But let me dig into the details here so you know whether your firm qualified. And so you know what your firm needs to do to get any refund you missed. One comment here too: The refunds get big fast. If you qualified you’re probably talking tens or even hundreds of thousands of dollars of refunds.

First Some Background About the ERC

The Coronavirus Aid, Relief, and Economic Security Act (Cares Act), enacted in March of 2020, provided several aid packages for employers and employees. The primary goals were to keep businesses afloat and prevent employee furloughs.

Initially, employers had to choose between two programs, the Paycheck Protection Program or Employer Retention Credits. You could not participate in both.

The PPP program generally provided more money to business owners, and, not surprisingly, became the more popular choice.

In December of 2020, however, Congress passed the Consolidated Appropriations Act (CAA). And the CAA allowed businesses to participate in both the PPP and the ERC. Tax practitioners and employers then scrambled to learn about the ERC program in early 2021.  And as we all learned, there was serious aid money available to qualified employers.

A final thing to know up front. Employers potentially got ERC funds, or employee retention credit refunds, for wages paid in 2020 and in 2021. But the ERC deadline for refunds based on 2020 wages ended roughly a year ago. What I’m talking about here then are ERC refunds for 2021 wages. But that’s okay. That’s where the big money is.

How to Qualify for ERC?

To qualify for the ERC, businesses must generally meet one of three criteria:

1. Significant decline in gross receipts, or
2. Full or partial suspension of operations due to a government closure order, or
3. Start a new trade or business after February 15, 2020 and before the end of 2021.

From a practitioner’s perspective (and based on experience with many ERC claims), qualifying via a significant decline in gross receipts is usually easiest to substantiate and prove to the IRS. For 2021, an employer needed a decline of more than 20% in gross receipts compared to the same quarter in 2019.

Government shutdown orders, the second way to qualify, introduce nuances that can complicate qualification and implementation. If you’re interested, you can read more about ERC and government shutdown orders here. But you probably want to know that much of the ERC fraud appears to have involved employers alledgedly qualifying based on government orders.

The third way to qualify is to start a new trade or business. To qualify for an ERC refund based on starting a new trade or business, you need to be a small business with average gross receipts over three previous years equal to $1,000,000 or less. This revenue limit looks at the total revenues from all your businesses. And you get the ERC refund based on the wages paid in any of the businesses.

Qualified Wages for ERC

Not all wages qualify for employee retention credits. Some do. Some don’t.

Qualified wages for ERC in 2021 include the following:

• Wages subject to FICA taxes
• Certain health plan expenses allocable to wages
• Employers had to have 500 or fewer employees

Non-Qualified wages for ERC include:

• Wages that were used for PPP
• Greater than 50% owner wages
• Greater than 50% owner family member wages (spouse, children, grandchildren, parents, siblings, in-laws etc.)

How is ERC Calculated

The 2021 ERC formula works differently depending on the credit.

If you qualify based on either a substantial decline in gross receipts or a goverment order, the ERC equals 70% of qualified wages, up to $10,000 per employee per quarter for the first, second and third quarters of 2021.

Example: Suppose in 2021 you have three employees earning $12,000 each quarter throughout the year. Qualified wages in this case equal $10,000 per employee per quarter for quarter 1, quarter 2 and quarter 3. The ERC in this case equals $10,000 × 70% × 3 employees or $21,000 per quarter. So $63,000 in total.

The startup business employee retention credit only applies to the third and fourth quarter of 2021. And the startup business employee retention credit tops out at $50,000 per quarter.

Example: A small construction company enjoys roughly $800,000 of average annual gross receipts. The owner invests in a rental property in late 2020 (so, a new trade or business.) The aggregated business doesn’t qualify for ERC refunds on the basis of either a substantial decline in gross receipts or a government closure order. But it does qualify because a new business started: the rental property. Say the construction company employed ten employees earning $12,000 each in quarter 3 and quarter 4 of 2021. The ERC in this case equals the greater of either $10,000 x 70% x 10 employees, or $70,000 for quarter 3 and $70,000 again for quarter 4., or $50,000 a quarter. In this case, the actual credit equals $50,000 a quarter for the third and fourth quarter, or $100,000 in total

ERC Deadline Depends on Year

The deadline to amend returns and claim the refund depends on the year.

For 2020 ERC claims, the ERC deadline was April 15, 2024. Accordingly, employers cannot still make claims based on 2020 wages.

For 2021 ERC claims, however, the ERC deadline is April 15, 2025. Employers can therefore make claims based on 2021 wages.

Thus, if you operated a small business in 2021, had employees, and never took advantage of the ERC program, reach out to your CPA or tax preparer now. You potentially have large ERC refund claims that will shortly expire.

Also if you started a new trade or business in 2020 or 2021, check in with your CPA or tax advisor. Many small business employers will also qualify for ERC refunds based on this lesser known method.

Tip: If your tax advisor wasn’t able to help you? Or if you’re a tax professional who didn’t gear up to provide this service? We’d be happy to talk about providing you or your client with help. The ERC refund program has restarted. You should have time to apply before the deadline. Contact us here: Nelson CPA inquiry form.

Two Final Words of Caution on ERC Claims

First, carefully vet anyone you engage for ERC work. Unfortunately, the program has been exploited by some (many?) unqualified ERC “mills” that have prepared allegedly fraudulent claims, often leading to significant consequences for businesses. Also if you believe you may have been a victim of ERC fraud, address the issue promptly. (The IRS has a voluntary disclosure program that allows businesses to rectify improper claims and potentially mitigate penalties. You can find more information about this process on the IRS Voluntary Disclosure Program webpage.)

But another caution or suggestion: Don’t not apply for ERC refunds if you legitimately qualify. The ERC has provided life-changing financial relief for many businesses. The window to claim these credits is still open. Therefore don’t miss your chance to file before the April 15, 2025 ERC deadline.

Other Resources

The rules for determining whether you had a substantial decline in gross receipts provide you more flexibility and wiggle room that I describe in the paragraphs above. This blog post gives more detail: 16 Ways of Qualifying for Employee Retention Credits.

More information about the startup business  employee retention credit appears here: Startup Business Employee Retention Credit and here: The $100,000 Real Estate Employee Retention Credit Windfall.

Many houses of worship qualified for employee retention credits. If you participate in a faith community where your group was affected by government closure orders, you may want to research this more specialized situation. This blog post provides more details about what went on in Washington state and should be applicable to many other states as well: Washington State Houses of Worship All Qualify for Employee Retention Credits.

The post April 15, 2025 ERC Deadline Approaches appeared first on Evergreen Small Business.

But the rules? Complicated from the beginning. And fluid. Lots of changes in how the credits work.

In this blog post, therefore, I want to identify the three basic ways in which professionals who own their own practice can qualify for and claim these credits. I’m mostly going to use healthcare professionals in the examples that follow. But the tactics and tricks described work for any self-employed professional or small business owner. Law firm partnerships. CPA firms. Consultants. You get the idea.

