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Do You Qualify for the Economic Retention Credit?

 

If you didn’t receive a Paycheck Protection Program Loan (“PPP”), you may qualify for the Economic Retention Credit (“ERC”).  The ERC is a fully refundable tax credit to employers.  In order to qualify for the ERC, you must meet the following criteria:

  • Carry on a trade or business during the calendar year 2020 (including tax exempt organizations) that either:
  • The operation of your trade or business is fully or partially suspended during a calendar quarter due to orders from a government authority limiting commerce, travel or group meetings due to COVID-19, or
  • Your trade or business experiences a significant decline in gross receipts during a calendar quarter.  A significant decline in revenue is defined as a 50% decrease in a quarter compared to same quarter in the prior year.
  • A business cannot have both a PPP loan and claim the ERC.

How is the credit calculated?

An employer is eligible for a credit of 50% of each employee’s qualified wages from March 12, 2020 through January 1, 2021.  The definition of qualified wages depends on the number of employees. 

  • If the employer has over 100 full time employees, qualified wages are defined as wages paid to an employee while the employee was not providing services.
  • If an employer has less than 100 full time employees, any wages paid during the period of economic hardship are considered qualified wages. 

Qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.  Qualified wages include the employer’s qualified health plan expenses.

The amount of qualified wages is limited to $10,000 per employee for all calendar quarters.  In other words, the maximum credit that can be claimed for an employee is $5,000 ($10,000 eligible wages x 50%).

What taxes can the credit be applied to?

The ERC is a credit against the employer’s portion of Social Security and Medicare taxes.

How can the credit be claimed?

  1. Credits can be claimed on Form 941 for each eligible calendar quarter.  Any credits earned during March 12, 2020 through March 31, 2020 will be included on the second quarter 94
  2. The amount an employer normally remits to the IRS can be reduced without penalty by the anticipated ERC.  Any tax reductions made will then be reported on the employers quarterly 941. 
  3. An employer can file Form 7200, Advance Payment of Employer Credits Due to COVID-19.  This form provides employers the opportunity to receive the full amount of the credits they have earned within a quarter but did not have enough employment tax deposits to fully receive the earned credits.  This form can be filed more than once within any given quarter; however, employers need to be careful to not claim credits AND reduce employment tax deposits for credits claimed.

How long can an employer claim the ERC?

Once revenues for a quarter are 80% or more compared to the same quarter in the prior year, the business is no longer eligible in the quarter following when the 80% threshold was met.

 
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