Employee Retention Credit for Businesses Impacted by COVID-19
As a result of the Covid-19 pandemic, the Federal Government initiated the Employee Retention Credit (ERC) to incentivize employers to retain employees.
For employers who qualify, the credit can be claimed against 50% of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13, 2020 and December 31, 2020. This means an employer could potentially receive a credit of $5,000 per employee for 2020.
For employers who qualify in 2021, the credit increases to 70% of qualified wages up to $10,000 per employee on a quarterly basis. This means an employer could potentially receive a credit of $7,000 per employee per quarter for 2021.
How do you qualify?
The credit is available to all employers regardless of size, including tax-exempt organizations, that have experienced economic hardship during the pandemic. Employers must meet one of the following criteria to be eligible:
- An employer must be a trade or business that was fully or partially suspended or had to reduce business hours due to a government order.
- The employer has had a significant decline in gross receipts. Generally, for 2020 if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019 an employer would qualify. For 2021, the gross receipts for a calendar quarter only need to be below 20% when compared to the same quarter in 2019.
An employer who receives a Paycheck Protection Program (PPP) loan is also eligible to receive the ERC. However, to prevent receipt of a double benefit, the eligible employer must either:
- Reduce the amount of loan forgiveness for which it qualifies under the PPP by excluding from its payroll costs those wages that qualified it for the ERC
- Exclude from payroll costs whose wages that qualified it for the PPP loan.
Pass Through Entity Tax Election
The Pass-Through Entity Election is an increasingly popular way for states to give some residents relief from the 2017 Tax Cuts and Jobs Act’s (TCJA) $10,000 cap on the state and local tax (SALT) deduction. The key is that the SALT cap applies only to personal income taxes, not taxes paid by businesses. Thus, business owners can deduct state income taxes without limitation if the taxes are paid at the business level. That’s why many states are changing the traditional business tax equation and introducing a pass-through entity (PTE) tax.
Beginning with the 2021 or 2022 tax years, several states are allowing some pass-through businesses such as partnerships and S-corporations to pay state income taxes at the entity level rather than on their personal income tax returns. In most states, the annual election must be made on or before the due date for filing the applicable income tax return, including extensions.
Each state has different rules and the benefit is determined by the level of taxable income.
We advise discussing these tax opportunities with your accountant to determine eligibility and benefits.