Employee Retention Credit alert (“ERC”)

The coronavirus relief bill signed into law in late December 2020 included an extension of the Employee Retention Credit (“ERC”) and amendment of certain extenders under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). Understanding how the ERC change, navigating its eligibility requirements, optimizing its benefits and maintaining appropriate documentation are all critical for businesses today. We’ll discuss the top 5 considerations to help your organization maximize its ERC benefits.

1. Eligibility requirements and maximum credit

The ERC is a refundable payroll tax credit that is available to eligible employers with qualified wages that began on March 13, 2020 and ends June 30, 2021. Eligibility criteria differs for 2020 and 2021, but includes certain employee headcount thresholds and the business must have experienced certain declines in gross receipts or have been fully or partially shut down by governmental order during the qualifying periods.

Mazars’ Insight:

The starting point for the ERC is identifying the periods in which your business is eligible for the credit due to either a reduction in gross receipts or full/partial shutdown. Reviewing the IRS’s FAQs on the full/partial shutdown by governmental order will help you determine eligibility. 

2. Understanding the differences between the ERC 2020 and the ERC 2021

To be eligible in 2021, employers must have a decline in gross receipts of at least 20% or be fully or partially shut down due to government orders and have 500 or fewer full-time employees. Eligible businesses are entitled to a credit of 70% on the first $10,000 of qualified wages per quarter for each employee, up to $7,000 per quarter. If the business has more than 500 full-time employees, qualifying wages are only those wages paid to employees not to work.

Mazars’ Insight:

Once the eligible period is defined, employers will need to evaluate their ERC eligible wages. The increase in the employee threshold to 500 for 2021 will expand the wages to be included in the ERC.

3. Considerations to maximize the PPP and ERC

Most businesses who received the first round of the PPP in April 2020 have already started, or will start, the PPP forgiveness process. It is important to maintain supporting documentation to substantiate the use of funds for the PPP and not claim forgiveness on the same qualified wages claimed for the ERC credit. Credits received under the Families First Coronavirus Response Act (“FFCRA”) are also excluded from wages that qualify for the ERC. Businesses eligible for these credits need to maintain appropriate documentation to support the credits claimed.

Mazars’ Insight:

The new tax law presents an opportunity to stack the PPP and ERC in order to maximize the available relief. Employers will need to carefully evaluate the ERC, PPP, and sick/family leave credits to ensure that wages are not double or triple counted. Documentation will be critical in the event of a future IRS or SBA audit.

4. Evaluating affiliation rules for the ERC

For purposes of determining eligibility for the ERC, businesses need to consider the requirements of a single employer under section 52(a) and section 414(m) or (o) of the IRS code. Affiliation rules require detailed understanding of ownership structures, including parent-subsidiary controlled group, brother-sister controlled group, and common management, which can impact eligibility of a business when qualifying for the ERC. Affiliated groups must be aggregated for purposes of determining significant decline in gross receipts and total average full-time employees.

Mazars’ Insight:

The affiliation rules for the ERC are different from the PPP.  The ERC relies on the IRS concept of a controlled group for affiliation in determining number of employees and reductions in gross receipts.

5. Documentation! Documentation!

Business are required to maintain all relevant documentation to support calculations used to claim the credit, documentation that aligns with the appropriate guidance. If retroactively claiming payroll tax credits, there may be amendments of payroll tax filings (Form 941). For 2021 credits, advances may be requested using Form 7200.  It is critical that proper documentation be maintained that can support claims in case of an audit.

Mazars’ Insight:

Due to the ever-changing aspects in the guidance for the PPP and ERC, we continue to encourage employers to keep detailed records that support business eligibility, qualifying wages and  that substantiate wages claimed for purposes of the ERC and PPP. 

Published on February 15, 2021

Authored by Sofia Cordero and Ryan Vaughan