In short, because the employee retention tax credit (ERTC) has been expanded and extended under new laws. The second round of PPP loans are available, and loan forgiveness is simplified – borrowers can allocate PPP loan proceeds to qualifying operating expenses (instead of just wages) and claim the ERTC, too!
Now, let’s review the Employee Retention Tax Credit and what operating expenses qualify for forgiveness under the Paycheck Protection Program…
What are the Changes with COVID Relief for the Employee Retention Tax Credit?
Under the Consolidated Appropriations Act, 2021, the ERTC is available through June 30, 2021. It is eligible to employers who retained employees during the COVID-19 pandemic. It is meant to help businesses offset the financial disruption caused by the pandemic.
The enactment of the Consolidated Appropriations Act, 2021, changed some of the provisions under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the employee retention tax credit that has been expanded and extended under the new law. Due to the ongoing impact of the COVID-19 pandemic, eligible employers now have until June 30, 2021, to claim the tax credit on wages paid to employees they retained through the crisis.
Another change under the law is the tax credit is now available to businesses that took a loan under the PPP. This includes borrowers from the first round of PPP who originally were ineligible to claim the tax credit. Keep in mind; the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP. The expectation is that the federal agencies’ guidance will clarify and define the limitation on what wages PPP recipients can consider for the retention credit. Also, PPP loan proceeds spent on Operating Services, including HR SaaS services, will be forgiven as well as wages. This change allows for a company to use both PPP and ERTC together to maximize its cash flow.
What is the Employee Retention Tax Credit?
For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020.
Employers who qualify in 2021, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualify for the credit is now $10,000 per employee per quarter for the first two quarters of 2021. So, an employer could claim $7,000 per quarter per employee or $14,000 for 2021.
How Do I know if I am a Qualified Employer?
Most employers, including tax-exempt organizations, can qualify for the credit. Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- An employer that has a significant decline in gross receipts.
Based on IRS guidance, some businesses generally do not meet this factor test and would not qualify.
- Those considered essential unless they have a supply of critical material/goods disrupted in a manner that affects their ability to operate.
- Businesses shuttered but able to continue their operations largely intact through telework.
However, any of these businesses still may qualify for the credit with the second-factor test.
Examples of Qualified Restaurant Employers
If a governmental order requires an employer to close its workplace for certain purposes, but the workplace may remain operational for limited purposes, is the employer considered to have a suspension of operations? The short answer is yes!
Employer F, a restaurant business, must close its restaurant to on-site dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. The employer is then allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis.
Employer F’s business operations are considered to be partially suspended because a portion of its business operations – its indoor and outdoor dining service – is closed due to the governmental order.
Same circumstances as Example 1, except two months later, under a subsequent governmental order, Employer F is permitted to offer sit-down service in its outdoor space. Still, its indoor dining service continues to be closed. During the period in which Employer F is allowed to operate only its outdoor sit-down and carry-out service under the order, Employer F’s business operations are considered to be partially suspended because, under the facts and circumstances, a more than a nominal portion of its business operations, its indoor dining service, is closed due to a governmental order.
The following month, under another governmental order, Employer F is permitted to offer indoor dining service, in addition to outdoor sit-down and carry-out service, provided that all tables in the indoor dining room must be spaced at least six feet apart. Under the facts and circumstances, the governmental order restricting the spacing of tables limits Employer F’s indoor dining service capacity. It has more than a nominal effect on its business operations.
During this period, Employer F’s business operations continue to be considered to be partially suspended because the governmental order restricting its indoor dining service has more than a nominal effect on its operations.
How Do the Credits Work?
The employee retention tax credit is allowed against the employer’s share of Social Security taxes. However, the credit is fully refundable. So, if the credit exceeds the employer’s total liability of the portion of Social Security in any calendar quarter, the excess is refunded to the employer.
At the end of the quarter, the amounts of these credits will be reconciled on the employer’s Form 941.
If you have questions or need more information, you should work with your accountant and payroll specialist.
For more detailed information about the Employee Retention Tax Credit, visit the IRS website.
PPP Loan Forgiveness for Eligible Operating Expenses
PPP borrowers can have their first and second-draw loans forgiven if the funds are used on eligible costs. As with the first round of the PPP, the costs eligible for loan forgiveness in the revised PPP include payroll, rent, covered mortgage interest, and utilities. Also, the following costs are now eligible:
- Covered worker protection and facility modification expenditures, including personal protective equipment, to comply with COVID-19 federal health and safety guidelines.
- Covered property damage costs from property damage, vandalism, or looting due to public disturbances in 2020. But only if there was no coverage by insurance or other types of compensation.
- Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.
- Covered operating expenditures, which refer to payments for any business software or cloud computing service that facilitates business operations; product or service delivery; the processing, payment, or tracking of payroll expenses; human resources; sales and billing functions; or accounting or tracking of supplies, inventory, records, and expenses.
To be eligible for full loan forgiveness, PPP borrowers will have to spend no less than 60% of the funds on payroll costs over a covered period between 8 or 24 weeks.
Simplified PPP Loan Forgiveness
Borrowers that receive a PPP loan of $150,000 or less shall receive forgiveness if the borrower signs and submits to the lender a certification. The certification should only be one page in length. It should include a description of the number of employees the borrower was able to retain because of the loan, the estimated total amount of the loan spent on payroll costs, and the total loan amount.
The SBA has issued the simplified application form here. The form may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers must retain relevant records related to employment for four years and other records for three years, as the SBA may review and audit these loans to check for fraud.
For more information about PPP loans and loan forgiveness, visit the SBA website.
If we pay for software in advance on a one-year contract, is the entire amount forgiven if we pay it during the covered period?
Yes, given the current guidance, the entire amount would be forgiven if paid off during the covered period.
(NOTE: Paying for 12 months of Efficient Hire software in advance is forgiven if you pay it within the 8 to 24-week covered period. Contact our Sales Team to learn more)
When the loan is forgiven, will we be taxed for the forgiven loan?
Will plexiglass, etc., expenses be eligible expenses for PPP2?
Would COVID-19 testing costs apply as a forgivable expense?
Why wouldn’t I just use my PPP to pay employee wages?
You can, of course, but if you use your PPP for wages, you wouldn’t be able to use the ERTC. This is because the wages were allocated to the PPP funds.
By allocating operating expenses to the PPP funds, you open up the ability to get your PPP and eat it, too…or should I say, “ERTC it, too.”
Reach out to our Sales Team if you want more information. Efficient Hire can help you post jobs with ease, engage applicants faster, onboard consistently and compliantly, and maximize your WOTC tax credits! The best part is, if you are a PPP borrower, you can use funds to pay for the Solution. Then all is forgiven!
This blog is only for informational purposes and should not be considered a legal authority.