Many Denver businesses have been looking for assistance in managing the abrupt changes created by the COVID-19 emergency. The combination of forced business closures and stay at home orders have left many facing a sharp decline in demand for products and services. This has left many turning to loan programs such as the Paycheck Protection Program, the Small Business Administration’s (SBA) low-interest loan program. In fact, it was reported the SBA has issued 52,785 loans totaling $3.2B during the second round of loan funding in Colorado alone. These numbers are large and reflect the economic hardship and damage caused by the emergency. While certainly popular there are other incentives for those who have not participated to provide a measure of relief. As part of the CARES Act, Congress created an important payroll-based tax credit known as the Employer Retention Tax Credit. To help clients, prospects and others, Hanson & Co has provided a summary of key information below.
What is the Employer Retention Tax Credit?
The ERTC is a refundable tax credit against employer-side FICA employment tax. The amount of the credit is equal to 50% of up to $10,000 of the usual and qualified wages an employer pays to each employee after March 12, 2020, and before January 1, 2021. The credit is designed to help businesses increase cash flow by reducing taxes owed on employee compensation. What is better is that businesses can get immediate access to the credit simply by making a few calculations and then reducing the employer payments on Social Security taxes. In the event that tax deposits are not sufficient to cover the credit, the company will be eligible to receive an advance payment from the IRS.
Who is Eligible?
Business and tax-exempt organizations that were in business at the start of the year are eligible to apply.. In addition, a business must also meet one of the requirements outlined below.
- The company must have experienced a partial or full business suspension due to government orders limiting operations, travel, and other restrictions, or,
- They must have experienced a significant decline in gross receipts during the calendar quarter, also known as, the Gross Receipts Decline (GRD) test.
For those businesses that started in 2020, the GRD test will not apply because of the lack of historical financial data available. This means they will need to wait for directions from Treasury on how to make the calculation.
What is a Significant Decline in Gross Receipts?
A significant decline begins with the first calendar quarter in 2020 in which gross receipts are 50% less when compared to the same period in 2019. It is considered to have ended in the 2020 calendar quarter when gross receipts are greater than 80% when compared to the same time period in 2019, or in the first quarter of 2021.
What are Qualified Wages?
These wages are determined by the total number of employees retained by the company. When a business has averaged more than 100 full-time employees during 2019, qualified wages typically include compensation, healthcare (up to $10,000 per employee), and related benefits, to employees not paid because operations were reduced or suspended. In this situation, businesses can only count wages up to the amount an employee would have been paid during the 30 days prior to the hardship.
When a business averaged less than 100 full-time employees in 2019, qualified wages include compensation and healthcare costs (up to $10,000 per employee) paid to any employee during the time when operations were reduced or the period of decline in gross receipts, regardless of whether employees are providing services.
Calculating Full Time Employees
According to the ERTC, a full-time employee is one that averaged 30 hours per week in 2019. For businesses that operated in 2019, the number of full-time employees is determined by taking the sum of full-time employees in 2019 and dividing that by 12 months. For those who started operations in 2020, take the sum of full-time employees in each month and then divide it by the total number of months elapsed in the year.
The challenges created by the COVID-19 emergency are still being navigated as states begin to re-open their economies. The opportunity created by the Employer Retention Tax Credit is one that Denver businesses cannot afford to miss. If you have questions about the information outlined above or need assistance with a COVID-19 tax issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.