Three Notes to Start

Three quick notes to start: First, these tax credit refunds connect to non-owner and non-owner-family employee wages paid in the last three quarters of 2020 and then usually for the first three quarters of 2021. Some employers also get tax credit refunds for the fourth quarter of 2021.

Second, the credit formula gives a per-employee refund equal to as much as 50 percent of the first $10,000 in wages paid in 2020 and as much as 70 percent of the first $10,000 in wages paid in a quarter in 2021.

A third point: This blog post talks about how the rules work for small employers. Small means 100 or fewer employees in 2020 and 500 or fewer employees in 2021. Different rules apply to large employers.

And now let’s talk about the ways you or the professional services firm you own may qualify.

Quarterly Revenues Sagged

The standard and most straightforward way to qualify for the credits? Compared to 2019 revenues, your firm’s revenue sagged some quarter by more than fifty percent in 2020 or by more than 20 percent in 2021.

Suffer the specified quarterly decline, and you usually get tax credit refunds.

Example: A group medical practice saw quarterly revenues drop from its typical $1,000,000 a quarter to $750,000 a quarter in 2021. That 25 percent drop qualifies the practice for employee retention tax credits. If the practice employs ten workers who each make $20,000 a quarter, credits equal 70 percent of the first $10,000 in wages paid each of the ten workers. That probably means a $70,000 tax credit for the first three quarters of 2021. So, $210,000 in total.

By the way? If you should have gotten credits but didn’t, that oversight may connect to your Paycheck Protection Program loan. Initially, the rules said you could not get employee retention tax credits if you borrowed and then received forgiveness for a PPP loan.

The rules later changed, however, and said only that you could not get tax credit refunds for wages paid with PPP funds.

Government Orders Suspend All or Portion of Operation

Probably the easiest way to qualify for most employers? Getting hit by a government order that shut down either the entire operation or some part of it.

Specifically, if a state or local government order suspended more than a nominal part of your operation? You qualify.

And two quick clarifications: First, the “more than nominal” standard means at least a ten percent drop in your revenues or in the hours people work.

Second, a government order that impacts your own operation qualifies your firm. But so does a government order that impacts a vendor or supplier you rely on.

An example illustrates how this works even for an essential professional service.

Example: A orthopedic surgery practice finds itself subjected to a state order which prohibits elective surgery from May 15, 2020 through August 15, 2020. That order triggers a ten percent reduction in revenues while it’s in effect. This surgical practice therefore qualifies for tax credits on wages paid during the last half of the second quarter and the first half of the third quarter. If the practice employs ten workers who each make $20,000 a quarter, probably credits equal 70 percent of $10,000 in wages paid each of the ten workers in both quarters. So, a $70,000 tax credit for the second quarter and again for the third quarter.  Or $140,000 in total.

And another example to show how easily government orders trigger eligibility.

Example: A law firm found itself impacted more than nominally by a county health order that closed courtrooms during the last two quarters of 2020. The firm qualifies for employee retention tax credits for both quarters. If the firm employed five employees who each made at least $10,000 during that government order? The employee retention tax credits should equal 50 percent of the first $10,000 in wages paid each employee, or $5,000 per employee. In total, that means $25,000 of tax credits for 2020.

Your Business Operation Bigger than You Think

A subtle thing to note about all this: Tax law combines the businesses a taxpayer owns using the same principles as apply to pensions. This aggregation can produce surprising results, as another example shows.

Example: A physician’s professional practice employs 15 high wage employees. He also owns a winery that employs three modest wage employees. A government order shuts down the winery. Because the winery represents more than ten percent of the physician’s businesses’ operation in terms of hours worked, however, he can claim the $7,000 per employee per quarter credit on all 18 employees—or $126,000 per quarter.

New Business or Rental Investment

Some small business owners enjoy a third way to qualify for employee retention tax credits in the third and fourth quarter of 2021.

If the employer averages $1,000,000 or less of revenue for the three years prior to 2021, starting a new trade or business sometime after February 15, 2020 and before 2021 ends qualifies the business owner for tax credit refunds.

Note: You need to start the new business before the quarter ends to get the credit for the quarter.

But this special version of the employee retention tax credit—called the recovery startup business employee retention credit—provides a credit of up to $50,000 a quarter.

A final example illustrates how this credit works.

Example: A dentist operates a small dental practice with $1,000,000 of average annual revenues. She also bought a rental property in late 2020. That rental property probably counts as a new trade or business and means she gets to take the employee retention tax credit for the third and fourth quarter of 2021 on her dental practice wages. If the practice employs five workers who each make $20,000 a quarter, probably credits equal 70 percent of first $10,000 in wages paid each employee. So, a $35,000 tax credit for each quarter or $70,000 in total.

If You Missed Employee Retention Tax Credit Refunds?

If you missed refunds you’re entitled to? Or maybe you did? Not a problem. Only a minor headache.

Confer with your tax accountant. See if she or he can help. Probably they can. (You need to amend your payroll tax and income tax returns to get the credits.)

And if they can’t help, consider talking with other tax accountants who have developed specialty practices in this area. Many CPA firms, including ours, did learn the ins and outs of the law. (We’d be delighted to help you. Contact us here.)

The one awkward warning I’ll share: My opinion is you should avoid the self-proclaimed employee retention credit consultants.

At least one of the larger firms providing this service appears to be subject to an FBI and Department of Justice investigation due to other tax credit and deduction work they’ve done. That’s scary.

And other firms whose work product we’ve learned about in various ways have often been extremely, extremely, extremely aggressive about the tax positions they take on the refund claims. I personally believe many of these refund claims won’t withstand scrutiny by the Internal Revenue Service.

Other Resources

This recent blog post at our CPA firm website provides a fuller description of the precise ways employers qualify for employee retention tax credits: 16 Ways of Qualifying for Employee Retention Credits.

If you want or need a lot more detailed information? Grab our paperback book: Maximizing Employee Retenion Credits.

And for readers who really want to dig into the details, three IRS notices provide most of the guidance one wants to know: IRS Notice 2021-20, IRS Notice 2021-23 and IRS Notice 2021-49.

The post Employee Retention Tax Credits Still Windfall for Professional Service Firm Owners appeared first on Evergreen Small Business.

The reason? These employee retention credits add up fast. Pretty easily as much $5,000 per employee for 2020. If everything clicks just right, as much as $28,000 per employee for 2021.

In fact, crunch the numbers and complete the paperwork? For even small employers, we’re making refund claims that average $50,000 to $150,000. Which can be a gamechanger if your small business got beat up by the pandemic.

A Handful of Notes Before We Start

This post won’t describe how the credit formula calculations work.

We’ve discussed that bit of the puzzle in earlier blog posts in detail over the last couple of years. We’ve also got that book that appears next to this paragraph.

