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In this special edition of PKF Texas - The Entrepreneur's Playbook®, Director Danielle Supkis Cheek, CPA, CFE, CVA, provides a high-level overview and walks through what companies need to know about the Employee Retention Tax Credit and its interplay with the Paycheck Protection Program.

Disclaimers:

  • This information is what is known to us currently, as of February 2nd, 2021. As with anything related to any government program related to COVID, it is subject to change pending future information and please check back.

Jen: Welcome to a special edition of PKF Texas – The Entrepreneur’s Playbook®, where we're going to discuss updates to the Employee Retention Tax Credit, as well as its interplay with PPP. I'd like to introduce Danielle Supkis Cheek, one of our directors here at PKF Texas.

Danielle: Hello, everybody. I'm Danielle Supkis Cheek from PKF Texas. Thank you for joining us for a quick update on the Employee Tax Retention Credit. A quick disclaimer at the front of this presentation is that this information is what is known to us currently, as of February 2nd, 2021. As with anything related to any government program related to COVID, it is subject to change pending future information and please check back, I'll provide a list of resources at the end of areas to check.

What I wanted to do today is briefly discuss what is the Employee Retention Credit, how do you get it, and the interplay in complexities that you may have with other credits and other COVID relief. A bit of history about the Employee Retention Credit is that it was originally put into law through the CARES Act in March of 2020. However, it is a little bit lesser known of a credit; it was not known to many people that were not eligible for PPP. PPP clearly got the larger public attention, and because those that took PPP were disqualified from taking the Employee Retention Tax Credit, ERTC for short, or ERC for short, it went fairly unnoticed in many circles, particularly smaller business circles, because the PPP was so prevalent.

However, the Consolidated Appropriations Act in late December of 2020 actually opened up not only the Employee Retention Tax Credit in a larger scale and scope related to dollar amounts that is valued at, but it also opened it up to those who have taken PPP. So, it has become a big point of focus on the interplay between the Employee Tax Retention Credit and your PPP.

I first want to talk to you about some of the calculation basics, we will get into the calculation complexities, and we're going to talk about the actual interplay with your PPP.

While it's still called the same credit for the whole 2020 and 2021 period, it's actually two distinct calculations in the 2020 period versus the 2021 calendar years. So, this is based on when the quarters occurred, and it's very much focused on the quarterly concept. So, I'll first cover how the 2020 component of the calculation works and then compare that to how the 2021 portion of the calculation works.

So, the maximum benefit you can get in 2020 is $5,000 per employee. It's actually calculating how you get to that $5,000 by taking up to the first $10,000 of qualified wages, and I'll explain what that is in a moment, starting with the eligibility period, and I'll explain more about the eligibility quarter period, but no earlier than March 12th, 2020, and for up to the first $10,000 qualified wages you get 50% of that. So, 50% times $10,000, maximum benefit is $5,000.

Now there's a size criteria. For those of you that are less than 100 employees, full-time employees, you get to take—the eligible wages include all wages that are paid to somebody. There are a couple exclusions, but in effect, it's all wages, and you get to take health insurance as well. For those of you that are over 100 employees, it's only the wages associated when the employees are not providing a service. So, you're paying the employees still, even though they're not working.

There's also an operational component of eligibility. So, you only get to do this when one of two things happens; you're either under a partial or full government shutdown order, so that's, in effect, the restaurant capacity restrictions; if you're able to telework, and even though you're not supposed to be going into the office, and everyone is able to telework, and you have no impact on your business, that wouldn't actually count. So, there are a lot of nuances there, so be sure to contact your service professional to find out if your government shutdown order applies. Or—so this is an either/or test, you don't have to meet both, your quarter over quarter, so that’s 2019, let’s say Q2, compared to 2020 Q2 goes below 50% of gross receipts, so it's very much income concept. But you stop calculating when you recover to 80% of your gross receipts from quarter over quarter. 

So, the window for some businesses may be very narrow in 2020 for the Employee Tax Retention Credit, and the dollar amount is not quite as much value. The 2021 credit is much richer. These are refundable credits, by the way, and in the 2021 calculation your value goes up to $14,000 max benefit per employee. And that’s calculating the same $10,000 wage concept but instead of being for the full year, which full year is starting March 12 to the end of December, so almost a full year, it’s now a per quarter concept. So, per quarter one and per quarter two, the first $10,000 of wages qualifies, and you get to now take 70% of it, so 70% of $10,000 times two quarters, that's where you get $14,000 as the maximum benefit.

They've also increased the number of employee threshold from 100 to 500 on what kind of wages you get. So, this is great for small businesses or medium businesses that were right at that hovering mark because many businesses do need a lot of employees to deliver their goods and services. You do have to include commonly controlled companies that have more than common 50% ownership, but only one business once you consolidate all that, only one business in that group has to meet the qualifications to be able to take the whole consolidated group, they kind of consolidate you together.

