Utilizing the Employee Retention Credit

Today, our guest is Barry Devine. Barry actually works at Tri-Merit with me. Barry’s been working with CPAs and specialty tech services for 15 years now, and Barry and I are going to do something a little different today—we’re going to be discussing the Employee Retention Credit with you. There’s obviously a lot of buzz going out about that, and Barry’s heading up our team. So Barry, welcome to the show.

I’m honored to be here. I’m an avid listener to The Unique CPA, and I finally get to be a guest! So thank you for inviting me.

Sure. So have you gone onto your favorite podcast listening platform, and given that five stars and a rating yet? I gotta start begging for that. I have heard just to brag, I did get notified by our producer that we are listed in the top 10% of all podcasts that are listened to, so I’m pretty proud of that. So Barry, you’re going to have to make sure we stay in that top 10% when we’re talking today.

Why don’t you give us a little background? I normally do a little introduction of the guest, but why don’t you give us a little background of you and why we’re here talking today?

Yeah, you got it. Well as Randy said before, we worked together doing R&D about 15 years ago. And I’ve remained in that boutique specialty tax space for the last 15 years, mainly with R&D. And then I’ve worked on some other specialty tax incentives, but really, for the last 15 years, supporting CPAs and helping them, you know, bring the best value to their clients.

And then here we are today looking at this 18 to 24 month tax season that CPAs have been experiencing since COVID kind of turned the world on its head, and you know, coming back together looking at the Employee Retention Credit coming out of the CARES Act, and then after the Consolidated Appropriations Act and the changes, it just seems like such a great opportunity to put dollars back in these taxpayers’ pocket, and so you know, joining forces with Randy again, here we are having new exciting, and sometimes a little complicated rules and regulations in order to navigate how to actually identify eligible businesses, and then how to put that money back in your pocket. So really exciting stuff we’re working on and really happy to jump into it today.

Yeah, so it is an exciting area. I really enjoy the work we do in general, but this one just has me like all amped up every day to keep digging deep into it.

So why don’t we give everybody—I’ll do this—I’ll give everybody a quick background as to what the ERC, the Employee Retention Credit, is, why it’s so exciting, what the benefit is, and you’ll probably give us an example on what the potential benefit is there. But let’s get into a quick definition. So I might take 10 minutes here just to get everybody aware.

[bctt tweet=”Barry and I will have a webinar on the ERC coming out March 25.” username=”TriMerit”]

And just so everybody knows, we’re taping, and normally I do actually put dates out there some time. But we’re taping on March 11, this will be released on March 23, and Barry and I will have a webinar on the ERC coming out March 25. So only a two day warning once you hear this, but I think you might find it very interesting if you find what we’re talking about today interesting.

So a little background on the ERC, the Employee Retention Credit, but I’m going to continue to call it ERC. ERC was defined—and I think Barry mentioned this—but defined in the CARES Act. And pun intended, I guess nobody cared about it. Because in the CARES Act, the employee retention rule said if you took a PPP loan, you weren’t eligible for the Employee Retention Credit. Well, everybody and their sister took a PPP loan, and because of that, the ERC was completely ignored.

What happened is at the end of last year, when the Consolidated Appropriations Act was signed into law on December 27, it turned everything on its head. It said, “Never mind, we changed our mind. You can take a PPP loan and still qualify for the Employee Retention Credit.” So then I heard about this the first week of January, and I’ve been obsessed with it ever since, just because that opportunity was tremendous. And we’ll get into that, why I think this opportunity is tremendous.

So now PPP, you received that loan, doesn’t matter, you can still qualify for ERC. And then Barry mentioned this as well: In addition, the ERC was scheduled to expire at the end of 2020. In the CAA, it got extended until June 30 of 2021, and enhanced, and as we sit here today on March 11, the president just signed the new stimulus bill into law, and that new law, that new bill, extended the Employee Retention for the entire year of 2021.

