Tag Archives: ERC

COVID-19 Financial Relief, Education, IRS, Tips

2020 Employee Retention Credit FAQ

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I recently received a few questions based on earlier blog posts, discussions with colleagues, and Slack conversations, and thought it might be helpful to readers to share them all here.

  1. Q: I attended the Compass seminar you recommended and it was super-helpful.  I noticed that she didn’t have anything on row 30 of her 941-X,  but on the other example we discussed, there were Line 30 entries on her 941-X that was generated by Gusto. Should I have something on line 30?

A: The Compass seminar presenter made a couple mistakes and they issued corrected pdfs afterwards – if you took the course, make sure you have the file called “Corrected_Forms_941-X_for_Case_Study.pdf” to refer to as you are preparing amended 941s to claim the Employee Retention Credit.

The first correction was that column 4 on the 941-X should be negative (even though that math makes no sense on the face of the form).

The other correction was that Lines 30 and 31 are blank in their original examples and should have totals on them. In the seminar, they had entered amounts on the Worksheet 1, Step 3, Line 3a (and 3b if there was health insurance), but then I think they just forgot to also enter them on the face of the form. (In the Worksheet it says these numbers come from Form 941, Lines 21 & 22 – and those correspond to Form 941-X, Lines 30 & 31.)

We built our own Excel version of Worksheet 1 to make all these calculations easier — not hard to do: just copy the last page of the IRS Form 941 instructions, paste into Excel, and set it up to do the simple math. We also made the following notes in Step 3:
a) For Step 3a, “This data will come from the ERC spreadsheet Total Wages row 20 (make sure to add Q1 + Q2 when preparing Q2). Enter on 941-X line 30.”
b) For Step 3b, “This data will come from the ERC spreadsheet Total Benefits row 21 (make sure to add Q1 + Q2 when preparing Q2). Enter on 941-X line 31.”.
c) For Step 3d, “Enter on 941-X line 27 *make sure amount in column 4 is a negative.”
d) For Step 3h, “Enter on 941-X line 18 *make sure amount in column 4 is a negative.”
e) For Step 3i, “Enter on 941-X line 26 *make sure amount in column 4 is a negative.”

  1. Q: Let’s say your PPP2 window is March 1 through August — it sounds like you’re not required to use wages from March 1-31 for your PPP2 forgiveness? You can take all of 1Q 2021 towards ERC and then use wages from April 1 and beyond for PPP2 forgiveness?

A: Yes, exactly – what we are doing in our firm is this: we calculate the minimum amount of wages + health insurance that are needed for PPP – and we use SUTA and retirement first, so that we use as few actual wage + health insurance dollars as possible (because ERC doesn’t use SUTA & retirement). That gives us a “target” that we use in our ERC calculations.

Then we assign wages + health insurance for the PPP period to each employee so as to maximize what’s left over for ERC. The difference has been really amazing, and worth the extra work.

So rather than picking wages to use for ERC based on which quarter they’re in to make it easier for filing, we’re picking them based on what maximizes the amount for ERC.

But the point is — that you can do it however you want, which was the second-to-last big piece of guidance I needed to make this system work to my clients’ advantage the most. (The other piece, whether 50%+ shareholder-EEs count for ERC, is something we’re still waiting on the IRS for. No one can believe they haven’t shared this yet.)

Follow-up question: Where did we land if we have to use every employee for the same duration for PPP forgiveness? So let’s say in the 24-week window you only need 13 weeks to get to forgiveness if you’re including everyone. Instead, could you use 3 employees for 24 weeks and then 2 employees for just 8 weeks (as an example off the top of my head). Or do you have to use all 5 employees for 13 weeks, or whatever it takes? Because in option 2, you’d have 3 extra weeks for the lower paid employees to use for ERC. If that makes sense what I’m asking.

A: There’s no requirement for PPP on a per-employee basis – it’s just a total dollar amount. Amazingly flexible. This analysis is accurate.

  1. Q: The Compass presenter mentioned something about the more than 50% shareholder and whether those wages count. I’ve got two clients who have employee shareholders, and I hadn’t really considered this yet. Do I count their wages?

