Employee Retention Credit 2021: What Business Owners Need to Know! - YouTube

Alright, everybody, so the SBA this week came out and said that it has stopped accepting

new PPP applications from most lenders. The SBA informed lenders this past Tuesday that

the PPP general fund was out of money and that the only remaining funds available for

new applications are $8 billion set aside for community financial institutions (CFIs),

which are institutions that specifically work with businesses in underserved communities.

But all is not lost, dear small business owners of America. If you missed out on the PPP or

if you did not qualify for the PPP, don't lose hope because you may still qualify for

the employee retention credit on all those wages you didn't claim for PPP forgiveness,

and this employee retention credit could be worth up to $28,000 per employee. And yes,

even if you got PPP money, you can still get a piece of this employee retention credit

cake. This is big, a lot of small business owners don't know about this, or they've heard

about it, but they don't know much about it, even many tax professionals don't know the

ins and outs of this thing because it's new and a lot of these changes that are advantageous

to business owners happened in the middle of tax season. So in this video I'm going

to dig into the employee retention credit, why it's so lucrative now in 2021, more lucrative,

far more lucrative, in fact now than it was in 2020, 5x more lucrative at least. So even

if you don't own a business, be sure to share this video with business owners you know,

this video could literally be worth tens of thousands of dollars for them. And if you

are a business owner and after you watch this video you want to talk with me and a member

of my team, who will also be either a CPA like myself or an EA, shoot me an email, [email protected],

tell me a little about your business and your ballpark year-over-year revenue, and let's

see if we can get some more money back in your pocket because you can take this credit

against your payroll taxes you pay by reducing your required employment tax deposits or you

can request an advance payment of the credit using IRS Form 7200, Advance Payment of Employer

Credits Due to COVID-19. I am not going to get into the intricacies of that form here

or the Form 941 and all the payroll stuff because that's the stuff your CPA should worry

about. In this video I want to tell you what you need to know so you can go to your CPA

and say, "Hey, what about this employee retention credit, why haven't you told me about this?"

so you can be informed and take ownership of your own tax situations, of your business's

tax situation to generate more cash flow in your business and more wealth for yourself.

Alright, now let's dig into this and let's talk about the employee retention credit or

the ERC as some folks like to call it, before I get into this, I want to say that nothing

in this video is to be taken as legal or tax advice, this video is for general informational

purposes only, yes, I am a CPA and a tax professional, but I am not your CPA nor your tax professional

unless you have engaged my firm as such. Another disclaimer here, for purposes of this video

I am assuming that if you're watching this you are a small business owner, which for

employee retention credit purposes means one hundred or fewer employees for purposes of

the 2020 credit and five hundred or fewer employees for purposes of the 2021 credit,

if you have a company with over five hundred employees I imagine you have in-house counsel,

in-house CPAs who are on top of this stuff, but I'm here for you small business owners

who may work with a local tax professional who is so neck-deep in tax returns right now

because the government extended the tax deadline to May 17 or volume is just the nature of

their business that your tax professional hasn't had the time to dig into the weeds

here like I have. So employee retention credit, why is it so lucrative for business owners

in 2021 and why weren't we talking about it in 2020, it's been around since then, since

the CARES Act? Why is it getting all this buzz now that it wasn't last year? Well, let's

back it up. Yes, the employee retention credit has been around since the CARES Act that was

passed over a year ago in March 2020, but the employee retention credit didn't get much

love last year in 2020 because of the PPP, the Paycheck Protection Program. Originally,

in 2020, if you received a PPP loan as an employer, you were not eligible for the employee

retention credit. But the stimulus bill passed in December, the Consolidated Appropriations

Act, as well as the American Rescue Plan Act, passed in February 2021, made changes to the

ERC making it much more attractive. So basically the employee retention credit had a glow-up

between 2020 and 2021, it went from the nerdy girl with unkempt eyebrows and thick glasses

and her hair up in 2020 to the belle of the ball for business owners in 2021. Why? Why

is the employee retention credit more attractive now thanks to the Consolidated Appropriations

