Changes in the Employee Retention Tax Credit with New Stimulus Bill

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The changes included in the relief bill allow for the Employee Retention Tax Credit (ERTC) to stick around for Q1 and Q2 of 2021. That means we can plan for it looking forward. I think it has mixed with the PPP Second Draw in a very strange way.

The changes to the ERTC allow up to $10k of wages per employee per quarter, instead of per year. Additional changes make the credit 70%, so up to $7k per employee per quarter max. These changes allow the ERTC to be claimed by taxpayers who did take a PPP loan, however, no double counting of wages for PPP forgiveness and ERTC is allowed.

The bill changes the rules retroactively so you can go back to Q2, Q3, Q4 of 2020 and amend to claim these ERTCs. The changes permit a company with only a 20% decline in gross receipts or was shut down by a government order, to claim the credit. The new bill also raised the size restrictions so business up to 500 employees can claim the ERTC.

Effectively, ERTC is a bigger amount, it applies to bigger businesses, applies to the ones who claimed PPP, applies retroactively, and it applies the next two quarters in 2021. Keep in mind that it is a refundable credit done through payroll tax returns.

If we assume that the Q2 2020 payroll was paid with PPP money, it is likely Q3 and Q4 of 2020 that require a closer look. As tax professionals, we need to see if the business was down 20% or if the business was closed because of shutdown orders. It will be different in each state. Let’s use a restaurant as an example. A restaurant used their PPP loan proceeds in Q2 of 2020 and they are sitting at about half of normal revenue and half of normal staff in Q3 and Q4. That’s when the ERTC comes in, in a big way. Many employees in a restaurant would make less than $10k per quarter, so the restaurant would be getting 70% of most wages paid with the ERTC. As such, for 2020 Q3 and Q4 the restaurant will have 70% of wages paid through ERTC. Since they have relatively low wage employees, they just have to go back and amend they payroll tax forms to claim the ERTC. This is a huge relief right here! Going back and determining qualification and amending 941s is a huge project, but well worth it.

Looking forward, the restaurant is probably still stuck at 50% revenue and staffing for Q1 of 2021. Q2 of 2021 is a bit harder to predict, but let’s be optimistic and assume higher staffing and higher revenue levels. So Q1 wages will qualify for ERTC, but wait, the restaurant could also potentially get a PPP Second Draw. You cannot count wages for PPP Second Draw forgiveness and the ERTC at the same time. Makes sense, so then, what’s the plan? ERTC covers 70% of the payroll cost (up to $10k wages per quarter) and PPP covers 100% of the wages (up to basically $25k per quarter). The PPP Second Draw appears to be the better option here.

Well, let’s not make up our minds so fast. The PPP Second Draw is better, but wouldn’t the ERTC plus the PPP be even better still? A business could potentially do ERTC in January and February and then get the PPP Second Draw in March. In this case, the PPP would go March plus 24 weeks – until August. Now that is a tasty restaurant idea right there.

Of course, the problem is we don’t know if you can still get a PPP Second Draw in March. The money allocated for that could very well run out long before March. So, in trying to stretch the relief benefits of the ERTC plus the PPP you could potentially miss out on the PPP Second Draw entirely. That would not be very good at all.

It is incredibly difficult to have a perfect strategy if you don’t know how long the PPP Second Draw funds will last this time around, but it seems to me that using the ERTC first in 2021, and then applying for the PPP Second Draw will give you more of a benefit and encourage you to have more staffing on hand than you otherwise would, which is kind of the point.

Another interesting provision is a new election you can make to use the prior quarter instead of the prior year. We’ll need guidance on how to make that election, but it is an odd new wrinkle. I am not sure what kind of business fits that profile. I suppose a business could have been starting up in 2019, so 2020 revenue is higher, but Q4 is significantly different from Q3 so this alternative quarter election would allow them to qualify even if Q4 2020 is higher than their 2019 revenue. It all seems messy.

Additionally, I have prepared these flowcharts for ERTC. I decided to go with separate ones for 2020 and 2021. My graphic design skills leave something to be desired, but here are the charts:

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Chris Wittich came to Boyum Barenscheer in 2007 to begin his CPA career and quickly made his mark in the firm’s tax department. He completed his MBT degree from the University of Minnesota in 2008. He works with individuals, businesses, trusts and estates, and expats providing tax planning and tax compliance services. Chris enjoys challenging research projects as well as training others in all things tax. His passion for educating others is evident as he is the firm’s most prolific website blogger. He carries that devotion into volunteering as he has been a tax season volunteer with Prepare+Prosper every year since 2001 when he was in 10th grade. Chris is a proud 2014 AICPA Leadership Academy graduate and the 2015 MNCPA Tax Conference chair. He spoke at the 2018 AICPA Engage Conference and the 2018-2019 MNCPA Tax Conferences. In 2019 he began serving on the AICPA’s Tax Practice Management Committee and on the AICPA’s task force to revise the Statements on Standards for Tax Services. Chris grew up in Eden Prairie, Minnesota but now lives in Eagan with his wife Brittany and cat Cornelius. In his spare time, Chris is busy playing golf or Ultimate Frisbee. His nickname, Ravenous Tiger, dates back to his days in drumline in high school.