A: We don’t know! We’re helping clients decide what to do on a case-by-case basis, using this approach (I wrote this up for RRF but it’s still valid for anyone who’s left):
Restaurant Revitalization Fund: Client Options for Tax & ERC Filings | The Dancing Accountant

Follow-up question: Regarding the Shareholder wages— Let me see if I understand it. I have a C-corp where one employee was the founder and basically has 90% of the stock. Is it a question as to whether he counts? And his wife works there as well. So it sounds like either way I cannot include her? Another employee has 10% of the stock. So he counts for sure, right?

A: The 10% employee counts for sure, and we don’t know about the 90% C-corp owner or the spouse that works there, which is why I’m making my clients choose Option 1 or 2 in the blog post I referenced. By coincidence, they reiterated in today’s AICPA Town Hall that we still don’t freaking know the answer here.

  1. Q: What date do I date the JE for “ERC Receivable”?  Is it the last date of the quarter for that 941X? (Rather than the date I send the amendment.)

A: Yes, because the IRS decided to be massive jerks and require this to be subtracted from deductible wages in the year of the payroll, rather than the year of the amendment, even for cash-basis tax filers.

Personal rant: after the past two tax seasons, have to admit that I hate Chuck Rettig with a passion.

  1. Q: So if I do form 941Xs, do I need to also send 7200s? Or is that an either/or situation? We definitely want refunds (not just applying refund towards future payments.)

A: No, the Form 7200 is only for advance payments — you would file it to get an advance payment of the refund before the end of the quarter in which you qualify. Once the quarter ends, you claim the credit on the Form 941, and reconcile the amount you’ve already applied to receive in advance. By all accounts I’ve heard, it’s not worth the trouble.

  1. Q: Finally–if I do the 941x’s myself, then do I need to notify that particular payroll company what I’ve done?

A: Not according to Gusto, because it only affects the cash paid, not the liabilities or reported amounts. It’s treated as an overpayment that will be refunded, so it doesn’t change things on their end — but I’m not sure about other payroll companies.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Restaurant Revitalization Fund: Client Options for Tax & ERC Filings

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Cafe Mustache, Logan Square, Chicago, IL

The Restaurant Revitalization Fund (RRF) is a grant calculated by subtracting 2020 revenue from 2019 revenue to calculate the total drop between the two years — presumably caused by the Covid-19 pandemic. To substantiate the amount of the revenue decrease between 2019 and 2020, the SBA will be requesting tax returns for both years. There are other documents that will be acceptable, but the way to get the application through the system as quickly as possible – processed by computers rather than slowed down by human review – is to use tax returns.

The issue is that many restaurants are also eligible retroactively for the 2020 Employee Retention Credit (ERC), and the IRS has recently ordered that the corresponding reduction in wages for that credit needs to be on the 2020 tax return. However, the Paycheck Protection Program (PPP) Forgiveness applications need to be prepared before calculating the amount of the ERC, in order to maximize the amount of financial relief the client receives between the two programs. Therefore, at our firm, these returns are all on extension while we run these calculations.

Now that the RRF is about to open – possibly as soon as the third week of April – we would like to finalize those calculations and returns, but the catch is that the IRS has still not released guidance on whether or not 50%+ owners of a business are eligible for the credit. Accountants are split down the middle on what the existing legislation, which is extremely unclear, tells us on the topic. As such, we either need to take a position or wait for IRS guidance.

(In the past two days, both the AICPA and Tony Nitti, two of my most trusted sources, have weighed in on this with a big “why is the IRS dragging their heels on this” reaction. Nitti went as far as to say, “Are wages paid to greater than 50% owners eligible for the credit? If I had a nickel for every time someone emailed me this question, I could afford to stop shamelessly and relentlessly shilling this newsletter. It is absolutely amazing that a full year after the ERC was created, we still don’t have a definitive answer.”)

So the options are:

  • #1 Calculate ERC as if owners are eligible and file 2020 income tax returns accordingly. This would result in a higher tax for clients (because more wages are disallowed as deductions). Submit PPP Forgiveness applications, but hold off on submitting ERC claims (941-Xs) until guidance is released. If guidance indicates that owners are eligible, file the ERC claims accordingly. If guidance says owners are not eligible, then amend the income tax returns and file the ERC claims accordingly.