So, it's now 500. So, under 500, all qualified wages. Over 500, you're only looking at those that are not providing—wages paid for not providing a service. The concept of the government shutdown still exists on full or partial. But the eligibility option for the reduction in quarter over quarter is now 2019 compared to 2021 quarter. So, Q1 2019 compared to Q1 2021, and you only have to be less than 80% of gross receipts. So, you're only, in effect, having to show a 20% or more reduction versus, in 2020, you had to show a 50% or more reduction. You also are allowed to make an election where you compare it to the immediately preceding quarter. So, in effect, for Q1 2021, that would be Q4 2020, and Q2 would be Q1 at your election. So, you get to pick which one those are.

So, this is already starting to get pretty complex and nuanced, but there's a lot of extra nuance when you get into the weeds of the actual calculation. I'm going to spare everyone from getting into the super weeds, but I just wanted to tell you about some of the tricky parts. 

If you're qualifying on the government orders, it's only for the periods in which you have the government order shut down. So, if you're in some kind of industry that you're having to, you're going under in order to shut down, partial or full, and then coming out and going back in, going out and going back in – those kinds of things – you’re going to only be allowed those particular periods. Whereas, if you're qualifying on the revenue drop or the gross receipts drop, that's for the quarter. So, you'll have to kind of interplay. You could theoretically be qualifying either/or as well.

You are not allowed to double dip wages from PPP. So, everybody that has a PPP is probably very familiar with the word, “no double dipping,” on the wages, so pretty much, if you claim wages for PPP forgiveness, you cannot use those same wages for ERTC. And I will get through some planning considerations on my next slide. 

You're required to exclude any wages that were paid related to your family first, sick and medical leave credits, FFCRA. Also watch out for the interplay of other tax credits that you may be eligible for. So, a very popular one of course, is R&D tax credits. There are actually certain periods in which you may be allowed to use the wages that qualify for ERTC in that case, and then there's periods where you may not be allowed to, so you really should reach out to your other tax professionals or us to see how this impacts any other credits you may be eligible for.

One of the nice benefits, at least under the old rules that we're waiting for updated FAQs to confirm that this is still the case, but for sure as of 2020, you're allowed to take the employee portion of the health insurance as qualified wages if it comes out of the employees’ wages pretax. If it's after tax, no, but if it's pretax you do get to take that out, so that's a nice benefit.

Do watch out for, there's limits on pay rate increases. The 2021 version of the credit relaxes some of those, but there are still limitations, so watch out for any kind of special pay type issues or hazard pay or merit increases, just make sure you know the rules before you try to take wages, there may be a cap depending on which calculation you’re in.

Something else that's new for the 2021 portion of the calculation is now advances are available. Instead of having to wait to do your tax, your 941 calculations, or wait for the wages to have been paid, you can actually take an advance for up to 70% of the 2019 quarterly wages to get cash flow now if you are in a position that you need cash flow now.

So, planning. The big planning component really is going to be that PPP interplay. Many people have asked us already, “Should we delay PPP forgiveness applications?” There's a lot of reasons to talk to your service professional about do you apply now or when do you wait? There's a lot of stuff there, I'll spare everyone the nuance and the details there, but make sure you understand where you are in the framework of your covered period and your strategy related to when do you apply. 

But there's not actually a reason related to ERTC to wait to apply. You can still apply; you just need to not be hasty and shortsighted in the work that you do related to your forgiveness application if you're going to qualify for ERTC.

One of the concerns has been, many people in the past that did apply for forgiveness because they could get as much payroll that they needed when they had the 24 weeks, turned in their payroll report, let's just use round numbers, they had  a million dollar PPP loan, they had $1.5 million of payroll, so they just turned in the payroll report that had $1.5 million of payroll associated with it. That's what they turned into their bank, which turned it into SBA. Does that mean $1.5 million is now ineligible to be used for the Employee Retention Tax Credit? And the answer to that is currently unknown. 

So, if you are in the process of applying, you should probably spend some time to see if you qualify for ERTC, and if you do, what is the strategy you want to do to apply for forgiveness if you're ready to apply for PPP forgiveness. I'll address those of you that have already applied for forgiveness. Right now we're waiting on rules for that, so hopefully I'll tell you what we're hoping the rules will be, but we don't have rules yet.

So, there's a couple strategies that you can use. You could first try looking at targeting the 60/40 split between the payroll costs and the nonpayroll costs for your PPP forgiveness. As you all recall, that you have to spend at least 60% of your forgiveness on payroll costs. Now, what's interesting and nice is the Consolidated Appropriations Act did add new covered expenses that were nonpayroll expenses to the list of qualified expenses that count for forgiveness and uses of the loan. So, that's a nice benefit if you're looking, if you all were one of the groups that have struggled to get nonpayroll costs in there, a lot of related party rent because of how the special related party rent rules came out worked, a lot of people who didn't have as much utilities during that period and they didn't have a lot of options for nonpayroll expenses to get towards that 60/40 split. They had plenty of payroll but not the nonpayroll.

So, now certain operational expenditures are included, including some software for cloud computing, so that's important; certain property damage, certain supplier costs, as well as certain worker protection equipment expenditures. So, all those areas, talk to your service professional and see what you qualify for. And also, don't forget that the payroll costs in PPP are a bit broader in definition for some areas related to employee benefits than they are in the Employee Retention Tax Credit, because that's only health insurance, whereas some areas of the PPP payroll costs have other employee benefits, such as a disability and life insurance type of concept. So, there's ways to interplay those two together.

