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Written by Frank Lopez
Soon after the pandemic began, business owners were quick to apply for any financial assistance from the federal government they could find — most notably, the Paycheck Protection Program (PPP).
According to a PPP Report from the Small Business Administration released in May, over $780 billion has been disbursed to businesses across the country since its creation last year, with more than 10 million loans approved.
However, nationally and locally, there was initially less interest in another federal effort aimed at helping businesses struggling because of Covid-19: the Employee Retention Tax Credit (ERTC).
The ERTC is an incentive first created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to encourage employers to keep their employees on payroll as they operated under the effects of the pandemic.
“The intent was to help employers get through the pandemic and help them. If they kept employees on and had payroll, they [federal government] were willing to subsidize that payroll if the business had suffered due to COVID,” said Natalie Siegel, CPA and Partner at M. Green and Company in Hanford.
Originally, businesses that received PPP funds were not eligible for the ERTC, but after the COVID relief bill was passed in December, eligible employers that received PPP loans were able to retroactively claim the ERTC for qualified wages paid after March 12, 2020, and before Jan. 1, 2021.
In early August, the Internal Revenue Service (IRS) released guidance on the extension and modification added by the American Rescue Plan Act, providing more info on how businesses can claim the ERTC in the third and fourth quarters of 2021.
A business will be deemed an “eligible employer” for the ERTC if they are carrying on a trade or business whose operation is fully or partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19.
Under the new notice, recovery startup businesses are also eligible.
A recovery startup business is defined as a business that began operations after Feb. 15, 2020 and whose average annual gross receipts do not exceed $1 million.
The updated ERTC provides a refundable credit of up to $5,000 for each full-time equivalent employee retained from March 13, 2020 to Dec. 31, 2020, and up to $14,000 for each employee retained from Jan. 1, 2021 to June 30, 2021.
The December relief bill brought rate changes for employees retained between Jan. 1, 2021 to June 30, 2021.
The ERTC rate per employee was increased to 70% of qualified wages, up from 50%.
The eligibility for an employer based on gross receipts is less than 80% after the changes, up from less than 50% compared to the same quarter in 2019. That means if an employer’s gross receipts decline more than 20% in 2021, they are eligible to take the credit.
Siegal said that initially, not many people were inquiring about the ERTC because they had already received PPP funds.
While the intention of the ERTC is to help employers, Siegal said that the rules have changed constantly, but once the PPP requirement was eliminated, more clients started noticing the financial opportunities.
However, many of the accounting firm’s ag clients in the area received program money from the U.S. Department of Agriculture, barring them from qualifying for the ERTC.
Because restaurants are payroll heavy, clients in the food and hospitality industries showed a lot of interest in applying for the credit.
There is a caveat that came with the new guidance that Siegal said doesn’t make any sense.
The IRS clarified that wages paid to majority shareholders do not qualify for the ERTC if they have “specified relatives,” which could include siblings, parents and children — even if the relatives do not work or have an interest in the company. If the majority owner has none of the specified relatives, the wages paid to that owner do qualify for the credit.
“It’s adding to more confusion, more time delays and processing. All the programs that have come out are so complicated and made it difficult for accountants who are really trying to help their clients navigate through all these changes. We are new to it too. We are all trying to adapt at the same time.” Siegal said.
Siegal still says it’s a “no brainer” for any qualifying business to apply for the ERTC, but with all the money going out, she predicts that eventually taxpayers will pay it back with higher taxes in the future.
Helping businesses to navigate through tedious tax laws is Clarus R+D, a tax service platform that builds cloud-based software to deliver access, compliance and clarity for federal and state programs.
Brent Johnson, co-founder and CEO of Clarus, said that in terms of dollar amounts, the ERTC could be just as substantial as a PPP loan, so it is important for any business to assess whether they qualify for the credit.
But Johnson said that business clients sought after PPP loans way more intensely than they did the ERTC.
“This program is not funded in a way that it will run out of money—if you’re entitled to the credit, you can claim it. There is not the gatekeeper that the banks were in terms of the process, but maybe because of it not being as broadly applicable as the PPP program was, acknowledgement that there could be significant dollars for businesses has been slower to develop,” Johnson said.
Johnson said that the company is trying to make more people aware of the ERTC. It could be very beneficial for industries that have a lot of entry-level employees.
He advises any business owner that has suffered from the pandemic to apply.
“If your business is down as a result of what’s happened over the last year and a half, you need to explore this just as aggressively as you did the PPP,” Johnson said.