Accordingly, in this blog post, we focus on identifying when you want to go to the work of grinding through the formulas and their calculations.

I’m going to assume you qualify as a small employer. A small employer employed 100 or fewer full-time employees in 2020 and 500 or fewer full-time employees in 2021. That assumption simplifies the following discussion.

Finally, we’ll return next week to our regular Tax Strategy Tuesday series.

And now let’s get started…

More Than Fifty Percent Decline in Quarterly Gross Receipts in 2020

If your firm’s or organization’s gross receipts declined by more than fifty percent in some quarter of 2020? Yes. You qualify.

Furthermore, once an employer qualifies for credits based on a more than fifty percent decline, its eligibility continues through the quarter that 2020 gross receipts rise to more than 80 percent of 2019 gross receipts.

Example: Say your firm suffered a decline in gross receipts for the second quarter of 2020. Gross receipts which usually run a $100,000 a quarter dropped to $49,000. Fortunately, the next quarter, gross receipts bounced back to the usual $100,000 a quarter. In this situation, your firm qualifies for employee retention credits for the second quarter and then again for the subsequent third quarter.

One other example, too…

Example: Say that through 2019 your firm enjoyed steady quarterly gross receipts of $100,000. But then in the first quarter of 2020, gross receipts dropped to $49,000. That gives you eligibility for the first quarter. If gross receipts then ran $80,000 for the second quarter and the third quarter of 2020 and but then improved to $150,000 for the fourth quarter? You potentially qualify for employee retention credits on wages paid in all four quarters of 2020.

A few things to keep in mind… First, for 2020 employee retention credits, you can’t get more than $5,000 for an employee for the year. Second, you get the credit only for wages you paid out of company funds. Not for wages paid using paycheck protection program loans. And not for wages paid using other tax credits. Third, finally, while you can get employee retention credits for a fifty percent decline in the first quarter’s receipts, only wages paid after March 12, 2020 plug into the credit formula.

More than Twenty Percent Decline in Gross Receipts for Quarter 4 of 2020

If your firm’s or organization’s gross receipts in quarter 4 of 2020 declined by more than twenty percent as compared to quarter 4 of 2019? You qualify for employee retention credits for quarter 1 of 2021.

Note that in 2021, employee retention credits equal as much as $7,000 an employee for each quarter.

Example: In 2019, your firm generated $1,000,000 in gross receipts in the fourth quarter. In 2020, your firm generated $795,000 of gross receipts in the fourth quarter. That “more than twenty percent” decline qualifies your firm for employee retention credits for the first quarter of 2021.

More than Twenty Percent Decline in Gross Receipts for Quarter 1, 2 or 3 of 2021

If your firm’s or organization’s gross receipts in the first, second or third quarter of 2021 declined by more than twenty percent, you qualify for employee retention credits for either one or two quarters. You’ll qualify for the quarter with the decline. And if the quarter is the first or second quarter, you’ll also qualify for the subsequent quarter.

Example: For the first quarter of 2019, your gross receipts equaled $100,000. Due to Covid-19, for the first quarter of 2021, your gross receipts equaled $79,500. That 20.5 percent decline qualifies your firm for employee retention credits for the first quarter—and for the second quarter.

Let me give you another example, too, to highlight how a decline in the previous quarter creates eligibility.

Example: Say that a firm enjoyed steady quarterly gross receipts of $100,000 through 2019 and the first three quarters of 2020. And then say for the fourth quarter, it saw quarterly gross receipts decline to $79,500. Gross receipts then recovered to $100,000 for the first quarter of 2021. But then again dropped back to $79,500 for the second quarter of 2021. In this case, the firm qualifies for employee retention credits for all three quarters of 2021. It qualifies in quarter 1 of 2021 because the previous quarter’s gross receipts declined by more than 20 percent. It qualifies in quarter 2 of 2021 because gross receipts for that specific quarter declined by more than 20 percent. Finally, it qualifies for quarter 3 of 2021 because the previous quarter’s gross receipts—so quarter 2–declined by more than 20 percent.

Use a “Wrong” Quarter for 2020 Credits if Your Business Started in 2019

Qualifying for employee retention credits based on a decline in gross receipts usually compares quarterly gross receipts in 2019 to those same quarters in 2020 and 2021.

To determine whether the Covid-19 pandemic pushed down gross receipts in the second quarter of 2020 or 2021, for example, the formulas look back at the second quarter gross receipts of 2019.

That begs a question, though. What if a business starts part-way through 2019 and therefore a business owner doesn’t have a quarter from 2019 to use for comparison? Congress and the IRS provide a work-around.

First, they say for 2020 employee retention credits you use the first, probably partial quarter the firm operated in 2019 for the comparison.

Example: You started a new business in the third quarter of 2019. Accordingly, no first quarter or second quarter gross receipts value exists for comparisons between 2019 and 2020. To determine if quarterly gross receipts for the first or second quarter of 2020 declined by more than 50 percent, however, you can compare those quarters’ gross receipts to the 2019 third quarter gross receipts value.

The IRS also tells employers to use a reasonable method for converting a partial quarter’s gross receipts to a full quarter’s gross receipts.

Example: If an employer started a business halfway through the third quarter of 2019 and generates $100,000 of gross receipts for that half quarter? Probably a reasonable way to estimate a full quarter’s gross receipts is to double the $100,000.

Use 2020 Quarter if Not Operating in 2019 for 2021 Credits

And then things work slightly different for 2021 credits.

If an employer didn’t operate in some quarter in 2019 and so can’t compare 2021 quarterly receipts to 2019 quarterly receipts, it can compare the equivalent 2020 quarter to the 2021 quarter.

You Acquired a Hard-hit Business

An employer needs to aggregate the gross receipts of all the businesses it owns for purposes of determining whether gross receipts declined.

If you acquired a business in 2020 or 2021, furthermore, you must aggregate gross receipts starting from the point you acquire the new business.

But then this wrinkle: You can choose to aggregate the acquired business’s gross receipts from before the acquisition.

This option to aggregate pre-acquisition gross receipts may create a really interesting opportunity for some entrepreneurs. The following example illustrates this.

Example: You operate a food services firm that generated $1,000,000 a quarter of revenues in 2019, 2020 and 2021. On July 1, 2020, you bought a struggling restaurant. Through-out 2019, that restaurant generated $2,000,000 a quarter. Unfortunately, the restaurant’s gross receipts dropped 90 percent to $200,000 a quarter in mid-2020. The aggregated quarterly gross receipts of the employer after the acquisition therefore equal $1,200,000. Those numbers reflect a 60 percent decline. Accordingly, your acquisition qualifies your firm for employee retention credits for the last two quarters of 2020 and the first three quarters of 2021.