This approach may make the most sense when there are two 50%-owners on payroll, and not many other other staff — as the increased credit would be worth the wait, compared to the total credit without owners.

  • #2 Calculate ERC as if owners are not eligible and file 2020 income tax returns accordingly. This would result in a lower tax for clients (because fewer wages are disallowed as deductions). Submit PPP Forgiveness applications, and submit ERC claims (941-Xs) — rather than holding off on these as in the above option. If guidance is eventually released that indicates owners are not eligible, then no action is needed. If guidance indicates that owners are eligible, then decide whether it is worth amending the income tax returns and ERC claims to get the additional funds.

This approach may make the most sense with only one 50%+ owner and many employees, as the cost to amend all returns and claims will probably not be worth the additional credit.

To clarify, neither approach will hold up the RRF or cause a smaller amount to be awarded, because ERC is not considered income (that’s why the wages they pay for cannot be deducted). The goal with both approaches is to get tax returns ready for the RRF application as soon as possible, with the best balance between wage deductions and potential wage credits.

While I was tempted to pick one of these two approaches and inform all clients of our choice, I decided — especially with advice from the AICPA Town Hall yesterday — that this is a decision that each client needs to make for themselves. We’re happy to explain the potential costs and benefits of each approach and make a personal recommendation for each client’s individual situation, but the decision should be theirs. We recommend other CPA firms take a similar approach.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Cooperatives, COVID-19 Financial Relief, Education, IRS, Tips

FREE Webinar Series For Small Biz Owners – Making Sense of Financial Relief Programs

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My trusted colleagues over at Wegner CPAs are putting on a two-week series of FREE webinars geared toward small business owners. They will go through each of the following current Federal relief programs designed to help small businesses make it through to a brighter day:

  1. Employee Retention Credit 2021
  2. Employee Retention Credit 2020
  3. Shuttered Venue Operator Grants
  4. Paycheck Protection Program
  5. Restaurant Revitalization Fund
  6. Economic Injury Disaster Loans

All of these programs have been changed over the past month to make them more useful to small business owners — often with the effect that multiple programs are available simultaneously. The resulting complexity is a real challenge, but the amount of financial relief available makes it worth learning what you can (and potentially working with a professional to make it happen).

We have been reaching out directly to clients who we believe qualify for each of these programs — but if you work with us and think you are eligible, yet haven’t been contacted, please let me know.

Webinar Series: Making Cent$$ of Stimulus Money

You can view Wegner CPAs’ Covid-19 Resources and click “webinars”, or see a calendar of all their upcoming webinars and view a selection of previously recorded webinars.

Employee Retention Credit 2021
Tuesday, March 30, 2021
10:00 am – 10:30 am CDT (8:00 am PT / 11:00 pm ET)
ERC in 2021 can result in big dollars for your organization. We will discuss how to determine if you’re eligible and how to be sure you file for the credit timely.
Register

Employee Retention Credit 2020
Wednesday, March 31, 2021
10:00 am – 10:30 am CDT (8:00 am PT / 11:00 pm ET)
Were you eligible for ERC in 2020? Find out as we take a deeper dive into the credit eligibility requirements and rules for last year. We’ll also review what you need to do to claim the credit for 2020.
Register

Shuttered Venue Operator Grants
Thursday, April 1, 2021
10:00 am – 10:30 am CDT (8:00 am PT / 11:00 pm ET)
The SVOG portal opens on April 8th. Are you eligible and ready to apply? Join us to learn more about the program and what you need to be doing now to prepare.
Register

Paycheck Protection Program
Tuesday, April 6, 2021
10:00 am – 10:30 am CDT (8:00 am PT / 11:00 pm ET)
Updates continue to roll out for PPP. We’ll discuss what the soon to be signed extension means for applicants and tips on getting through the application process. We’ll also review the updated loan calculation for Schedule C filers. Don’t forget about PPP loan forgiveness!
Register

Restaurant Revitalization Fund
Wednesday, April 7, 2021
10:00 am – 10:30 am CDT (8:00 am PT / 11:00 pm ET)
The SBA announced that they hope to have RRF up and running by early April. We will review timely released guidance and how to prepare for applying to the program.
Register

Economic Injury Disaster Loans
Thursday, April 8, 2021
10:00 am – 10:30 am CDT (8:00 am PT / 11:00 pm ET)
The EIDL program has continued to evolve over this last year. There are EIDL loans and EIDL grant advances. Are you eligible for either? Learn more about this program and the changes that have come from the last two stimulus bills.
Register

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, Illinois, IRS, Site News, Tips

What The ARPA, ERC, PPP And Other Laws Mean For Your 2020 Taxes

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Recent new legislation from Congress and the White House, as well as guidance from the IRS and DOL, has caused sweeping changes for small business owners and individuals, and we tax preparers are still trying to wrap our heads around it — during what was already the most complex and demanding tax season on record.

