding 2019 calendar quarter.

The definition of qualified wages for the 2021 ERC is more restrictive for employers that averaged more than 500 full-time employees during 2019 (large employers). For large employers, qualified wages include only wages paid when the employee is not providing services.

For additional background on the 2020 and 2021 ERC, click the button below:

Additional ERC Background

The Rescue Plan’s Changes

The Rescue Plan extends the ERC through December 31, 2021, and restructures the credit to be claimed against the employer’s share of Medicare rather than Social Security taxes.

It also expands eligibility for the credit to “recovery startup businesses.” A recovery startup business is any employer that began carrying on any trade or business after February 15, 2020. Guidance on additional eligibility requirements is expected. The credit allowed for recovery startup businesses for any calendar quarter cannot exceed $50,000.

In addition, the Rescue Plan expands the definition of qualified wages for large employers that qualify as “severely financially distressed employers.” A severely financially distressed employer is an eligible employer whose gross receipts for the relevant calendar quarter in 2021 are less than 10% of its gross receipts for the same calendar quarter in 2019. Severely financially distressed employers can count all wages paid to employees as qualified wages rather than only wages paid to employees when they do not provide services.

The Rescue Plan states that wages used in connection with a Paycheck Protection Program (PPP) loan, a Shuttered Venue Operator Grant (SVOG), or a Restaurant Revitalization Grant (RRG) cannot be used for calculating the 2021 ERC.

The Rescue Plan’s changes apply to wages paid during the third and fourth quarters of 2021.

Tax Credits for Paid Sick and Family Leave

Background

The Families First Coronavirus Response Act (FFCRA), enacted in March of 2020, required most government employers, as well as tax-exempt organizations and private employers with fewer than 500 employees, to provide employees with paid sick or family leave for various COVID-19 related reasons. Under the FFCRA, the amount of leave and pay to which employees were entitled varied depending on the reason for leave.

To offset the cost of providing paid leave, the FFCRA provided employers with a refundable payroll tax credit equal to 100% of qualified sick and family leave wages, plus allocable health plan expenses and the employer’s share of Medicare tax paid each calendar quarter. The credit was allowed against the employer portion of Social Security tax. Equivalent credits were available for self-employed individuals.

Under the FFCRA, the requirement to provide paid leave took effect April 1, 2020, and expired December 31, 2020. However, the Appropriations Act extended the payroll tax credits’ availability to cover leave taken through and including March 31, 2021. Notably, the Appropriations Act did not extend the requirement to provide FFCRA paid leave beyond December 31, 2020; it only extended the availability of the payroll tax credits for employers that voluntarily provide this leave to eligible employees.

For additional background on the FFCRA paid sick and family leave tax credits, click the button below:

Additional FFCRA Paid Sick and Family Leave Background

The Rescue Plan’s Changes

The Rescue Plan extends the employer payroll tax credits, but not the requirement to provide paid leave, for sick and family leave taken through and including September 30, 2021. In addition, the Rescue Plan:

Resets the 10-day limit for sick leave beginning April 1, 2021 (the FFCRA limited sick leave to 10 days per employee);
Allows sick and family leave tax credits for leave provided to employees to obtain a COVID-19 vaccine or recover from an injury, disability, illness, or condition related to the vaccine;
Expands the definition of paid family leave to allow family leave tax credits to be claimed for all qualifying uses of paid sick leave;
Increases the limit on the tax credit for paid family leave wages to $12,000 (up from $10,000) total per employee;
Adds a non-discrimination rule prohibiting employers from claiming the tax credits if paid leave provided to employees discriminates in favor of highly compensated or full-time employees or based on employment tenure;
Restructures the tax credits to be claimed against the employer’s share of Medicare tax, rather than Social Security tax, after March 31, 2021; and
Permits 501(c)(1) government organizations and certain state and local governments to claim the tax credits.

Under the Rescue Plan, wages used in connection with a PPP loan, an SVOG, or an RRG cannot be used for claiming sick or family leave tax credits.

Self-employed individuals are allowed a refundable income tax credit for paid sick and family leave. The Rescue Plan extends and expands the sick and family leave tax credits for self-employed individuals, similar to the modifications made for employers.

For more information on COVID-19 relief efforts, visit our coronavirus relief resources page or browse the articles below:

COVID-19 Resources

Do you have questions about the new American Rescue Plan Act? Contact your Dean Dorton advisor, or contact us at:

covid19solutions@deandorton.com