Are you eligible for the employee retention credit?
Almost a year after the start of the Covid-19 pandemic, shipping and RV businesses are still looking for ways to stay afloat by reducing federal taxes and increasing cash flow. Businesses that experience at least a partial shutdown or a decline in gross revenues due to the pandemic are uniquely positioned to take advantage of subsidies given to taxpayers who pay wages. These credits include the employee retention credit and a credit for the voluntary payment of wages due to Covid-related absences.
The CER was introduced as part of the CARES Act to encourage employers to retain employees by offering a refundable tax credit for certain employment taxes for 2020. Recently, the CER has been broadened and extended under of the Consolidated Appropriations Act. Notably, the law extends the ERC until June 30 and removes the loan restriction from the paycheck protection program. Companies that obtained PPP loans in 2020 can now apply retroactively for the ERC in 2020, as long as the salaries that were used to support the cancellation of PPP loans are not used as ERC qualified salaries.
Even before the CARES Act, the Families First Coronavirus Response Act imposed sick leave and family sickness leave on certain employers who paid wages for certain amounts in the event of absence from work related to Covid, and provided for a tax credit to do this. The mandate to pay these sums expired on December 31; however, the credit was extended until March 31. It now applies to amounts paid voluntarily as long as the requirements of the mandatory provisions are met.
Is your company eligible for the ERC? Employers are eligible for the REB if they have experienced one of the following two things:
• A total or partial suspension of their activities. The suspension must be attributable to a government order restricting travel, commerce or group meetings as a result of Covid-19.
• A significant drop in gross revenue in any calendar quarter. This decline could be defined as the gross revenue for a given calendar quarter in 2020 being less than 50% of such gross revenue for the same calendar quarter in 2019; or the gross revenue for a given calendar quarter in 2021 being less than 80% of that gross revenue for the same calendar quarter in 2019.
Note that the ERC is only available during the first two calendar quarters of 2021 and will expire on June 30.
An example of a qualifying recipient would see a significant drop in gross revenue from the first calendar quarter of 2021, as gross revenue was reduced by more than 20% from the same calendar quarter in 2019 (a 25% reduction). Gross revenue for the second quarter of 2021 was reduced by less than 20%. Therefore, the employer is only entitled to the CER for the first quarter of 2021.
Once an employer has determined eligibility, the REB’s eligible salary depends on the size of the employer, which is determined on a controlled group basis, as explained below.
For 2021, employers with an average of more than 500 full-time employees in 2019: Salaries include amounts paid to employees who do not provide services because operations have been suspended or because there has been a significant drop in gross revenue. For 2020, this employer size applied to more than 100 full-time employees.
Employers with an average of 500 employees or less: Salaries include amounts paid to employees during the period in which operations have been suspended or the period of declining gross revenue, even though the employees are providing services. For 2020, this employer size applied to more than 100 full-time employees.
For all employers in 2020, wages paid after March 12 and no later than December 31: Credit is limited to 50 percent of a maximum of $ 10,000 of salary per employee per year. The maximum credit allowed is $ 5,000 per employee per year.
In 2021, salaries paid from January 1 to June 30: Credit is limited to 70 percent of a maximum of $ 10,000 of salary per employee per calendar quarter. The maximum credit allowed is $ 7,000 per employee per calendar quarter ($ 14,000 total annually for 2021).
Other limits that may affect the amount of your credit include the research and development tax credit, the employment tax credit, and the credit for compulsory or voluntary paid leave. Given the inherent complexity of CER, you should speak to your tax advisor about the opportunities for your business.
In today’s complex tax environment, proactive tax planning should be part of your overall business strategy. Planning opportunities such as R&D tax credits for innovation, IC-DISC companies for exports, and local and state hiring credits for job creation are often overlooked. Avoid leaving money on the table by following these four steps:
First, determine if you are an REB eligible employer.
Second, verify that there are 2020 CRE eligible salaries by filing amended quarterly income tax returns.
Third, determine if you qualify for CRE in 2021 and apply for the credit by reducing regular payroll tax deposits to get an immediate cash benefit.
Fourth, review the payment of sick leave or voluntary family leave benefits to ensure that any eligible credit is claimed.
Working closely with a trusted tax advisor will help you create a plan that will support your marine and RV business goals, and create opportunities to drive growth. not
Michael C. Laur, Jaime Garcia de Paredes and Ronald G. Wainwright are managers and leaders in Cherry Bekaert’s tax group, with expertise in tax deductions and more for multinational, public and private companies.
This article originally appeared in the March 2021 issue.