Specifically, the American Rescue Plan Act (ARPA) included a few provisions that are retroactive to 2020 — and the IRS, various state Departments of Revenue, Department of Labor, and tax software programs are trying to figure out how best to implement these changes as efficiently as possible. (For a breakdown of key provisions in the Act, see this excellent summary.)

These changes include:

1) The first $10,200 per person of 2020 unemployment benefits will no longer be taxable at the federal level, though certain states will continue to tax the full amount (Illinois has asked all taxpayers with unemployment income to hold off on filing returns until the Dept of Revenue has addressed the situation). The IRS will be releasing a worksheet that the tax software companies then need to incorporate into the 1040 returns.

2) A 2020 “Repayment Holiday” for the Marketplace Health Insurance Advance Premium Tax Credit was issued, but implementation questions remain; IRS guidance is expected soon.

3) Another economic impact payment (stimulus check) is on its way. You do not need to file your 2020 tax return right now to claim your check, as the law allows for an additional payment in a few months if your 2020 tax return shows you are entitled to more (vs your 2019 tax return). Conversely, if your income went up in 2020 and you are now ineligible for the full benefit, you’ll want to wait to file your 2020 taxes until after your payment arrives, since you won’t have to pay back the overage on your 2021 tax return.

In addition to the above legislative shifts, the IRS recently released guidance concerning the Employee Retention Credit (ERC) that changed our expectation of how it would be handled on business tax returns for cash-basis business tax filers. Previously we had expected that those who received PPP funds in 2020 and can now (as of the Dec 21 Consolidated Appropriations Act) retroactively claim ERC would adjust for the related deductions on their 2021 tax returns. Not so. These adjustments will have to be made on the 2020 tax returns. As a result, we have had to put approximately 75% of our client business returns on extension.

(Technical note: keep in mind if you are doing tax returns for a client that claimed ERC, not only do you have to reduce deductible wages by the amount of the credit, but also recognize this reduction may impact Section 199A eligible wages for purposes of the 20% qualified business income deduction.)

And yet we are still awaiting essential guidance on whether or not the Employee Retention Credit can be taken on wages paid to >50% owners of a company. Interpretations by tax analysts so far are pretty much split evenly between whether the law as [sloppily] written provides reasonable basis in this area.

I’m guessing you see the challenge here: we don’t yet know the rules for claiming the ERC, and yet we have to report related adjustments (as a direct result of the credit calculation) on the 2020 business tax returns. Most of these returns have a flow-through relationship with the business owners’ personal tax returns — so those may have to be placed on extension as well if we do not get guidance soon.

(Related blog post: please call your representatives and ask for all taxes — estimated quarterly as well as corporate — to be extended; not just the Form 1040.)

We are also expecting guidance about how the IRS wants business owners to treat basis reporting for owners where PPP forgiveness causes issues.

Yet another example of a forced need to wait on certain returns: using tax filing software, we can e-file a return today, but set the payment direct-debit date to a future date — not later than the return due-date. This date has not yet been updated in most tax prep systems to go beyond April 15th to the new due date of May 17th.

It’s particularly frustrating for us as small business advocates, because filing a tax return is the only way to get a refund if you’re owed one, and many of our clients may be more in need this year than usual. And yet, for a large number of taxpayers right now, holding off on filing is the recommended approach.

All the while we are trying to help our small business clients respond to 2021 changes, such as important employment law updates; alterations to COBRA and Marketplace subsidies; major modifications to the current round of the Paycheck Protection Program (PPP); new relief programs such as the Shuttered Venue Operators Grant (SVOG) and the Restaurant Revitalization Fund (RRF); the aforementioned ERC/PPP maximization… and so much more.