So right now, we have potentially most of 2020 available for the ERC, and all of ’21, available for ERC, if you qualify.

So let’s get into the numbers real quick, just from a definition standpoint of why I think this is an exciting area. The ERC in 2020 is a 50% credit of the first $10,000 of qualified wages per employee. And qualified wages, not going to get into that definition on the podcast, but it includes more than just wages. So if you have somebody that makes at least $10,000, you’re going to have most likely a $5,000 credit for that employee. Well, that’s for the year of 2020, we can look at all the employees—whether they hit 10,000, or whether they didn’t hit 10,000, we can look how much they made—take 50% of those wages, and calculate a credit for them. Very nice benefit.

What happened in 2021, is it just exploded. So no longer were we limited to 10,000 per year per employee for the credit—in 2021 it’s 10,000 per quarter per employee for the credit. In addition, the 50% credit that we had in 2020 went to 70% in 2021. So if we have an employee making $10,000 a quarter in 2021, we can potentially have a $7,000 credit per each of those employees per quarter. So each employee has a maximum value of 2021 of a $28,000 credit, which is great—and credits in general, you know people deal with credits, and a lot of times credits are used to offset income taxes. This is completely different. This credit is used to offset payroll taxes, so it goes on the 941. But not only does it offset payroll taxes, if there’s excess credit, it comes out as a refund. So this is a refundable credit. So this is cash.

If a company has a $50,000 credit, that’s as good as cash in their bank account, because that’s the value. It doesn’t matter how much taxes they’re paying, they have $50,000 that’s going to come to them. So it became extremely beneficial. 2020 a great year, great credit. 2021 just blew 2020 out of the water. And obviously you need to qualify in order to get this credit, but let’s go into the qualifications a little bit first.

ERC credits in excess of payroll tax liability returns to the company as a refund in cash.

I don’t know Barry, if you want to talk about the qualifications at all. First thing, let me tell you one thing, before you jump into that: One, you have to be a business to qualify and you have to be a privately held business. Tax exempts can qualify as well. There’s some different rules, and each year and other businesses or other types of entities that could qualify, but for the most part, it’s the privately held companies.

[bctt tweet=”The ERC is such a great benefit even for the smaller companies that are really affected by the shutdown.” username=”TriMerit”]

And then once you have that you have to meet one of two—one of two—other requirements in order to qualify. And Barry, you want to expand on what those two areas are?

I just want to reiterate what you were saying on the numbers there, and maybe put a little real-life example on it. And a real life example of you know, talking about a company that’s really affected by this shutdown. So the restaurant on the corner that you frequent, or the gyms and massage parlors, people that are really, you know, some smaller companies that are really affected by this—like you were saying the numbers, if it’s $28,000 for 2021 and 5,000 for 2020, so potentially, you know, if you have just a 10 person company, you know, you’re you’re looking at a potential of $330,000, over the eight quarters from ’20, starting Q1 of 2020, which kind of only has 19 days qualified, but Q2, 3, and 4 of 2020, and then now that we have a year of 2021, the dollars really, really add up. So it’s just such a great benefit even for you know, the smaller companies that are really affected by the shutdown.

So into the qualification, there’s two tests, and one is going to be the gross receipts test. And so if your gross receipts for 2020—we’re going to compare 2020 to 2019—and if the gross receipts are 50% or greater in a decline, so less than 50% of the previous year, then you automatically qualify for the entire quarter. 2021, the decline in gross receipts has to be a 20% or greater decline, and that would qualify you for the entire quarter, for any quarter you qualify on that gross receipts test.

Although bars and restaurants have been among the businesses most affected by Covid, they’re not the only ones eligible for ERC.

So if a company does not qualify for you know, loss of gross receipts, then you can go to the test, if it’s—are you partially or fully shut down by government mandate, these government orders are restrictions for business, for commerce and for group interaction. So there’s two tests to be had in order to determine the qualification

So Randy, there’s a lot of facts and circumstances on the government shutdown side of that qualification. So I can just say that is what, you know, on a high level, what the rules are, but the nuances in-between go really deep. So maybe I’ll throw it back to you to elaborate on that part.

