Beyond the PPP: Claim a Tax Credit for Retaining your Workforce
Officially titled the Taxpayer Certainty and Disaster Tax Relief Act of 2020, President Trump’s second stimulus passed December 27, 2020 and amended, expanded, and enhanced the Employee Retention Credit (ERC) to provide businesses a refundable tax credit of up to $19,000 per employee.
While the ERC was previously included in the original Coronavirus Aid, Relief, and Economic Security (CARES) Act passed last March, businesses that received Paycheck Protection Program (PPP) loans through the Small Business Administration were ineligible to participate.
The TCDTRA of 2020 enhances the ERC program in two important ways. It provides:
- a retroactive amendment to March 27, 2020 that clarifies businesses receiving PPP loans are eligible, though the credit does not apply to wages paid with PPP loan proceeds.
- a refundable tax credit of up to $14,000 per employee for 2021. When combined with 2020 credits, businesses can receive up to $19,000 per employee.
Eligibility for the program is based on one of two factors:
- A company experienced a significant decline in revenue compared to the same quarter the prior year,
- Or, a company suspended operations due to governmental order limiting commerce, travel or group meetings.
The former is straightforward and is based on a calculation, while the latter is a little more nuanced. The IRS has provided some guidance regarding suspended operations, and it is important for business owners to consider how a disruption made a financial impact. Generally, disruptions relate to an impact on sales, clients or supply chains, for example:
- If a significant portion of your business is conducted via trade shows, did the inability to travel cause you to miss financial goals?
- If supply chain disruptions caused a delay or inability to fill customer orders, how was your revenue impacted?
Obtaining the Tax Credit
The criteria for calculating the available credit is based on the number of full time employees, defined as those who work at least 30 hours per week (if needed, employers can find this number on the 2019 1094-C form). The maximum credit per employee is $19,000, which incorporates qualified 2020 and 2021 wages through June 30. To claim the credit for 2020, employers will need to amend Form 941 for the 4th Quarter. For 2021, employers may take immediate advantage of the benefit by subtracting the anticipated credit from payroll taxes before deposit.
Companies should work with their tax advisors to determine eligibility and calculate and monetize the ERC. They may also consider utilizing a tax credit and incentive consulting service to manage the process, with the caveat that the consulting firm will charge a success fee on the total credits earned.
While this does not constitute tax advice, please reach out to your relationship manager if you have additional questions about the program.
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