Claiming Employee Retention Credit After PPP Loan Restriction Removal

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updated 9/4/2024

Employee Retention Credits Video Transcript

Kristen Bailey here, certified Construction Industry Financial Professional at KatzAbosch. Happy New Year! Maybe we’ve somehow entered 2021 with more uncertainty than we left 2020 with and I did not think was possible. But here we are, and we’re going to use the same strategy we used in 2020 which is focus on what we know. And, there are some new things we know that we’d like to share with you about the Employee Retention Credit. Previously, if you took a PPP loan in 2020, you might not have even heard of this Employee Retention Credit because you weren’t able to claim it. But now, the restriction of having a PPP loan has been removed, so all entities can claim this credit in 2020.

So, the first step is to figure out if your entity qualifies for it, and there’s a two-part test, and it’s an “or” test, not an “and” test. The first part is: during a calendar quarter, operations were fully or partially suspended due to orders from appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. Luckily, in Maryland, a lot of the contractors were not shut down, so you might not meet that first part of the test, but the second part is: or there is a significant decrease in gross receipts in one or more calendar quarters in 2020 compared to that same calendar quarter in 2019.

 In 2020, a significant decrease is 50% or more, and gross receipts are measured using your accounting method for income taxes, and they also include your investment, income, dividends, interest, rents, royalties, sales of fixed assets, and any other income.

Once you figure out if you meet one of those qualifications, the next step is to determine your average full-time employment in 2019. If you met the qualifications but have over 100 employees, then the entity can claim the credit up to 50% of wages, capped at $5,000 per person, for wages paid only for employees not to work. So, if you had over 100 employees, you can only claim the credit for wages paid to employees not to work.

But, if you have 100 or fewer employees, wages paid during a full or partial government-imposed shutdown qualify. And then, if you have that 50% decline in a calendar quarter, it becomes an eligible quarter, and all wages paid qualify. Plus, each subsequent quarter in 2020, up to and including the first quarter in which gross receipts exceed 80% of that same quarter in 2019, are also eligible quarters and all of those wages qualify as well.

For example, if in the second quarter you were at 40% of 2019, and then went up to 70% in the third quarter, and back down to 60% in the fourth quarter, all three of those quarters qualify because you went below 50% and never got back up to that 80%.

So, how do we calculate this credit? It is your qualified wages as we just discussed, plus eligible healthcare costs up to $10,000 per employee, and it’s 50% of that. So, it’s $5,000 per employee.

An important note is if you have a PPP loan, you want to keep documentation as to what wages were used for the PPP, because the same wages cannot be used for this Employee Retention Credit. But, the PPP was originally based on 10 weeks of payroll, so there should be after you apply for your PPP loan forgiveness plenty of wages left over in 2020 if you qualify to claim this credit. It’s just important to ensure you have documentation as to what wages went for which program during this time.

This credit was extended in 2021 for the first two quarters, with a few number of changes. The gross receipts reduction is only 20%, compared to the same calendar quarter in 2019, and the credit is now 70% of wages, up to $10,000, or $7,000 per employee. And, the company size criteria has increased from 100 to 500.

So, as you can see, this credit might be pretty lucrative for your entity, but it is a little bit tricky. So, please do reach out to us here at KatzAbosch to help walk you through the qualifications and the calculations of this credit. If you have any questions, give us a call. Until next month, see you later!