Impact of COVID

In March 2020, a business relief provision was proposed under Coronavirus Aid, Relief, and Economic Security Act (CARES) Act for those qualified wages who retained their employees from March 13, 2020 to June 30, 2020.

Under the CARES act, employers who have borrowed loans under Paycheck Protection Program (PPP) are not eligible to qualify for ERCs, but the Consolidated Appropriation Act (CAA) that was enacted in December 2020 changed the rule. Now, the employers can still qualify for ERCs on wages that were not paid with forgiven PPP funds.

Further, the American Rescue Plan Act (ARPA) also extended the eligibility of ERC up to the end of 2021. It also induced some changes specifically for the third and fourth quarter of 2021 under which credit will be awarded against employer’s share of Medicare taxes rather than his share in Social security taxes.

The purpose behind this program was to encourage employers to keep their full-time employees on payroll even during the time of coronavirus outbreak when they were not working at all or were working for a lesser cause.

Eligible employers are given a financial grant of $5000 to $14000 who kept their employees on payroll when their businesses were partially or fully shut down and gross receipts also reduced.

Who is an ‘eligible employer’?
According to the latest CAA update regarding the ERC program, for the period from March 2020 to December 2020, an eligible employer is the one;

• Who carried on a small business and was running a tax-exempt organization
• The function of his business was either partially or fully suspended
• Who experienced a great decline of 50% in their gross receipts as compared to gross receipts of 2010
And for a period from January 1, 2021 to June 30, 2021, an eligible employer is the one;
• Who carried on a small business and was running an organization whose tax was exempted
• The operation of its business was either fully or partially suspended
• Who experienced an 80% decline in gross receipts as compared to the gross receipts of 2019

There were also some restrictions imposed for the qualification of an eligible employer that is;

• Government and state entities cannot qualify for ERC.
• A self-employed person cannot qualify for an eligible employer. An employer who has employed other persons to carry out the function of small business can qualify for an eligible employer.
• If you were not in business in 2019, you can use 2020 as your standard comparison year.
• You cannot receive ERC for an employer for whom you have already been granted Work Opportunity Tax Credit.

Amount of Credit:
For the period of 2020, maximum credit of $5000 per employee was granted to employer. This amount equals 50% of up to $10,000 in qualified wages for all eligible calendar quarters from March 2020 to December 2020.
For 2021, maximum credit of $7000 per employee per quarter was granted to its employer. This amount equals almost 70% of up to $10,000 in qualified wages for all full-time employed employees per quarter from January 2021 to June 2021.

Employee Count:
Businesses of any size can acquire benefits from ERCs however; certain limitations are imposed on large employers. A large employer is the one who averaged 100 or more than 100 full-time monthly employees in 2020, and 500 or more full-time monthly employees in 2021. But if there is a small business, it can claim the credit for all employees through ERC, whether these employees are working or not. New laws have changed the eligibility pool of ERC qualifiers. New forms to acquire ERC awards have also been added according to which you don’t have to prove suspension of operation or decline in gross receipts in order to qualify for ERC. You can also qualify for ERC for “recover startup business”.
A recovery startup business is the one that started working from February 15, 2020 and has an average of annual gross receipts amounting $1 Million or less than that. Such employers are limited to the credit of only $50,000 per quarter. Moreover, ARPA also provided extra reliefs for severely distressed employers who have less than 10% average gross receipts for 2021 as compared to that of 2019. These employers can count their qualified wages according to any wage paid to any employer in any quarter of the calendar.
IRS also issued a notice 2020-21 in order to provide guidance on eligibility of qualified employers. Under this notice, it was claimed that if an employer operates an essential business whose more than nominal operations are suspended due to a government order, then its operations might be considered under a partial suspension.
IRS also provided that business operations will be comprised of more than nominal portion if their gross receipts are not less than 10%. All these new acts and reforms have altered the availability of ERC. So if you’re a small business and looking for ERC, then you must consult your tax adviser to check your eligibility to find out the nature, amount, and availability of ERC for which you qualify.

Monetizing the ERC:
An eligible employer will claim its ERC on its federal employment tax returns. So on receiving ERC, an employer can

• Reduce the deposit of federal employment taxes along with withholding taxes
• Request an advance amount equal to the credit which exceeds reduced federal employment tax deposits by filing a Form 7200.

Notice 2021-23 also confirms that the condition of the requirement to reduce the deposit of taxes once you have anticipated the credit before requesting advance will apply to all 2021 eligible small employers. The tax credit is important but the main benefit which you acquire is employee retention and job satisfaction. While anticipating all the grants under CARES Act, you must focus on your present and future compensational and management plans. You should plan for post COVID scenarios. You should learn about cash benefits and must improve your employee satisfaction by retaining and enhancing benefits for them in hard times.