The provisions noted above — and others — may affect your return. Tax professionals everywhere need some time and space to learn about these changes, analyze their impact, and develop personalized recommendations to maximize your COVID-19 tax benefits. Please be patient with us during this extremely stressful time.

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Tips To Maximize 2020 Employee Retention Credit (ERC) & PPP Interaction

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I recently wrote about reasons to hold off on Paycheck Protection Program (PPP) forgiveness applications for the time being. Among them is the complex interaction between PPP and the Employee Retention Credit (ERC), which previously was not permitted as an option for financial relief for those that had received PPP funding.

Because ERC is now available for small businesses who have accepted PPP funds — but not for the same payroll dollars (no double-dipping) — there are some pretty complicated calculations that, if done right, could generate a great deal of financial relief to a lot of independent business-owners in need.

The IRS came out with guidance on March 1. The Journal of Accountancy summarizes:

The notice explains (1) who are eligible employers; (2) what constitutes full or partial suspension of trade or business operations; (3) what is a significant decline in gross receipts; (4) what is the maximum amount of an eligible employer’s employee retention credit; (5) qualified wages; (6) how an eligible employer claims the employee retention credit; and (7) how an eligible employer substantiates the claim for the credit.

Summary of the 2020 Employee Retention Credit

As a reminder, the 2020 ERC is a payroll tax credit available to business owners whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. (Note: in the new IRS guidance it also states that if “the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order”, your business may be eligible for ERC — even though there was no governmental order in your area.)

The credit comprises 50% of up to $10,000 in wages to each employee. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC.

The ERC is claimed as a reduction of payroll taxes on quarterly Form 941 (or a prepaid refund on Form 7200). The IRS updated the form on July 1, and a handy breakdown of the new lines can be found here. There are different rules for eligible businesses to be able to claim the 2021 ERC moving forward — a topic for another day — but this post concerns the opportunity to “scoop up” payroll dollars from 2020 that would have been eligible for ERC had it not been for the PPP Loan. These can be claimed by filing an amended Form 941 for each relevant quarter.

Keep in mind that the ERC is complex, and this blog post will not walk you through the specifics — I’ve included a list of some of my favorite resources below. The goal here is to share the steps in our firm’s approach toward these calculations for our clients.

So let’s start with a couple of things to be aware of before we go through the steps that my firm plans to walk through come May/June.

  1. First, the ERC is not generally as valuable as the PPP. It is a payroll tax credit, rather than actual cash funding (though you can file for an advance on it).
  2. And the ERC did not get the benefit of having Congress declare its related expenses deductible, like the special treatment that PPP costs received. So you will lose all the deductions for the payroll tax dollars on which you receive the credit. Deductions aren’t worth as much as credits, so you still come out ahead. But if you’re choosing PPP or ERC for a given payroll dollar, you want to pick the PPP first — up to the minimum 60% requirement for that loan to be forgiven.
  3. However, once you’ve reached that 60% requirement, if you can use non-payroll costs for the remaining 40%, then you “free up” the rest of the payroll dollars to be used for ERC. So you’ll want to work on PPP1 forgiveness applications at the same time as 2020 ERC calculations — they are related to each other, and changing one will potentially affect the other.
  4. But what does this mean for companies filing income tax returns for 2020? Businesses that later decide to retroactively claim the ERC will need to file amended income tax returns — or preferably, put their income tax returns on extension until they have claimed the ERC for 2020. We had previously thought that cash-basis filers could potentially claim the income for the credit and the associated reduction in payroll costs on the 2021 income tax return, but that was ruled out with the most recent IRS guidance.

Steps to Evaluate Payroll for PPP vs ERC

The hope is that in most cases you’ll be able to do Steps One and Two and skip the rest. But just in case, Steps Three and Four will take you the rest of the way there.

Step One
When figuring out how to combine ERC and PPP, literally make a calendar for each client and work from that.

a) Determine dates for which you qualify for ERC, based on either:
– the full or partial shut-down period, or
– a gross receipts decline of 50% over the same quarter in 2019
(the latter qualifies you from the beginning of that quarter to the end of the quarter where receipts go back up to 80%)

Keep in mind that both scenarios may apply, but for different periods — for example, the business was shut down on 3/18/20, and then later fully reopened… and then the 50% revenue drop started in the following quarter.

