Based on the Senate HEALS Act proposed last month, along with the House HEROES Act passed earlier this year, it likely means that most business owners will be able to both obtain a PPP loan AND qualify for the Employee Retention Credit (ERC).
The ERC may end up being greater than any PPP loan that you may receive.
The CARES Act, which Congress passed at the end of March, originally set in place an ERC that allows for a 50% refundable tax credit based upon wages paid during 2020 with a limit of $10,000 of qualified wages (therefore maximum credit is $5,000 per employee).
Business owners would need to see their gross sales decrease by at least 50% in one quarter to qualify for the ERC (they must also be listed as an essential business). And, if you obtained a PPP loan, you were ineligible for the ERC.
Both the HEALS and HEROES Acts make changes to the ERC, including increasing the amount of wages that qualify and allowing business owners to obtain both a PPP loan and ERC.
The HEALS Act increases the credit to 65% of wages up to $10,000 per quarter for EACH employee. In order for a business to qualify, the gross receipts for the quarter must be at least 25% lower than the same 2019 quarter. Please note that you are also not allowed to use the same wages for PPP loan forgiveness and the ERC.
For example, if you start to qualify for the credit in July and have two employees that make at least $10,000, you qualify for a $13,000 refundable credit. If your total payroll taxes for that quarter are $10,000, you would owe no payroll taxes and get a check back of $3,000.
The HEROES Act expands the credit to 80% with a maximum of qualifying wages of $15,000 per quarter and a maximum of $45,000 of wages for the year.
Using our same HEALS Act example, instead of a $13,000 credit, the maximum credit may increase to $24,000 (assuming each employee earns at least $15,000). However, the House bill may make it tougher for farmers to qualify for the full credit based on revenue reductions.
Let’s review an example of a Schedule F farmer who has 5 employees each earning $40,000 on an annual basis. The Schedule F farmer shows a loss on their 2019 Schedule F and obtained a PPP loan of $50,000 (based on the qualifying payroll costs for their five employees).
Gross receipts for 2019 were $2 million and their gross receipts for the third quarter of 2020 are 40% less than the same 2019 quarter. The farmer had sufficient payroll in the second quarter to get full PPP forgiveness.
Now,let’s assume the HEALS Act is passed as is. In this case, the farmer can obtain an additional $20,833 PPP loan (based on gross receipts of at least $100,000) and will now qualify for the ERC beginning July 1, 2020. Qualifying wages earned from July 1, 2020, to December 31, 2020, are $100,000 and the refundable tax credit is $65,000.
Instead of simply receiving total assistance of $50,000 (the original PPP loan), the farmer will now qualify for total assistance of $135,833 — or an increase of $85,833.
As you can see, if the HEALS Act passes, a large amount of additional stimulus will flow through to many farm operations. However, the key is to reduce gross receipts by at least 25% in the third quarter.
If you can achieve this level, substantial refundable employment tax credits may be the result. But, this only applies if you have employees.
I am generally not a fan of tracking legislation through the process. This is one time, however, that a business owner will want to be aware of a very timely infusion of cash, albeit through a credit, to keep the business afloat.
This article is general in nature. Contact a CPA to understand how this may impact your specific situation. CLA’s Paul Neiffer contributed to this article.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He’s also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at mike.bosma@claconnect.com.
-->Based on the Senate HEALS Act proposed last month, along with the House HEROES Act passed earlier this year, it likely means that most business owners will be able to both obtain a PPP loan AND qualify for the Employee Retention Credit (ERC).
The ERC may end up being greater than any PPP loan that you may receive.
The CARES Act, which Congress passed at the end of March, originally set in place an ERC that allows for a 50% refundable tax credit based upon wages paid during 2020 with a limit of $10,000 of qualified wages (therefore maximum credit is $5,000 per employee).
Business owners would need to see their gross sales decrease by at least 50% in one quarter to qualify for the ERC (they must also be listed as an essential business). And, if you obtained a PPP loan, you were ineligible for the ERC.
Both the HEALS and HEROES Acts make changes to the ERC, including increasing the amount of wages that qualify and allowing business owners to obtain both a PPP loan and ERC.
The HEALS Act increases the credit to 65% of wages up to $10,000 per quarter for EACH employee. In order for a business to qualify, the gross receipts for the quarter must be at least 25% lower than the same 2019 quarter. Please note that you are also not allowed to use the same wages for PPP loan forgiveness and the ERC.
For example, if you start to qualify for the credit in July and have two employees that make at least $10,000, you qualify for a $13,000 refundable credit. If your total payroll taxes for that quarter are $10,000, you would owe no payroll taxes and get a check back of $3,000.
The HEROES Act expands the credit to 80% with a maximum of qualifying wages of $15,000 per quarter and a maximum of $45,000 of wages for the year.
Using our same HEALS Act example, instead of a $13,000 credit, the maximum credit may increase to $24,000 (assuming each employee earns at least $15,000). However, the House bill may make it tougher for farmers to qualify for the full credit based on revenue reductions.
Let’s review an example of a Schedule F farmer who has 5 employees each earning $40,000 on an annual basis. The Schedule F farmer shows a loss on their 2019 Schedule F and obtained a PPP loan of $50,000 (based on the qualifying payroll costs for their five employees).
Gross receipts for 2019 were $2 million and their gross receipts for the third quarter of 2020 are 40% less than the same 2019 quarter. The farmer had sufficient payroll in the second quarter to get full PPP forgiveness.
Now,let’s assume the HEALS Act is passed as is. In this case, the farmer can obtain an additional $20,833 PPP loan (based on gross receipts of at least $100,000) and will now qualify for the ERC beginning July 1, 2020. Qualifying wages earned from July 1, 2020, to December 31, 2020, are $100,000 and the refundable tax credit is $65,000.
Instead of simply receiving total assistance of $50,000 (the original PPP loan), the farmer will now qualify for total assistance of $135,833 — or an increase of $85,833.
As you can see, if the HEALS Act passes, a large amount of additional stimulus will flow through to many farm operations. However, the key is to reduce gross receipts by at least 25% in the third quarter.
If you can achieve this level, substantial refundable employment tax credits may be the result. But, this only applies if you have employees.
I am generally not a fan of tracking legislation through the process. This is one time, however, that a business owner will want to be aware of a very timely infusion of cash, albeit through a credit, to keep the business afloat.
This article is general in nature. Contact a CPA to understand how this may impact your specific situation. CLA’s Paul Neiffer contributed to this article.
Michael Bosma, CPA, is Principal-in-Charge of the Reno office of CliftonLarsonAllen LLP. His NNBW column, “Covering Your Assets,” focuses on effective planning strategies for every business owner. He’s also the host of “Bosma on Business,” which airs Saturdays at 10 a.m. on Newstalk 780 KOH. Reach him for comment at mike.bosma@claconnect.com.
