The Employee Retention Credit – Explained

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by John A. Sanchez, CPA

John A Sanchez In response to the COVID-19 pandemic, congress passed several broad-sweeping legislative initiatives. Starting in March of 2020, the CARES Act was passed providing small businesses economic relief nationwide. Among the initiatives included in the legislation was the Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC). Both initiatives were intended to encourage business owners to keep employment rolls active to avoid the likely tsunami of unemployment claims, further impacting the overall economy.

Many business owners were uninformed on the benefits of the ERC primarily due to Congress’ initial ban on availing of both programs. Initially, Congress denied business owners who took a PPP loan to also avail themselves of the ERC. After all, faced with the option of practically ‘Free’ money (PPP), why consider the lesser appealing ERC.

Until 9 months later. On December 27th, Congress passed the Consolidated Appropriations Act (CAA) which made some retroactive changes to the Cares Act ERC provisions. Among those being allowing business owners who took a PPP loan to also avail themselves of the ERC. However, with one caveat. Wages used to claim PPP forgiveness could not also be used to claim ERC.

So how can you determine if you qualify? Well, depends on which year your referring to. Read on..

Different rules for Different Years

For 2020, the eligibility rules are as follows:

  • Business had a >50% reduction in Gross Receipts compared to same quarter in 2019, or
  • Business operations were fully or partially suspended due to a government mandated order  (More on this later.)
  • Credit is 50% of up to $10,000 of qualified wages per employee for the entire year ($5k max per employee for 2020)

For 2021, the eligibility rules get better:

  • Business had a >20% reduction in Gross Receipts (Big Difference from 2020 rules) compared to same quarter in 2019. This assessment could alternatively use the immediately preceding quarter compared to same quarter in 2019.

  • Business operations were fully or partially suspended due to a government mandated order
  • Credit is 70% of up to $10,000 of qualified wages per employee PER QUARTER (Big difference from 2020 rules).

Is the calculation that simple?

While the ERC calculation for eligible wages is simple, determining eligible ERC wages can be complex. Due to the inability to claim same wages for PPP loan forgiveness, the ERC wage eligibility must be determined at the employee level individually. Also keeping in mind that the ERC eligibility is determined by QUARTER. While PPP forgiveness wages, paid during the PPP Covered Period, can span more than 1 quarter. One can easily see how complex the exercise to determine eligible wages can be. In addition, keeping audit ready records of how eligible wages were determined is critical as these amended payroll tax form filings are auditable for up to 6 years.

What is considered partial suspension of operations?

Many states and local government units have issued full or partial closures of certain non-essential businesses. For many Dental business owners, state mandated closure or suspension of non-essential procedures. Since instances like these could fall under the ‘Partial suspension of operations’, many dental practice owners may qualify for ERC if they fail to meet the reduction in gross receipts test.

Does the ERC need to be repaid?

Unlike the PPP loan, the ERC is a payroll tax credit which is claimed by filing an amended 941-X for the appropriate quarter. The IRS will issue a refund check for the amount of the ERC claimed. At the time of this article, ERC refunds have been taking anywhere from 6-9 months.

Since most dental practices, in the authors experience, are most likely to be eligible for the ERC for the 2nd or 3rd quarter of 2020 time is of the essence to claim the credit as the window is closing to amend these 941 filing in mid to late 2023.

Is the ERC Taxable income?

Well, no. but kind of.

For those quarters which an ERC is claimed, business owners will need to reduce wage expenses by the ERC. In short, if you are filing for ERC claim for 2Q 2020 you will most likely need to amend your business tax return to REDUCE wage expense. The reduction will consequently increase your taxable net income thus creating a taxable event. Despite the tax consequences of claiming the ERC, most situations prove the cash flow positive benefits outweigh the cost.

The Employee Retention Credit cannot be overlooked as another potential opportunity to improve the working capital for your Dental Practice, enabling further growth and financial strength to move ahead into 2022.

The Dental-ERC team at John A Sanchez & Company have been helping dozens of business owners claim the Employee Retention Credit. To date, we’ve helped business owners claim over $1 million in ERC funds helping to strengthen their working capital and enabling their businesses to thrive.

To explore how our Dental-ERC team can help your business, find us at www.Dental-ERC.com for more information and resources on the ERC. While you’re there, apply for a no cost evaluation to determine if you qualify.