Note: you may want to find out the exact dates that your client’s city/county/state decreed full-capacity indoor dining was illegal — for those dates, restaurants qualify for ERC based on “full/partial shut-down” rules. If your client is a gym, bar, or other type of non-essential business that had hours limited, find out the exact full-or-partial shut-down dates decreed for that industry in that specific area.

b) Determine PPP covered period. For most folks, this will be the 24 weeks starting on the date of loan fund disbursement.

c) Determine the “bookend” periods — the time both before and after the PPP covered period; for the timeframe when the client qualified for ERC but was not in the PPP realm.

Step Two
You may be able to skip the rest of the steps by eyeballing whether you’re able to claim the entire 2020 ERC of $5k per employee (on the first 10k paid to each) all in one quarter — for most businesses this would usually be the final quarter of the year. Then, not only will you not have to worry about overlapping PPP and ERC payroll dollars, but you also will be able to claim this through most payroll companies and not have to manually amend the 4Q 2020 Form 941. Double-bonus!

If not, then see if you can get the full $5k per employee ERC (again, on the first 10k paid to each) using only the periods before and after the PPP1 covered period. You at least eliminate the need to juggle the PPP payroll dollars along with the ERC payroll dollars during the covered period.

Step Three
If that’s not an option — if you can’t get to the full 10k within the bookend periods — then:

Before you work on PPP1 forgiveness, subtract whatever the 2020 unallocated ERC balance is after Step 2 (not to exceed 10k of wages per employee) from the payroll amounts during the PPP covered period — before putting numbers in the forgiveness application, just to make sure you can still get full forgiveness at this rate. This is just a “gut check” to see if you can eliminate the need to run the actual ERC calculations for the PPP covered period.

If so, then go ahead and take ERC on the difference, even if you haven’t figured out the specifics of your PPP1 forgiveness yet.

Step 4
If you can’t get full forgiveness on PPP1 at this rate, then go ahead and fill out the PPP1 application in full, using only 60% of the PPP funds to allocate payroll.

Then see how many payroll dollars are “left over” to be used for ERC.

And remember that you can use payroll from employees who made over $100k annually for ERC during the PPP period — because those dollars are not eligible for PPP (due to rules and limitations specific to that program), but they are eligible for ERC.

You can also count — for ERC purposes — dollars that were above 60% of the PPP loan, and therefore are not needed for forgiveness (presuming the business has sufficient eligible costs to make up the 40% “non-payroll” portion of PPP forgiveness).

Think of it this way: you are effectively reducing the ERC subtraction amount per-employee from PPP forgiveness until you get to full PPP forgiveness… and taking 2020 ERC on the balance (since as I mentioned before, the PPP payroll dollars are more tax-advantaged than the ERC dollars).

Does this four-step process sound easy? No! It’s not. It may not in fact be worth it for most small business clients to pay a professional to scoop up the remaining piddly amounts in the PPP covered period — in which case, consider just using Steps One and Two: the amounts in the bookend periods, or even better, just the amount from the final quarter (because that way they don’t have to pay you to manually prepare a 4Q Form 941, either).

But reviewing this approach before going in and working on all the client ERC and PPP calculations should help a great deal in identifying where the bulk of the payroll dollars are that will qualify for the ERC program, and will allow you to make intelligent decisions about which periods to mine for this type of financial relief for your small business clients.

Resources

For a wonderful in-depth explanation of the Employee Retention Tax Credit, please see Tony Nitti’s two-part Forbes article:
– Breaking Down Changes To The Employee Retention Tax Credit In The New Covid Relief Bill, Part 1
– Breaking Down The Changes To The Employee Retention Credit In The New COVID Relief Bill, Part 2
– Part 2 also links to an earlier article of his that goes through the details of calculating the ERC according to the 2020 rules.

KBKG is offering a free one-hour webinar on March 17:
– Employee Retention Tax Credits: Qualifications, Benefits & Refunds (kbkg.com)
–This is the same firm that offers the free 2021 ERC estimator calculator.