Note: A firm of the size imagined in the preceding example might have as many as forty or fifty employees. That would mean potentially a $200,000 or $250,000 employee retention credit for 2020. And as much as $280,000 to $350,000 a quarter for each of the first three quarters of 2021.

Government Order Fully Closes Your Business

If a federal, state or municipal government order fully closed your business due to Covid-19, wages you paid employees during the closure probably count for employee retention credits for 2020 and for the first three quarters of 2021.

Example: A government order banned patrons from visiting your firm from April 15, 2020 through November 15, 2020. Wages paid for the last half of the second quarter, all the wages paid during the third quarter, and wages paid for the first half of the fourth quarter potentially count for employee retention credit purposes.

Government Order Partially Closed Your Business

If a federal, state or municipal government order partially closed your business due to Covid-19, and that partial closure was more than just nominal, wages you paid during the partial closure probably count for employee retention credits in 2020 and for the first three quarters of 2021.

The IRS defines nominal, by the way, as ten percent or greater. Further, the IRS rule looks at either hours of service or gross receipts. So if a government order closed a part of the business that represents either ten percent or more of the hours worked… or closed a part of the business that represents ten percent or more of the gross receipts? Yeah, that counts as a partial closure.

As with a full closure, only wages paid during the partial closure count.

Example: A restaurant owner’s facilities include an inside dining room, a cocktail lounge, and outside patio area. Government orders close the inside dining room and cocktail lounge. These orders allow the outside patio area to continue operations. Further, the restaurant attempts to ramp-up a “take-out” service which government orders also allow. As long as the suspended parts of the business—the inside dining room and cocktail lounge–represent at least ten percent of the hours of service or at least ten percent of the gross receipts, all the restaurant’s wages probably count for employee retention credit purposes.

Government Order Closed Your Supplier

A government order that fully or partially suspends not your firm but a supplier you rely on can qualify you for employee retention credits, too.

The trick here? That government order that hits your supplier must trigger you either fully or partially suspending your operations.

Example: Your firm, a restaurant, isn’t subject to government orders which fully or partially suspend your operations. However, due to Covid-19 infections, local authorities close for May and June of 2020 the meatpacking plant you rely on for many of your supplies. That closure order, if it causes a full or partial closure of your restaurant, qualifies your firm for employee retention credits for May and June of 2020.

Government Order Reduces Hours of Operation

If a government order reduces the hours of operation from ten hours a day to eight hours a day, that twenty-five percent reduction in hours of service counts as a partial suspension. And the employer probably qualifies for employee retention credits during the interval when the reduced hours are mandated.

Government Orders Required Employees to Work Remotely

If a government order closes down a firm’s physical office location, and employees can successfully telework, that doesn’t count as a full or partial suspension.

However, if employees can’t really successfully telework, the closing of the physical office location counts as a partial suspension. (The key factor is whether the new remote-work approach works comparably to the old in-person approach.)

Further, if a transition to a remote work approach takes two-weeks or longer of transition time, the IRS says that creates a partial suspension.

Government Order Requires Social Distancing or Similar Modifications

If a government order requires social distancing or other modifications to a firm’s operations and those modifications have more than a nominal effect on a firm’s operation, that probably counts as a partial suspension.

Example: A government order requires restaurants to operate at fifty-percent capacity so as to allow social distancing. That modification order probably produces at least a ten percent reduction in hours of service or gross receipts and so counts as a more than nominal partial suspension.

Note: The IRS Notice that describes when modifications required by government orders possibly lead to partial suspensions (IRS Note 2021-20) identifies the sorts of changes that potentially qualify an employer as partially suspended: “limiting occupancy to provide for social distancing, requiring services to be performed only on an appointment basis (for businesses that previously offered walk-in service), changing the format of service (for example, restrictions on buffet or self-serve, but not prepackaged or carry-out), or requiring employees and customers to wear face coverings.”

Employer Expands a State or Local Order

If a firm operates in more than one location, it can decide to apply a government closure order that technically applies to only one location to all its locations. And if the effect of the closure order is more than nominal once the employer expands the government order to create a nationwide or firmwide policy? Yeah, that can count as a partial suspension.

Note: The IRS Notice that provides this guidance, IRS Notice 2020-21, comments that the expansion of the local government order should mesh with CDC recommendations and Department of Homeland Security guidelines.

Government Order Fully or Partially Closed One of Businesses You Operate

The employee retention credit formulas treat all the trades or businesses someone owns as a single employer. That means if someone owns, say, a winery, a software company, and rental property, these three trades or businesses get aggregated into a single employer

If a government order closes one of the trades or businesses—say the winery—and that partial closure counts as more than just nominal, wages paid by the employer in all three of the trades or businesses it operates probably count for employee retention credits.

Again, the IRS defines nominal as a ten percent or greater reduction in either hours of service or gross receipts. But for entrepreneurs operating multiple trades or businesses, therefore, a closure of any one of the ventures they operate possibly gives them employee retention credits on all their trades or businesses.

Another reminder. As with a full closure, only wages paid during the partial closure count.

Example: A business owner owns a winery (three employees), a consulting firm (15 employees), and an apartment building (one employee). Government orders close the winery for April, May, June, and July of 2020. That should count as a partial, more than nominal closure. Therefore, the employer probably qualifies for employee retention credits on wages paid in April, May, June and July of 2020 for the winery, the consulting firm, and the apartment building.

You Started a New Trade or Business After February 15, 2020

For the third and fourth quarter of 2021, an employer qualifies for a special flavor of employee retention credits—called recovery startup business employee retention credits—if it began carrying on any trade or business after February 15, 2020 and before 2021 ends.

To get recovery startup business credits for the third quarter of 2021, the employer needs to begin carrying on the trade or business before September 30, 2021. To get the credits for the fourth quarter of 2021, the employer needs to begin carrying on a trade or business before December 31, 2021.

Tax law limits a recovery startup business employee retention credit to not more than $50,000 in a quarter. And only small employers (averaging $1,000,000 or less in gross receipts for the three years prior to 2021) qualify. Furthermore, if in the third quarter of 2021, an employer qualifies for non-recovery-startup-business credits? So those based on a substantial decline in gross receipts or a full or partial suspension of operations? It should use those larger credits.

But if an individual who can’t otherwise qualify for employee retention credits starts a new trade or business? That act of starting a new business probably qualifies the employer for employee retention credits. And once again note that in this case the employer gets credits on the wages paid by all of the trades or businesses the employer aggregates.

Example: A small construction company averages less than $1,000,000 in annual gross receipts. The owner starts working as a rideshare driver on weekends to supplement his family’s income. That new sideline rideshare-driver business probably qualifies the business owner for employee retention credits on the wages paid by his construction company.

You Bought a Rental Property After February 15, 2020

One final way to qualify. Which is really a variant of the recovery startup business qualification method just described.