Act and the American Rescue Plan Act? I'll tell you why, a few reasons. First reason,

the employee retention credit for both 2020 and 2021 is now available to PPP recipients,

but of course you can't double dip. You can't get PPP for the hundred thousand dollars you

paid your employees and then turn around and claim the employee retention credit on those

wages as well. The government doesn't look too fondly on paying your payroll for you

through the PPP and then you claiming a credit against the taxes you pay the government on

those wages that the government paid for you. So that makes sense. Now, there's some planning

here. If you got PPP and you are eligible for the employee retention credit, then when

you do your PPP forgiveness application, you need to choose the best covered period that

will get you full PPP forgiveness but also maximize your employee retention credit. Also,

for PPP forgiveness, you want to fill up that payroll bucket with as many costs as possible

that don't count for employee retention credit purposes. For example, you can't claim the

employee retention credit on state unemployment insurance contributions, but state unemployment

insurance contributions count toward PPP forgiveness, see? So you'd want to dump all your state

unemployment insurance contributions on your PPP forgiveness application to leave as much

ordinary wages as possible to take the employee retention credit on. See? So this can get

very technical very fast and it's very situation specific in terms of optimizing PPP vs. ERC

and my firm has tools to figure this stuff out for you, I'm not going to dig into all

that here, but just know that you really have to do the math when doing your PPP forgiveness

to make sure you're not leaving anything on the table in terms of the employee retention

credit. Another thing to note is you can't deduct the wages you claimed the employee

retention credit on, and that makes sense as well, why should the government give you

a deduction for these wages that they already gave you a credit for? So essentially the

credit is tax-effected. Alright, sorry for getting a little sidetracked there, I just

love talking about this stuff, but let's talk about another reason why the employee retention

credit is more attractive now than it was last year, and that is that it's easier to

qualify for the employee retention credit in 2021. In 2020, for a quarter to qualify

for the employee retention credit, you had to show a 50% decrease in gross receipts compared

to the same calendar quarter in 2019. But in 2021, for a quarter to qualify for the

employee retention credit, you only need to show a 20% decrease in gross receipts compared

to the same calendar quarter in 2019. So this means far more businesses will qualify. My

business, for example, experienced a 26% decline in gross receipts, comparing Q1 2019 to Q1

2021, and it was a similar story last year too. So I didn't qualify for the 2020 employee

retention credit first, because I got first round of PPP money and second because my business

didn't suffer that large 50% decline required to qualify for the employee retention credit

last year. But for 2021, at least for Q1, yeah, my business qualifies. Also, for 2021,

for any quarter, you can elect to use the lookback quarter, meaning that, for example,

even if your Q1 2021 gross receipts aren't at least 20% lower than your Q1 2019 gross

receipts, you can compare for purposes of determining eligibility for the employee retention

credit for Q1 2021, you can compare Q4 2020 to Q4 2019. Implication here is that if you

qualify for Q1 2021 based on Q1 2021's gross receipts, you will also qualify for Q2 2021

since you qualified in the lookback quarter of Q1 2021. Same thing for Q2 to Q3 and Q3

to Q4, so basically if you just qualify for Q1 and Q3 2021, you also qualify for Q2 and

Q4 based on the lookback. Also, even if you didn't have a sufficient decline in revenue,

you can qualify for the employee retention credit if you were required to fully or partially

suspend operations in your business during any calendar quarter in 2020 or 2021 due to

state or federal orders, in which case you are eligible for the employee retention credit

during that period of full or partial shutdown. Common example, you own a restaurant, and

your governor signed an executive order stating that you need to shut down indoor dining.

That is an example of a partial shutdown. Also, not only are more businesses eligible

for the employee retention credit thanks to these new laws, making PPP recipients eligible

for the employee retention credit though not on the same wages and making more businesses

eligible through the 20% decline threshold rather than the 50% decline threshold, but

the 2021 credit is also more lucrative than the 2020 credit. This is because for 2020,

the employee retention credit was equal to 50% of all qualified wages for 2020, the employee

retention credit was equal to 50% of all qualified wages you paid employees between March 12,

2020, and December 31, 2020, with a limit of $10,000 in wages for that entire time period.

So the maximum 2020 credit per employee was $5,000. Not bad, but that's nothing compared

to the 2021 credit because for 2021, the credit is equal to 70% of qualified wages per employee

paid from January 1, 2021 through December 31, 2021, limited to $10,000 in wages per

employee...for that entire time period? No. Per quarter. So for 2021 the percentage is

more (70% in 2021 vs. 50% in 2020) and you can take it on up to $10,000 in wages per

employee per quarter, so we're talking about a maximum credit of $7,000 per employee per

quarter. If you're eligible all four quarters, $7,000 times four is $28,000. That's right,

folks, the maximum 2021 employee retention credit is $28,000 per employee. That's huge.

