ERCs Guidelines from IRS (Q1 – Q2)

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This article is shared from the APA website here

The IRS issued guidance for employers on how to claim the employee retention credit (ERC) for the first two quarters of 2021. To claim the ERC, employers can reduce employment tax deposits. Small employers (500 or fewer full-time employees in 2019) may request advance payment of the credit on Form 7200, Advance of Employer Credits Due to COVID-19, after reducing their deposits. Advances are no longer available for larger employers.

Changes to the ERC

The notice details changes to the ERC, including:

  • Increasing the maximum credit amount
  • Adding more employers that may be eligible to claim the credit
  • Modifying the gross receipts test
  • Revising the definition of qualified wages
  • Modifying the ability of eligible employers to request an advance payment

Due to changes made by the Consolidated Appropriations Act, 2021, eligible employers can now claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages they pay to employees from January 1 through June 30, 2021. Qualified wages now are limited to $10,000 per employee per quarter, so the maximum ERC is $7,000 per employee per quarter, for a total of $14,000 for the first two calendar quarters of 2021.

More Guidance Coming Soon

The American Rescue Plan Act of 2021 (ARPA) extended the ERC to the third and fourth quarters of 2021. The IRS will provide guidance on the ERC available under the ARPA later.

Widespread audits of SBA PPP Loan recipients.

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Across news media outlets reports of the increase in PPP audits have grown steadily since Treasury Secretary Steve Mnuchin announced that all Paycheck Protection Program loans above $2 million will be audited.

Public companies with “substantial market value” and the ability to raise money through capital markets were not the intended recipients of the Small Business Payroll Protection funds.  Those funds were meant to help small businesses, as the name of the administering agency (the Small Business Administration SBA) would suggest. 

Forgiveness for loans under $150K is automatic and requires only that the recipient keep records for 3 years should an audit occur. While the recipient does still have to file, no documentation proving the correct usage of the funds is necessary to be granted forgiveness on these smaller loans. AS business owners may remember, criteria for forgiveness shifted from the original statement that: “if the recipient of the funds uses 75% of those funds to pay payroll costs and the remaining 25% for operating expenses and used all of the funds within 8 weeks” the PPP loans would be forgiven. That bar shifted in percentages and length of time allotted causing many business owners to wonder how and when which criteria would be applied when it came time to file for forgiveness. The goal, in the midst of the massive unemployment wave, is to keep employees on the payroll.

“Anybody that took the money that shouldn’t have taken the money, one, it won’t be forgiven and two, they may be subject to criminal liability, which is a big deal,” Mnuchin said in an interview on Fox Business. “I encourage everybody to look at this and pay back these loans now so we can recycle the money if you made a mistake.”

While the smallest loans are essentially auto-forgiven, businesses between $150k – $2m amount mentioned by Mnuchin should take heed. Impeccable financial records will be necessary to ensure loan forgiveness should you be aduited.  Business owners should put SBA PPP funds into a separate account, pay ONLY payroll costs with 60% – 75% of the funds and use a spreadsheet or other tool to track where the money goes. 

Regardless of need, audits will come and it’s always best to have finances in order, reports at the ready and a clear process for compliance in place.