If a business owner bought a rental property after February 15, 2020 in pursuit of profits? And if she or he shows continuity and regularity in the rental trade or business? Bingo. That rental trade or business probably qualifies the employer for recovery startup business employee retention credits. (The aggregated gross receipts of the employer need to average $1,000,000 or less for 2018, 2019 and 2020.)

Example: The owner of a small professional services firm averaged less than $1,000,000 in revenues from 2018 through 2020. During the summer of 2020, he started a short-term rental trade or business. That qualifies the business owner for up to $50,000 of employee retention credits for wages paid in the professional services firm in the third and fourth quarter of 2021.

We published a longer blog here that explains all the details of using a rental property to qualify for employee retention credits: The $100,000 Real Estate Employee Retention Credit Windfall

Other Resources You Might Find Useful

Tax accountants probably want to read or maybe reread the employee retention credit IRS notices. They provide the rules discussed in this blog post related to qualifying for employee retention credits: IRS Notice 2021-20, IRS Notice 2021-23 and IRS Notice 2021-49.

If someone is helping clients with recovery startup business credits? This blog post may be a useful: Nine Awkward Questions about the Recovery Startup Business Employee Retention Credit

Nonprofit organizations may find this blog post helpful: Houses of Worship and Nonprofits Miss Boat on Employee Retention Credits

Finally, if you need help with employee retention credits, first talk with your tax accountant. Do keep in mind tax season gets pretty busy for accountants. And if you can’t get the help you need from her or him? Sure, you can contact our CPA firm. Please use this form, Nelson CPA.

The post 16 Ways of Qualifying for Employee Retention Credits appeared first on Evergreen Small Business.

And then the reason I’m writing this. And sorry to suggest this. But I’m thinking you may be a member of a local church, mosque, temple or synagogue which has similarly missed this opportunity. Or that maybe you spend time working with a local charity and that that organization has bungled the opportunity.

So I want to go over the details of the employee retention credit as it connects to tax-exempt organizations. Give you some examples of tax exempt employee retention credits. And then end with providing some next steps you may want to take so the tax-exempt organizations you care about get a tax benefit that Congress intended and provided them.

Section 501(c) Organizations Qualify

The first thing to know: Tax-exempt organizations get to take employee retention credits on W-2 wages.

More precisely, any of the tax-exempt organizations described in Section 501(c) qualify. That means the house of worship you attend. It probably means the not-for-profit organization you volunteer at. It probably includes any social or fraternal organizations you join.

The credits can be as much as $5,000 per employee per year in 2020 and as much as $7,000 per employee per quarter in 2021.

In 2020, the employee retention credit equals up to 50 percent of the wages paid to an employee but no more than $5,000 for the year.

In 2021, the employee retention credit equals up to 70 percent of the wages paid to an employee but no more than $7,000 for the quarter.

Eligibility Works Roughly the Same

Next thing to note? A tax-exempt organization becomes eligible the same way a regular for-profit trade or business does.

It can start a new trade or business.

A government order can fully or partially suspend its operations.

Gross receipts can decline by more than fifty percent in 2020 or more than twenty percent in 2021.

Different Accounting for Gross Receipts

The one wrinkle about the above rules? The gross receipts accounting works differently for tax-exempt organizations.

For-profit trades or businesses use the accounting rules described in Section 448 of the Internal Revenue Code. Tax-exempt organizations use the accounting rules described in Section 6033 of the Internal Revenue Code.

In one of the IRS notices that explain how to calculate and claim refunds, the IRS goes into the details. But I’m going to copy and paste the meat of that guidance here:

‘gross receipts’ means the gross amount received by the organization from all sources without reduction for any costs or expenses including, for example, cost of goods or assets sold, cost of operations, or expenses of earning, raising, or collecting such amounts. Thus, gross receipts includes, but is not limited to, the gross amount received as contributions, gifts, grants, and similar amounts without reduction for the expenses of raising and collecting such amounts, the gross amount received as dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts, gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption), the gross amount received from the sale of assets without reduction for cost or other basis and expenses of sale, and the gross amount received as investment income, such as interest, dividends, rents, and royalties.

Tax Exempt Employee Retention Credits vs. Paycheck Protection Program

One other thing to mention. In talking with staff at tax-exempt organizations, I’ve heard people mention that they believe they don’t qualify for employee retention credits because the organization received a PPP loan.

That’s sort of true. Or was true. But you want to understand the history and the details here.

Originally, an employer chose between employee retention credits and the paycheck protection program (PPP). Firms that received a PPP loan, in the beginning, got disqualified from getting an employee retention credit.

Later changes to the law tweaked this, however. And the new rule says you cannot not get employee retention credits for wages paid using PPP money.

For example, say a nonprofit organization paid $300,000 in wages but used a PPP loan to pay $100,000 of the wages. In this case, it can only get employee retention credits on the $200,000 of wages not funded by PPP money.

Some Examples of Tax Exempt Employee Retention Credits

Let me quickly provide some examples of tax-exempt organizations getting employee retention credits.

I’m going to paint in broad brushstrokes here to get you thinking about how this might work for tax-exempt organizations where you participate.

Government Orders Closed Worship Services

A first example: Say state or local government orders prevented your church, temple, synagogue or mosque from holding worship services from March 15, 2020 through May 31, 2021. You guys should qualify for employee retention credits during that period time. Even if you cobbled together some sort of online substitute service.

Substantial Decline in Contributions

A second example: Say a not-for-profit organization saw contributions and activity decline as the pandemic ramped up as compared to 2019. Maybe the organization usually collects dues and fees from members for activities and those activities stopped in the spring of 2020 and are only just now beginning to restart.

If gross receipts declined by more than fifty percent for some quarter of 2020 as compared to the same quarter of 2019? Your non-profit qualifies.

If gross receipts decline by more than twenty percent for some quarter of 2021 as compared to the same quarter of 2019? Your non-profit qualifies.

Note: This other blog post explains how substantial declines in gross receipts work: Full or Partial Suspensions.

New Trade or Business

Employers may also qualify for employee retention credits in the third and fourth quarter of 2021 if they begin carrying on a new trade or business after February 15, 2020. That may not happen as commonly with tax-exempt organizations, but a couple of quick examples show how a new program or initiative might work.

Suppose a tax-exempt school opens a food bank to support some of its students’ families. Perhaps the food bank is response to the economic hardship created by the COVID-19 pandemic. That food bank can probably qualify the tax-exempt organization for employee retention credits.

Another example: What if a religious organization buys rental property to provide housing to families threatened with homelessness due to pandemic-related unemployment. That rental property can probably qualify the tax-exempt organization for employee retention credits.

Note: We talked about how the recovery startup business employee retention credits works here, Recovery Startup Business Employee Retention Credits, and how rental properties can trigger employee retention credits here, $100,000 Real Estate Employee Retention Credits. But the same general principles should apply for a tax-exempt organization.