Yeah, let me do that. Because as Barry said, it’s important to remember the either/or requirement: reduction of gross receipts, or a full or partial shutdown of your business. And that’s the full or partial shutdown, which is the one where it’s—you know, gross receipts test is math, we can all do math, we can figure out if we had a reduction in gross receipts. The full or partial shutdown is based on a government order—a government mandate—we have to have a government entity, federal, state, local, tell us that we have to somehow throttle our business. We have to restrict part of our business in some way.

It can’t just be a governor getting on TV and saying, “Hey, you know what, it’s just gonna be much better if we only work nine to five, even if you’re working, you know, nine to nine, it’s probably better if everybody stays home for a couple of weeks.” That’s not an order. That’s not a mandate. It has to be something official that that actually restricts our ability to do business.

But the interesting part is, we can have that direct effect, and I think Barry mentioned it—restaurants for the most part around the country have had a direct effect. They have been at a minimum, had a reduction in capacity that can be indoors, and for a lot of places completely shut down indoors, but they could do outdoor, maybe they could do pickup or delivery. So that’s a direct effect.

But it doesn’t have to be that complete shutdown, you know. Hey, shelter in place for three weeks, everything shut down. Yes, that’s a complete shutdown. But that partial shutdown can qualify as well. But the interesting fact is, you can be indirectly affected by that partial shutdown and potentially qualify for the ERC credit.

So an example that maybe I am, and I’m not saying this definitely qualifies, but maybe I am a supplier of materials to a restaurant. Well now, my demand has gone way down, and we have to be careful with demand because in one of the IRS FAQs it talks about demand itself may not be a qualified activity. But if we put the whole story together, this supplier of food, linens, whatever to a restaurant has been indirectly affected. And I think there’s an argument to be made that indirect effect can count as well.

[bctt tweet=”The interesting fact is, you can be indirectly affected by that partial shutdown and potentially qualify for the ERC credit.” username=”TriMerit”]

And restaurants are by no means the only business. You can pretty much—we’re seeing the gamut on any business. A law firm that does litigation, and that that law firm cannot litigate, because the courts were shut down, so the law firm wasn’t directly affected, but they can’t go litigate cases because courts were shut down. So now they have an indirect effect. So the  point is, we don’t need to expand, this is not an hour webinar today. But the point is, we can look at just about any business and see if facts and circumstances qualify them under the full or partial suspension or shut down of business.

So it’s a really interesting and exciting area. Barry, you gave the example. I think some other things that I think people just need to be aware of. I mean, it sounds straightforward from a math standpoint. All right, 50%, 70%, you know, we get to do this credit. But there is a lot of interplay between other credits and PPP that we need to be aware of. And so are we running into any complications with that? Or how are we looking at these interplays between other areas?

We are definitely looking at the interplays, and like we said at the beginning, there’s a little different set of rules for 2020 as there are for 2021. But with 2020, there is definitely the WOTC, the Work Opportunity Tax Credit. Of course, the FFCRA or Family Sick Leave on those payments, are definitely not allowed to be taken as the same wages, and the small caveat there is any employee receiving the Work Opportunity Tax Credit, the entire employee has to be removed from the calc.

So in 2021, they did put a list of interplaying credits so the WOTC like we said, Work Opportunity Tax Credit—they list the Research and Development Tax Credit, Indian Employment Credit, Credit for Employer Differential Wage, and Empowerment Zone Employment Credit. So there is a list of other credits that have to be backed out from the credit calc, and those are things we’re working on.

And Randy, just some research you did, is there’s actually good news for 2020—you’re not going to have to back out the R&D credit calc in the wages of the qualified employees of the qualified research expenditures, that [are] under the wage portion of the R&D tax credit. But in 2021, that will come into play, and the interesting part about that is most people will be claiming their Employee Retention Credit before claiming their R&D tax credit.