Another strategy could be, actually just if you have higher wage earners or you have so much payroll you don't need to worry about it, just take off the top the first $10,000 of wages for each employee, in effect, reserve that back for possible ERTC eligibility for the Employee Retention Tax Credit and then turn in the remaining of the payroll. If you have that much payroll and just hold back that first $10,000, set that aside for ERTC if you need it, and then turn in the rest.

You can elect longer cover period, as you know, for the first draw 2020 PPP loans, or the loans that most of you all did probably in 2020. On the first draw loans you had the option of an eight-week or 24-week period. Under the second draw loans, you actually get some optionality, and it's between eight and 24 weeks. So, you can kind of pick, but if you pick the longer periods, that gives you a longer runway to incur more cost.

Now, some of you all may need to do shorter covered periods related to other matters related to the quotient reduction, or you needed to do salary reduction, so the scenario planning here is key, you're going to have to do a lot of scenario planning and some Excel exercises more likely than not.

You can also spend some time strategically segmenting out different periods and have wages associated with different periods count for different credits. I'm going to show an example of those right now. So, my first example is, let's pretend that we were like a restaurant type group, under a seating capacity restriction in Houston, I believe that's been in place since March 17th. So, the CARES Act starts the ERTC at March 12th, but we don't hit a government shutdown until March 17th, so that means wages after March 17th account. This hypothetical company has two PPP loans. Two 24-week cover periods is what they've elected. And so, we have a couple of strategies here. We could take that middle PPP part out and see if we have enough qualified wages on each of the two bookmark ends before and after our cover period, in blue. So that would be March 17th through May 5th, and then October 16th through the end of the year. In some cases, that may be enough; for other cases, or even some employees, but not others, that may not be enough. And then we start looking into how can we segment out the PPP period and allocate wages between the two based on what I just talked about.

Once we get into 2021, here's where it gets a little bit more interesting. Because the calculation is a per quarter $10,000 calculation and we have our PPP two start date in our Q1, so 2/15, but we have until August 2nd. So, what we could do is actually segment out and not start using PPP money for wages at the start of our covered period, waiting to see can we maximize our ERTC for Q1 for everybody or as much as possible for everybody, then do the same thing for Q2 and use this white space between June 30th –or July 1, in effect, to August 2nd to see if we can get enough wages to fully maximize our PPP two forgiveness, and then where's the crossover in the calculation. So again, a lot of scenario analysis planning.

Another example is, let's pretend this is now a revenue drop situation, or gross receipts drop, more precisely, and we only have two small windows of eligibility. And so, you see, there's a lot of overlap in my first window in 2020 between my PPP covered period and when my gross receipts recover at July. So, I have not that much time that I can use ERTC in 2020. 

If we then have a drop in revenues, again, get below the 80% of the quarter over quarter or 2019 - 2021 quarter, then we have the same kind of concept that we just had before where we have the eligibility overlapping a fair amount with the covered period for ERTC and PPP.

So, a lot of you all want to know when are things due, because that's what we're used to. We're used to hard due dates on some of these things related to different programs, but there is no hard due date at this time. Right now, you file a 941 to get the credit, but you always have three years to file at 941-X, which is the amended 941. And 941, for anyone that doesn't know, is your quarterly payroll tax, kind of, federal return that goes and explains how much payroll tax you are remitting to the government or did remit.

But don't forget that if you're taking the credit for something that you took deductions for in the past, which payroll taxes would be and wages, you'll probably need to go back and amend your tax return. 

So, functionally, you probably don't want to wait the three years, because you'll probably have to amend some tax returns.

Also, the new 70% advances form is going to be on the new Form 7200, but right now we're still waiting on revisions for that form. I do not have an ETA of when that will be out, but that is currently not open yet, so we're still waiting for that form.

So, there's time. So, the short is don't be hasty and rush your PPP forgiveness application math calculation without considering the ERTC, even though you may not be able to take the ERTC right now from a form perspective, you will still be able to in the future.

So, right now we're waiting on the new IRS FAQs; those are not out yet. We're specifically waiting to see what they want to do about taxpayers that have already applied for their PPP forgiveness and maxed out on wages. The AICPA has put out a letter that I linked to in my next slide on resources, saying what they suggest you should do. They suggest, in effect, a work paper calculation that you have to maintain and not have to reapply with SBA. We have no idea what the result will be. So, if you're in this position, please watch the news, the accounting news. I know it's an exciting time for accounting news, to see what ends up becoming the rules. And we are waiting for that new Form 7200.

So, here are a couple of resources for you to do some more research. Please always feel free to call your professional service advisor at our firm or whatever form you may use. And thank you for your time today, and I hope you're doing well during these times. 

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Disclaimers:

  • This information is what is known to us currently, as of February 2nd, 2021. As with anything related to any government program related to COVID, it is subject to change pending future information and please check back.