A $5,000-per-employee tax credit may sound like a great incentive.
But the Employee Retention Credit rolled out under the Coronavirus Aid, Relief and Economic Security Act in March failed to entice many businesses in the nine months that followed. The main problem, according to local accountants, was the requirement that applicants could not also receive a forgivable loan through the Paycheck Protection Program.
“We could see very few scenarios where a business would benefit from [the credit] over a PPP loan,” said Michael Garcia, a partner in enterprise solutions for Kahn, Litwin, Renza & Co. Ltd.
Fast forward to February, and Garcia’s firm has been immersed in all things ERC: hosting webinars, sending emails and talking one-on-one with clients interested in applying for the credit – and crunching the numbers to determine if it could help them.
The spike in interest came thanks to the Consolidated Appropriations Act of 2021, which removes the stipulation that recipients cannot receive both PPP and the credit. Now, eligible applicants – those shut down by government order or with a 50% cut in total revenue for one quarter of 2020 compared with the same time the year prior – can retroactively apply to receive the credit for last tax year. The bill also extends the credit through the first half of 2021, reducing the demonstrated revenue loss to 20%, and upping the per-employee credit from $5,000 per year to $7,000 per quarter.
‘The devil is in the details.’
DAVD FONTES, CliftonLarsonAllen LLP principal
Anthony J. Mangiarelli, also a partner at KLR, in a panel discussion hosted by Providence Business News in February, called the changes to the credit an “inside-the-park home run” for eligible businesses.
“It could be very helpful,” Patricia A. Thompson, a partner at Piccerelli, Gilstein & Co. LLP, said of how the amended tax credit program could affect businesses’ bottom lines, particularly those with larger staffs, which would translate to more credits. Certain industries, such as hospitality, tourism and food services, stand to benefit most – not only because they are most able to meet the eligibility requirements but also because continued restrictions and fear surrounding travel, large events and indoor dining have severely limited their ability to bounce back.
The 50% revenue loss requirement for 2020 is a “high hurdle” for applicants to meet, though having to prove only 20% revenue losses for 2021 will ease that burden, said David Fontes, a principal at the Cranston offices for CliftonLarsonAllen LLP, which acquired Blum Shapiro & Co. PC earlier this year.
“The devil is in the details,” said Fontes. “The only way to know for sure [if a business qualifies or would benefit] is to go ahead and model it out.”
And that modeling is best done with a certified public accountant. To those trying to crunch the numbers themselves, Fontes offered a skeptical “good luck.”
Amid surging interest in the credit, most accountants are advising clients against going ahead with amending 2020 filings or banking on the credit in their 2021 tax plan. That’s because the IRS has not yet said how the wages eligible for tax credit interact with those funded by the PPP loans.
Businesses can’t use both a PPP loan and a tax credit to cover the same set of wages. This kind of “double dipping” is why Congress likely made the two programs mutually exclusive to begin with, Garcia said.
The problem lies with businesses that have already applied for forgiveness on their 2020 payroll loans. While federal guidance allows PPP recipients to spend up to 40% of their loan on certain expenses other than payroll, many simply dumped all the dollars into paying their wages to be safe and not overcomplicate things.
But in doing so, they unknowingly diminished the amount of payroll they have left over for which to apply the credit. Ideally, they should be able to repurpose those additional wages beyond the 60% threshold for PPP forgiveness to the credit, said Kristin Esposito, director of tax policy and advocacy with the American Institute of Certified Public Accountants.
In January, the institute sent a letter to the IRS asking for clarity on this issue and recommending the agency allow businesses that already applied for PPP loan forgiveness using entirely payroll expenses to reallocate the eligible portion toward the tax credit.
On March 1, the IRS at last issued new guidance outlining details of the updates to the credit program, including that business owners who already applied for PPP forgiveness could reallocate excess wages beyond the loan amount to the tax credit.
But for the two months prior, accountants including Garcia were left in the dark, resorting to refreshing the IRS webpage daily. Before the new guidance, he said he felt hamstrung on how to advise clients who are interested in both programs.
If they held off on applying for a second payroll loan awaiting clarity on the tax credit program, they risk the second-round fund running dry. If they applied sooner, they may not be able to maximize the credit later on.
“I can only advise them on the risk and let them make a decision that is best for their business,” Garcia said.
Nancy Lavin is a PBN staff writer. Contact her at Lavin@PBN.com.