So if you are trying to file timely and get your R&D tax credits for 2020, and get that return filed, and you haven’t done the ERC, then you’ll look at it from R&D into ERC, but it looks like that a lot of taxpayers who are still working on the R&D tax credit, might calculate the ERC first, and then calculate the wages for R&D. So that is just an example of an interplay that we’re dealing with, with other tax credits. So interesting—

—Yeah, there’s definitely… sorry to cut you off there. But that’s definitely an interesting area. And that’s what we’ve been digging into a lot, is those interplays. Because it isn’t just straightforward. But I think the interesting thing to point out is, just because you have an employee that’s used in the R&D tax credit calculation, doesn’t mean that we have to remove all their wages from ERC or vice versa. It’s just we can’t use the exact same wages, you know, that we use for that when an employee is in the R&D tax credit that we use in the ERC.

So, you know, if we use $10,000 in ERC for an employee, we just have to remove that from their total wages before we do the R&D tax credit. And that’s—it’s kind of the way the interplay with the PPP forgiveness works as well, we just can’t use the same dollars for PPP forgiveness that we use for ERC. But what we’re seeing is when we do these credit estimates for the ERC, we’re finding that the PPP forgiveness has not been a super major effect on the ERC. There’s enough additional wages paid in 2020, up and above forgiveness wages for most taxpayers, that we’ve been able to get almost a full, if not a full ERC for those taxpayers.

And then the other thing is, if you have asked for forgiveness and received forgiveness already for 2020’s PPP, you know, we have to follow what wages you used in that forgiveness when we’re figuring out the wages available for the ERC. But if you haven’t asked for forgiveness for the PPP for 2020 yet, that’s where there’s some planning that can go in and try to minimize wages used in the PPP forgiveness so we can maximize wages available for the ERC.

So we’re getting deeper into the weeds. I think the important thing we wanted to point out today is: great opportunity, more than just restaurants and bars are going to be qualified for this. Pretty much any industry has the opportunity to evaluate whether they’ve been affected by a full or partial shutdown. And you’ll find some interesting areas that have qualified that you probably wouldn’t have thought of, and that there is a lot of complexities with the interplay and the PPP. But it’s not any reason not to look at this.

And we built out—Barry’s actually did a great job building out a whole credit model on the calculation and estimation of ERC. So I appreciate any final thoughts on this, Barry, before we we wrap?

I mean, I would just say on the closure, whether a full or partial suspension, it’s definitely based on the facts and circumstances. So each client is unique, each client had its struggle due to the government mandates. Is that eligible or not? So just got to just kind of got to dig into it.

Yep, yep. And that’s we are building the database on those shutdowns as well. So we’re able to cross reference that with where the location of the employer is, and find out if they’ve been affected by one of those mandates, shutdowns, decrees that have been put out again by the federal, state, or local government. So it’s not just federal, not just state, but even local. You know, your mayor can put down an order, and we can follow that.

So I appreciate everybody listening. I thought it’d be some important information to get out during tax season. Again, I guess, sounds like a sales pitch. But just letting you know, we’re here, we’re available, we can answer questions, we can help out if you need it. It is an important time to be able to put money back into taxpayers’ bank accounts, and this being a refundable credit, that doesn’t happen very often. So the fact that we have this refundable aspect of this credit is another area that makes it so exciting.

So Barry, I appreciate you being on with me today, and I’m having a lot of fun working with you on this and you know, you don’t look too tired, so I’m assuming you’re having some fun with it as well.

You got it. I appreciate you inviting me.

Thank you for joining us today. And you can find all the links and show notes for today’s episode, as well as more about Tri-Merit at TheUniqueCPA.com. Remember to subscribe and join us for our next episode where we’ll be going beyond compliance into forging new pathways of delivering value to your clients, diversifying your revenue streams, and leading edge management techniques and styles.