Next Steps for Tax Exempt Employee Retention Credits

Talk with your tax-exempt organization’s treasurer. Or the accountant or the bookkeeper. (If they don’t understand the rules well enough to help you, you can contact us here. We will even do an initial free consultation.)

You want to move quickly. The easiest way to get the credit is when you file the quarterly 941 payroll tax return.

You can also go back and amend prior quarter 941 payroll tax returns. That’s more work. And the organization waits many weeks for the money.

Need More Information or ERC Training for Staff?

If you realize some of your staff need more training about how the employee retention credits work, no problem.

We’ve got economical $14.95 paperback book that represents a great way for staff, managers and partners to learn how employee retention credits work: Maximizing Employee Retention Credits.

We’ve also got a number of related articles and blog posts about the employee retention credit and many may be useful for folks still getting up to speed.

The post Houses of Worship and Nonprofits Miss the Boat on Employee Retention Credits appeared first on Evergreen Small Business.

Partly awkward because the thing we’re going to discuss doesn’t present tax legislation in a very favorable light.

Partly awkward because the thing we’re going to discuss is a little foggy.

And then, quite honestly, awkward because it took a couple of tax practitioners I respect a lot, Dan Chodan and Ed Zollars, quite a bit of effort to convince some of us that what I’m about to describe probably works. Or maybe works. Even though it shouldn’t, probably, as a policy thing.

But let’s go though the details quickly. And then–if you’re interested–the next step for you is to talk with your tax accountant. And get more detailed information from them.

The Original Business Employee Retention Credit

To put everybody on the same page, let me quickly describe the original employee retention credit and then a special flavor of the credit.

The original employee retention credit gives employers up to $7,000 per employee per quarter in 2021 if their business got beat up bad by the COVID-19 pandemic.

Note: This blog post goes into more detail: Three Tips for Bigger Employee Retention Credits. But so you know the general contours… A firm qualifies for employee retention credits if it suffered a substantial decline in gross receipts. And it qualifies if government orders closed or partially closed the business.

The precise credit formula, by the way, works like this for 2021: You get seventy percent of the wages you pay nonowner employees during a quarter but no more than $7,000 per employee per quarter.

A firm with ten employees making $10,000 or more a quarter, for example, might get $70,000 in tax savings for the quarter. And then again for the next quarter if they continue to qualify.

An important practical point: The employer can get the money nearly immediately. Often by taking the funds out of the very next payroll tax deposit they would otherwise make.

And that’s the original employee retention credit formula

The $100,000 Recovery Startup Business Employee Retention Credit

For the last two quarters of 2021, a new special flavor of the employee retention credit exists. The recovery startup business credit.

The recovery startup business credit gives an employer employee retention credits if she, he or they start a new trade or business.

A firm doesn’t use this flavor of employee retention credit if it can qualify using the original employee retention credit. The original flavors of the employee retention credit will almost always deliver bigger refunds.

But as long as a firm started the new trade or business after February 15, 2020 and as long as its average annual receipts for the three previous tax years don’t exceed $1,000,000? Yeah, that firm is good to go.

Two other wrinkles to note:

1. A firm can’t get more than $50,000 for a quarter in recovery startup business employee retention credits. A firm also can’t receive the credit except in the third and fourth quarter of 2021. Thus, the maximum refund for the recovery startup business credit equals $100,000.
2. All the trades or businesses an employer owns get aggregated for purposes of calculating the eligibility, totalling the wages that plug into the formula, and determining the credit limits. This last bit is important, as you’ll see in a minute.

Real Estate Rentals Count as a Trade or Business

Here’s the next thing you need to understand. And you can probably see where this is going. But say you buy a rental. Sometime after February 15 202o. And ideally sometime before the third quarter of 2021 ends. Let’s say you get a tenant into the property and everything totally setup and running.

Your rental probably qualifies as a trade or business. You need to be motivated by profit. You will need to display regularity and continuity in your activity. You’ll need to have separate or separable books and records. But the tax accountants who think a lot about this, all agree you should be able to fairly easily meet these requirements.

And if this is the case? The new rental property means you may qualify for a recovery startup business employee retention credit.

But you want to understand how the aggregation rules for employee retention credits work.

Employee Retention Credit Aggregation

The employee retention credit rules make employers aggregate the trades or businesses they own. An entrepreneur who, say, runs a sole proprietor, owns an S corporation, and then holds a majority interest in a partnership? She doesn’t do three separate employee retention credit calculations. She aggregates these three businesses together into a single employer. And then she does a single set of calculations.

For example, you recall I mentioned a few paragraphs ago that an employer’s average annual gross receipts for the previous three years can’t exceed $1,000,000 if the employer wants to claim a recovery startup business credit. The average number used in that determination? The average after aggregating the annual gross receipts for all the trades or businesses.

For example, if an aggregated employer combined three businesses and that aggregated average equals $700,000? That employer qualifies for a recovery startup business credit if it starts a new trade or business after February 15, 2020.

The $100,000 Real Estate Employee Retention Credit

And here’s why things get weird…

The same aggregation of course applies–at least under current IRS guidance–for wages that plug into the employee retention credit formula.

Say, for example, an employer averages less than $1,000,000 a year in gross receipts in its existing trade or business. That would be true of the overwhelming number of small businesses.

Say that existing trade or business pays ten employees $10,000 a quarter, but doesn’t qualify for the original employee retention credits.

If the business owner starts a new rental property trade or business before the end of September, bingo, the business gets employee retention credits on the wages paid during the third and fourth quarter in the existing business.

Note: If the business owner starts a new rental property trade or business after September but before the end of December, the business gets employee retention credits on the wages paid during just the fourth quarter.

But you see the windfall. The aggregated employer’s wages means she, he or they get that credit equal to seventy percent of the first $10,000 paid during the quarter to each employee by the existing business.

With ten employees, the $50,000 per quarter limit kicks in. The employer doesn’t get $7,000 for ten employees. She, he or they get $7,000 for the first seven employees. and than a little bit for the eighth employee.

But that’s the way the math works.

And let me make sure readers understand: Another way to describe the above accounting? The IRS will provide $100,000 of cash to you if you buy a rental before the end of September. Well, as long as you understand the rules, that is. And as long as they don’t change the rules.

A Quick Digression for Tax Accountants

The odd result described here stems from the IRS using the small eligible employer rules for the recovery startup business credit. The IRS did this as a workaround because Congress didn’t provide rules for recovery startup business employers. If a tax practitioner has questions about the mechanics, probably she or he wants to refer IRS Notices 2021-20 and IRS Notice 2021-49.

Last Words and a Caveat

I don’t want to put words into anyone’s mouth. But I think it’s fair to say some tax accountants see the accounting described above, nod their heads and think, “Wow,  real estate employee retention credit? Interesting…”

Others see the accounting above, shake their heads and think, “Oh my gosh, the IRS needs to change their guidance. And quickly.”

