When the Consolidated Appropriations Act of 2021 (CAA) was signed into law, it extended many provisions of the Employee Retention Credit. Under the CAA, the qualified period to claim the Employee Retention Credit has been extended; the period is from January 1 to June 30. Relating to changes under the CAA, the IRS issued guidance to employers in Notice 2021-23.
The changes under the CAA and Notice 2021-23 are great news for real estate investors who operate a business and run payroll.
Note:the American Rescue Plan Act has further extended the qualifying period to December 31, 2021.
What is the Employee Retention Credit (ERC)
To refresh your memory, the Employee Retention Credit was developed in response to the COVID-19 pandemic to help impacted employers (including tax-exempt organizations that pay qualified wages) retain their employees; in short it is a payroll tax credit. Originally, eligible employers could claim up to $5,000 of qualified wages for the purpose of claiming the credit. Details about the original credit can be found here.
After the CARES Act was signed into law, there were several changes made to the tax credit. The CARES Act extended and amended the credit in the following ways:
- The credit can be claimed on 70% of qualified wages; qualified wages are limited to $10,000 per employee.
- Increased the maximum credit to $7,000 per quarter (the original amount of the employee retention credit was $5,000).
- The category of employers that may be eligible to claim the credit expanded (eligibility is partly based on declining gross receipts).
- Modified the gross receipts test percentage to 80%; the qualified business gross receipts have to be 80% or less of the income when comparing it against Q1 and Q2 of 2019; that equals a 20% or more decline in gross receipts.
- Revised the definition of qualified wages.
- Placed restrictions on small businesses claiming the advanced credit; the eligible business must have less than 500 employees.
- Extended the qualified period to June 30.
Note: If you are a business with qualified wages, be sure to consult with a qualified advisor before attempting to get the ERC, especially if you have taken out a PPP loan.
Now that you're aware of the updates, it's important to learn how to calculate this credit correctly. Employers who do not correctly calculate the credit may face some penalty exposure for improperly claiming credits. Below we will review the general steps to calculating the credit. These steps are provided for educational purposes only. If you plan to claim this credit, it is advisable to consult with a competent advisor.
How to calculate the credit
If you're a qualified business (business with less than 500 employees) with qualified wages, then you're in luck -- you can use those qualified wages to calculate the employee retention credit.
There are a few ways to calculate yours: You could go old school with a sheet of paper, a pen, and a calculator; you can use an Excel spreadsheet; or you can simply use Worksheet 2. Once you get a hold of your tools, you need to write down and compare your earnings in Q1 and Q2 2021 to your earnings in Q1 and Q2 of 2019. This first step will determine your eligibility for the credit. Your earnings need to be less than 80% of the earnings in the same quarter of 2019.
Let’s run through a simple hypothetical to better understand how this all works.
Gross receipts test example