That's a godsend to many business owners right now. So you see what I mean now, right, how

the employee retention credit has gone from ugly duckling in 2020 to beautiful swan in

2021, right? And by the way, by the way, qualified wages includes employer-paid health insurance

premiums. This can huge for you and your business. Alright, so this is a huge boon for small

business owners. If you want to have a conversation about this and about my firm's services, shoot

me an email, [email protected], and let's chat, you, me, and a CPA or EA on my team,

and let's see if we can work together. But before I close out this video, I want to address

one pressing question, and it's this: Can you take the employee retention credit on

owner wages? For example, let's say you have an LLC, it's owned entirely by you, and you

made the S corp election, and you pay yourself a reasonable salary. Can you take the employee

retention credit on the wages paid out of your S corporation to you, the 100% owner?

Now, this is a big debate in the tax professional community right now. I'm not going to hang

my hat on any one position until we get more clarification from the IRS on this, but if

I had to lean one way or the other, I would lean in the direction of saying that owner

wages insofar as we're talking about someone who owns more than 50 percent of the business,

do not qualify. I don't want to get too technical here, but Section 2301(e) of the CARES Act

-- which created the employee retention credit -- says that for purposes of the employee

retention credit, "rules similar to the rule of sections 51(i)(1) and 280C(a) of the Internal

Revenue Code of 1986 shall apply," don't get caught up on the 1986, that's just the last

time the Internal Revenue Code had a major overhaul, so it's just referred to as the

Internal Revenue Code of 1986. The important part here is those other code sections reference.

Let's start with 280C(a) because that's the easy one. That is just saying that if you

get a credit on some wages you pay in your business, you can't double dip and take a

deduction for those same wages. But now let's talk about section 51(i)(1), which says, "No

wages shall be taken into account...with respect to an individual who bears any of the relationships

described in subparagraphs (A) through (G) of section 152(d)(2) to the taxpayer, or,

if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than

50 percent in value of the outstanding stock of the corporation, or, if the taxpayer is

an entity other than a corporation, to any individual who owns, directly or indirectly,

more than 50 percent of the capital and profits interests in the entity." So let's focus on

the clause that says "if the taxpayer is a corporation" because we're assuming an S corp

taxpayer here. So this is saying that you don't take into account wages with respect

to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding

stock of the corporation. That seems clear to me that owner wages do not qualify. Now,

some tax professionals are looking at the employee retention credit qualified wages

FAQs on the IRS website, and they're looking at FAQ 59, which says, "Are wages paid by

an employer to employees who are related individuals considered qualified wages?" and they're saying,

"Look at the answer here. It's only these relatives whose wages don't count. And the

IRS didn't specifically say owner wages or spouse wages don't count here, so bad-a-boo,

bad-a-bing, therefore owner wages must count." To that, I would say, "Look. The IRS website

is not the tax code. If there's a disagreement between the IRS website and the tax code,

and there are plenty, believe me, the tax code wins every single time. You can't say,

'Well, it said such and such on the IRS's website!'" And in this case, it's an argument

by omission. You're saying, "Well, the IRS website doesn't explicitly say that owner

wages are excluded so therefore they must be OK." No, look at the code and the regs

as well, though of course the code is more authoritative than the regs. But on the other

hand, the section in the CARES Act itself about this is admittedly vague, all it says

is, "For purposes of this section, rules similar to the rules of sections 51(i)(1) and 280C(a)

of the Internal Revenue Code of 1986 shall apply." "Rules similar to..." What does that

mean? It's up to Treasury to figure this out. So my take on this right now, unless the IRS

comes out and definitely says otherwise, I'm assuming that you can't take the employee

retention credit on owner wages. And it's the same if it's, you know, a husband-wife-owned

business, let's say both own 50%, well, sorry you're related so neither of your wages qualify

either, nor relatives you employ, children, siblings, etc. Alright, folks, that's what

I have for you here, of course I'm just scratching the surface especially with that interplay

between the PPP and the employee retention credit. If you would like to speak with me

and a CPA or EA on my team, be sure to email me at [email protected], tell me a little

bit about your business, your year-over-year revenue, and we'll see if working together

would be a good fit, and I also have some more tax videos for you right here on the

left and right down here below, be sure to check those out as well, and I will see you

in the next video, keep grinding, all you small business owners out there, you are what

make America great, buh-bye.