Probably most knowledgeable tax practitioners will agree that owners of existing businesses want to consider this tax planning opportunity.

The post The $100,000 Real Estate Employee Retention Credit Windfall appeared first on Evergreen Small Business.

Unfortunately, this method of qualifying for credits is murky. At least for small businesses that operate in a single location. But you want to look at the rule. Learn it. And then see if it applies to your situation.

If you can’t otherwise get employee retention credits? The partial suspension eligibility method provides a backdoor way for some firms who wouldn’t otherwise qualify to get credits.

Quick Review of the Easy Eligible Employer Rules

But first a quick review of what employee retentions are and how they usually work…

Employers who experience a greater than fifty reduction in gross receipts in some quarter of 2020 or a greater than twenty reduction in gross receipts in some quarter in 2021, get an employee retention credit.  (The comparisons typically look at the same quarter of 2019.)

For 2020, that credit equals fifty percent of the qualified wages paid. But not more than $5,000 per employee for the calendar year.

For 2021, that credit equals seventy percent of the qualified wages paid. But not more than $7,000 for a quarter.

Note: The 2021 credit—potentially $28,000 per employee—is huge. Take notice of that.

If a federal, state or local government order fully suspends operations, that order also qualifies an employer for employee retention credits.

For example, if a government order causes a restaurant to close from May 15 through August 15, the wages paid for that interval plug into the employee retention credit formula. The employer does not, in other words, need to compare quarterly gross receipts.

But then there’s also one other route to qualifying for employee retention credits: partial suspension. And here the waters get muddy in many settings.

Partial Suspension Rule

Let’s start by quoting official language that describes how the partial suspension rules work. IRS Notice 2021-20 says this about which employers have eligibility to claim employee retention credits:

Section 2301(c)(2)(A) of the CARES Act defines the term “eligible employer” as any employer carrying on a trade or business during calendar year 2020, and, with respect to any calendar quarter, for which (1) the operation of the trade or business carried on during calendar year 2020 is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.

Note: The same rule applies for 2021. But you need to read IRS Notice 2021-23 to get the official instruction for that.

IRS Notice 2021-20 Question 11:

On page 27 of that IRS Notice 2021-20, the IRS then asks and answers the key question about when a business is “partially suspended” in what I’ll call a blurry-picture situation.

Here’s the actual question asked which you want to look at and consider:

If a governmental order requires non-essential businesses to suspend operations but allows essential businesses to continue operations, is an essential business considered to have a full or partial suspension of operations due to a governmental order?

 IRS Notice 2021-20 Answer 11:

And here’s the official answer to this question:

An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows all of the employer’s operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.

For example, an employer that maintains both essential and non-essential business operations, each of which are more than nominal portions of the business operations, may be considered to have a partial suspension of its operations if a governmental order restricts the operations of the non-essential portion of the business, even if the essential portion of the business is unaffected. In addition, an essential business that is permitted to continue its operations may, nonetheless, be considered to have a partial suspension of its operations if a governmental order requires the business to close for a period of time during normal working hours.

The notice then elaborates. A “more than nominal” portion of an employer’s business operations would have generated ten percent or more of the firm’s gross receipts in the same quarter of 2019. Or it would have amounted to ten percent or more of the firm’s hours of service in the same quarter of 2019. (This information appears in the “Question 12” discussion.)

If a employer operates in multiple locations and government orders close one of those locations, that closure counts, plain and simple, as a partial suspension. (This information appears in the “Question 20” discussion.)

Finally, the notice adds a little twist and complexity to all of this. A reduction in consumer demand doesn’t matter for purposes of determining partial suspension. (This information appears in the “Question 13” discussion.)

You may want to read the roughly 15 pages of discussion about what counts and what doesn’t count if it matters to your clients. Or for your own firm’s employee retention credits. But let me spotlight some of the issues that I think may help you determine whether you qualify or might qualify for partial suspension for less than obvious situations.

Nominal Matters

A first obvious observation. You probably need to be able to show a reduction of ten percent or more in gross receipts or hours in order to take the position that an employer’s operations have been partially suspended.

In other words, any reduction in gross receipts or hours of service less than ten percent probably fails to support the position that a non-nominal chunk of the business stopped due to a government order.

Consumer Demand

And then something else. The bit about not looking at consumer demand connects to this, I think.

For example, the available data I’ve looked at and talked about elsewhere at this blog suggests that reduced consumer demand and government orders work hand in hand to push down business revenues. (Er, if you’ve read any of my complaints about the media exaggerating infection, hospitalization and fatality rates, you know I beat that drum because I worry it damages your business.)

But if we maybe think about this? Maybe you and I want to see considerably more than a ten percent reduction in gross receipts or hours worked so we’re also formally recognizing some dampening in consumer demand?

In other words, you need some ten-percent-or-greater chunk of the business to have been suspended, obviously, to just meet the “more than nominal” operations threshold. That’s maybe the first ten percent.

And then don’t we probably need some chunk of additional reduction in revenue or hours to reflect the drop in consumer demand?

The Twenty Percent Test May Be Relevant

Another percentage to anchor your analysis and thinking? Twenty percent. And here’s why I say this.

For 2020, the gross receipts eligibility test qualifies an employer for employee retention credits when the gross receipts drop to less than fifty percent of the same quarter in 2019. But the employer maintains its eligibility for the credits as long as the gross receipts stay at least twenty percent off as compared to 2019.

That twenty percent value pops up again for 2021. For that year, the gross receipts eligibility test qualifies an employer for employee retention credits when gross receipts drop by more than twenty percent as compared to 2019.

Again, we’re just talking here. Trying to bring this partial suspension rule into sharper focus… but I propose this: If a twenty percent decline in gross receipts often works as the hard number that maintains or creates eligibility for credits based on gross receipts? That reduction in revenues may really suggest a firm suffers from non-essential operations or activities closing.

Fixtures and Equipment and Comparability

One final thing to mention here. The IRS Notice mentions (Question 14) the issue of whether a firm can continue operations comparable to those prior to closure due to a government order.

The Notice discussion then gives a couple of examples. One example describes a software development firm. It reconfigures its operations to run comparably even after a local government order closes its offices. That firm, the IRS concludes, fails to qualify as partially suspended.

Another example in that same discussion describes a physical therapy facility. This firm also reconfigures operations. But reconfigured, it can’t provide the full range of therapies. Why? The facility provides equipment and tools that the physical therapists often need in hand to treat patients. That firm, the IRS concludes, qualifies as partially suspended.

The takeaway here? Maybe two things. First, if a business operation uses physical assets located in the closed offices, that suggests a partial suspension occurs when the offices close. Second, if a service must sometimes be provided in the presence of a customer or patient, that suggests a partial suspension occurs when the offices close.

Summing Up Partial Suspension Rule

Putting everything mentioned above together?