The three paid courses I’ve taken so far that were the most valuable were:
– Tom Gorczynski‘s Employee Retention Credit Update, which included an Excel Calculation Template.
– AICPA – The NEW Employee Retention Credit: More for Eligible Employers
– NATP (natptax.com) – Calculating the Earned Income Credit

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Why You Should Still Hold Off on PPP1 Forgiveness Applications

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Many clients and colleagues have reached out to me over the past two months to ask whether they should apply for PPP1 forgiveness yet, and my answer (and that of the AICPA) is still “not quite yet”. But rather than just pushing off the question of “but when” into the future, I wanted to publicly share our company’s strategy and timeline for handling these applications.

The deadline to apply for Paycheck Protection Program (PPP) forgiveness is 10 months after the end of the covered period — which for most folks for the first round was 24-weeks — so that wouldn’t be until sometime in July 2021 for the earliest borrowers. (It’s not really a deadline, but it’s the date on which the lender will start requiring loan payments, so I think of it as one.)

We’re planning to dedicate May & June 2021 to working through all our existing clients’ PPP forgiveness applications. There are many clarifications we’re still waiting for (they keep dribbling out of Congress, IRS, and the SBA bit by bit, with occasional leaps), and the interaction between the PPP and other types of financial relief is complex.

In particular, the rules surrounding the 2020 Employee Retention Credit — which until recently was not an option for PPP borrowers — are vague and complex, even with the recent IRS Notice and FAQ. Furthermore, most payroll companies have not figured out how to collect the information and prepare the 4th-quarter Form 941 forms for partial quarters, and we may end up having to file some ERC requests manually. (Don’t get me started on this one.)

An example of how the changing rules affect applications: the EIDL advance grant was previously supposed to be subtracted from PPP forgiveness; but by asking our clients to wait on their forgiveness applications, they were able to take advantage of a December 2020 change that removes this requirement, saving them many thousands of dollars. (Though thankfully, it sounds like SBA will eventually refund those amounts to businesses who applied before this new rule went into effect.)

As if these reasons weren’t enough, in a recent on-demand AICPA Town Hall, they mentioned that:
– Most lenders are not actively taking forgiveness applications because their teams are focused on administering PPP2.
– SBA is working very slowly on forgiveness process because they are also focused on PPP2.
– The new simplified form for $150k and under will not be worked into the SBA system until sometime in March.

Between the constantly-changing rules for PPP and the guidance and calculations needed for ERC, we’re still following the recommendation of the AICPA and asking folks to hold off on PPP1 forgiveness applications, until tax season is behind us all and the IRS can focus on the remaining questions, allowing us to be methodical and consistent in our approach.

There’s no reason to be nervous about holding off on forgiveness — of the one-third of PPP loans that have been submitted for forgiveness, fully 99% of the loan dollars have been forgiven. The very small amount that have not are small loans at only 1% interest. Furthermore, by waiting you are giving your business the best chance at maximizing other types of financial relief, especially as the new Biden-Harris administration is in the process of changing rules to make them more attainable for a larger number of the smallest businesses out there, as well as Congress creating new funding opportunities.

(For tips on planning for the potential Employee Retention Credit, see my next blog post.)

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

COVID-19 Financial Relief, Education, IRS, Software, Tips

How To Look Up The Employee Retention Tax Credit (ERC) In Gusto Payroll

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The newest Covid-19 financial relief package was finally signed, and one of the big features is that the Employee Retention Tax Credit (ERC or ERTC) was made available to many businesses that previously were not allowed to claim it, most notably those who accepted PPP loans.

For a wonderful in-depth explanation of the Employee Retention Tax Credit, please see Tony Nitti’s two-part Forbes article:
– Breaking Down Changes To The Employee Retention Tax Credit In The New Covid Relief Bill, Part 1
– Breaking Down The Changes To The Employee Retention Credit In The New COVID Relief Bill, Part 2
– Part 2 also links to an earlier article of his that goes thorough the details of calculating the ERC according to the 2020 rules.

