By: Bruce J Legawiec, CPA/Partner, Osborne Rincon CPAs
Most businesses are aware of the Payroll Protection Program (PPP), which included a first draw in 2020 and a second draw in 2021. The PPP provided much needed assistance to many businesses suffering because of the COVID pandemic.
There is another government assistance program that can be of great value to a business impacted by COVID business restraints – the Employee Retention Credit (ERC).
Initially passed in 2020, a business receiving a PPP loan was not eligible to apply for ERC and this program was overlooked and infrequently used. Under the Consolidated Appropriations Act, a business may now take advantage of ERC for 2020 – even if it received PPP funds and the program is expanded to include 2021.
For 2020, the credit is 50% of qualified employee wages paid between March 13, 2020 to December 31, 2020 up to $10,000 per employee (a potential credit of $5,000 per employee).
A business must demonstrate a decline in quarterly gross receipts in 2020 of 50% or more when compared to the same quarter of 2019, or it must have experienced a full or partial shutdown of its operations due to a government COVID restriction.
While the 50% gross receipts decline may be hard to meet, in California, many businesses were forced to close their doors or reduce capacity due to government regulation. For example, many restaurants were forced to restrict their operations to less than full capacity or only operate outdoor dining.
There is a catch: any wages used to apply for PPP loan forgiveness cannot be used to apply for ERC. This caveat makes accurate filing of PPP loan forgiveness application very important. Proper planning and allocation of wages for PPP loan forgiveness is critical to maximizing PPP forgiveness and ERC.
The 2021 ERC is easier to qualify for. Like 2020, a business will qualify if it meets the government restriction test. The business shutdown can be full or partial.
If a business did not claim the ERC for 2020 it can amend payroll returns for 2020 and receive refunds – assuming it meets qualifications. In addition, there may even be an opportunity to revise a PPP forgiveness application claiming excessive wages that otherwise qualify for ERC.
When a business has a full understanding of the interplay between PPP loan forgiveness and the Employee Retention Credit, it can properly allocate wages to result in 100% loan forgiveness and a substantial Employee Retention Credit.
If you need a tax advisor to ensure you are informed on all the latest tax requirements, please contact Osborne Rincon at (760) 777-9805.