To summarize the ERC:
• 50% refundable payroll tax credit on qualified wages paid between 3/13/2020 and 12/31/2020
• Claimed on quarterly payroll tax Form 941
• Qualify for quarters with full or partial shutdown due to government order =OR= 50% decline in gross receipts from prior quarter
• Maximum qualified wages of $10,000 per employee during tax year 2020 period
• For employers with 100 or fewer employees, all wages paid are “qualified wages” (different rules for larger employers)
• PPP loan recipients were previously ineligible

Changes retroactive to 3/13/2020:
• PPP loan recipients can use the credit for wages not paid for with forgiven PPP loan proceeds (no overlap)
• Group health plan expenses are considered qualified wages even if no other wages were paid to employee

And the reason for this post — the employer can elect to treat newly creditable wages as paid in the quarter that includes the date of enactment of the Act (4Q 2020) if employment tax returns for prior quarters were already filed prior to the enactment of the Act.

The ERC is also being extended and expanded — but that’s beyond the scope of this blog post. A quick summary of what’s to come:
The credit availability is extended to wages paid through 6/30/2021 and the following changes will apply:
• Credit rate increases from 50% to 70%
• Maximum creditable wages increases to $10,000 per employee per quarter
• For employers with 500 or fewer employees, all wages paid are qualified wages
• Qualifying gross receipts decline from prior year quarter reduced to 20% instead of 50%
– Employer can elect to compare to immediately preceding quarter
– Employers not in existence for all or part of 2019 can use the credit

But the point here is that the old ERC is now available to any qualifying employers who had either a 50% reduction in gross revenue or were fully or partially shut down by government order — even if they received PPP funds. They just can’t double-dip on the payroll costs that were claimed for PPP forgiveness. And so for these employers, any remaining (non-PPP) payroll costs from 3/13-12/31/20 can now be claimed on the fourth-quarter payroll tax Form 941 and 50% of up to $10,000 per employee will be credited back to them. This is not small change for some employers!

The problem, of course, is that we have to act fast — the fourth-quarter 941 forms will be filed in a matter of a week or so, depending on your payroll company. They are all scrambling to find a way for us to report which wages are eligible… but in the meantime we need to get our clients ready.

The first step is to determine which clients are already taking the credit.

There are many fine payroll companies out there (actually, there aren’t), and Gusto is hands-down my favorite, and that of many of my colleagues. (And if you use my referral link you’ll get a $100 gift card when you run your first payroll by January 31. If you’re a bookkeeper or accountant wanting to switch your clients to Gusto, this referral link will get you a $500 gift card.)

So I’ve written up instructions with screen shots on how to look up which clients of yours using this system are already claiming the ERC. Once you know this, you can then 1) reach out to them to let them know they can now apply for the PPP, and 2) reach out to the ones who haven’t to let them know they might qualify.

Step One: log into your Gusto Accountant dashboard.
Step Two: click on “Clients” in the upper-left to see a list of your clients.
Step Three: you’ll need to click into each client and perform the following steps.

  1. Click “Covid-19” in the upper-left.
  2. Scroll past the new notice about the Consolidated Appropriations Act (see screenshot at top of blog post).
  3. There are a bunch of blocks of info on the different programs for which the client might be eligible. Click the “Claim credit” button for the Employee Retention Tax Credit.

4. You will see one of two screens — either it will say “You’re currently receiving the employee retention tax credit” or it won’t.

This is what it looks like if your client is already receiving it:

And this is what it looks like if they’re not:

If they’re not, and you’ve determined that they qualify (50% reduction of gross revenues over the same quarter in the prior year =OR= full/partial shutdown by the government), then click the button at the bottom of the screen to claim the credit and you’ll come to this screen next.

You’ll need to know the quarter in which they became eligible and had wages that qualified for the credit.

Once gross revenues climb back up to 80% of what the same-quarter prior-year revenues were, the client ceases to qualify and must stop taking the credit.

Again, remember that this is to claim wages paid from 3/13-12/31/20 (that were not paid for with PPP funds) on your fourth-quarter payroll tax Form 941. We do not yet know how Gusto (or any of the other payroll companies) will process this information, but given how soon they will need to be filed, it’s essential that we get our clients ready as quickly as possible, and this is Step Two — finding out if they’re already claiming it or not.

(In case it’s not obvious: Step One is determining if they qualify. We’re going through all our clients’ QuickBooks files to review for a 50% drop in gross revenue and then reaching out to clients accordingly, after determining whether they have taken the ERC already or not.)

Good luck!

If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.