Here are my current impressions. I think separating essential not-suspended business operations from non-essential suspended businesses gets tricky. Especially for single-location and really small businesses. Accordingly, I think these small businesses want to see some overall reduction in revenues or hours significantly greater than ten percent. To me, that seems in line with non-nominal operations stopping due to a government order.

I don’t think however, that you need to go much above that ten percent reduction threshold for blurry-picture situations. Maybe a fifteen percent reduction signals a firm suffers from partially suspended operations? Or maybe twenty percent sends that signal? At least the way I’m thinking.

Finally, as just a matter of common sense? In any blurry-picture situation, I think a firm arguing for partial suspension wants to be able to point to equipment or fixtures required for the services but that could not be used due to an office closing. Or a firm wants to be able to point to in-office, face-to-face services that could not occur due to a government order closing the offices used for such meetings.

But I’d welcome your comments…

Need More Information or ERC Training for Staff?

If you realize some of your staff need more training about how the employee retention credits work, no problem.

We’ve got economical $14.95 paperback book that represents a great way for staff, managers and partners to learn how employee retention credits work: Maximizing Employee Retention Credits.

We’ve also got a number of related articles and blog posts about the employee retention credit and many may be useful for folks still getting up to speed.

The post Solving the Employee Retention Credit Partial Suspension Puzzle appeared first on Evergreen Small Business.

Editor’s Note: The employee retention credit (ERC) potentially provides big tax benefits to employers beat up by the pandemic. But the credit is wickedly complex.

In this guest blog post, nationally known expert Daniel Chodan, a tax partner with the Trout CPA firm in Pennsylvania, explains how the credit works for owner wages. Take it away, Dan!

The Employee Retention Credit (ERC) is a tremendous program for businesses with employees. Refunds can be up to $5,000 per employee in 2020 and up to $28,000 per employee in 2021.

Unfortunately, the ERC is mired in complex rules. Most employers will need to work with a professional to claim ERC as eligibility can be nuanced, reporting a claim is convoluted, and the interplay with other relief programs is intricate (particularly for the Paycheck Protection Program).

The Owner Wages Question

Here is one common question, for example: Can a greater-than-50% owner claim the employer retention credit on their own wages?

We would hope a simple enough question would have a simple answer, but it does not. The underlying IRS code and its practical implications confuses business owners and professionals alike.

I will explain the rules here to show how a greater-than-50% owner’s wages are ineligible for the ERC.

Related Parties Do Not Qualify for ERC

The CARES Act (which creates the employee retention credit) and later IRS guidance states “rules similar to Sec. 51(i)(1) apply” for the credit, which causes certain related individuals’ wages to be ineligible.

Relationships disqualified include the following:

• A child or a descendant of a child;
• A brother, sister, stepbrother, or stepsister;
• The father or mother, or an ancestor of either;
• A stepfather or stepmother;
• A niece or nephew;
• An aunt or uncle; and
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

Each of the relationships listed is disqualified for ERC if the person is related to a greater-than-50% owner. The confusion begins with this list. Owners and spouses themselves are not listed as disqualified relationships. This has led some to believe owner and spouse wages are allowed for ERC benefits, but further reading will show why they are not.

Attribution Rules Expand the List

The definition of a greater-than-50% owner under Sec. 51(i)(1) is the key issue. The IRS’s ERC FAQ No. 59 indicates it is an individual owning “directly or indirectly” greater-than-50% of the value of stock in a corporation or of the capital and profits interests in the entity.

The term “directly or indirectly” under Sec. 51(i)(1) is defined as being determined with the application of Sec. 267(c). The attribution rules of Sec. 267(c) include entity-to-member attribution, family attribution, partner-to-partner attribution, and limits on reattribution. While all of these rules do apply to the determination of a greater-than-50% owner for ERC, let’s just focus on the family attribution rules for today.

Family attribution of ownership under Sec. 267(c) occurs between the direct owner and the owner’s brothers and sisters (whether by whole or half blood), spouse, ancestors, and lineal descendants. This attribution of ownership occurs regardless of whether the family member owns any portion of the business under Regs. Sec. 1.267(c)-1. As a result, family attribution rules create many indirect owners of a business because they are related to the direct owners of a business. Family attribution also may cause an owner with only a small portion of direct ownership to have a larger portion of both direct and indirect ownership.

What This All Means to Employers

We got a bit technical there, but that is unavoidable to cover this issue. So what does it all mean? It means nothing is easy with ERC.

We might expect to only have a single greater-than-50% owner in a small business, but once the family attribution rules are applied, we will have many greater-than-50% owners.

We then must apply the list of disqualified relationships to each greater-than-50% owner to determine all of the disqualified related party wages. This pattern of attribution of ownership followed by disqualification is ultimately how a greater-than-50% owner’s wages become disqualified.

Let’s look at some examples to see how these rules work practically.

Example 1: S Corporation Owned by Father, Employing Father and Son

As a first example, consider a S corporation owned 100% by a father with the only employees being the father and his son.

The son’s wages are clearly disqualified for ERC as he is a disqualified relationship to a greater-than-50% owner (the father).

The father’s wages are not as clear because owners themselves are not listed as disqualified relationships. However, when we apply the family attribution of ownership rules, we determine there is more than one owner. The father’s 100% ownership attributes to his son, leaving both the father and the son as 100% owners directly and indirectly.

Because the father now has a disqualified relationship to a greater-than-50% owner, the father’s wages are also ineligible for ERC. The same result would occur whether or not the son was employed by the S corporation or had any direct ownership himself.

Example 2: S Corporation Owned by Two Brothers

Another common example is an S corporation owned 50%/50% by two brothers with the only employees being the two brothers.

Since there is no greater-than-50% owner, it may at first seem there are no related-party wages disqualified for ERC. However, when we apply the family attribution of ownership rules, the ownership of each brother attributes to the other and leaves both as 100% owners directly and indirectly.

Because each brother now has a disqualified relationship to a greater-than-50% owner, the wages of both owners are ineligible for ERC.

Example 3: S Corporation Owned by Two Cousins

A final example is an S corporation owned 50%/50% by two cousins with the only employees being the two cousins.

The cousins’ ownership does not attribute to each other by the family attribution rules. So each cousin is only a 50% owner directly and indirectly. However, the cousins’ ownership does attribute to ancestors, including their shared grandmother. The grandmother is considered a 100% owner of the S corporation because she is attributed the ownership of both of her grandchildren (the cousins).

Because each cousin now has a disqualified relationship to a greater-than-50% owner, the wages of both owners are ineligible for ERC.

Where Related Parties Rules Leave Employers

We must achieve full understanding of the direct ownership of a business, the related individuals employed by the business, and the owner family tree(s) for ownership attribution purposes.

The first step is determining who the direct and indirect owners of the business are according to family attribution rules.

The second step is applying the list disqualified relationships as they relate to any direct and indirect greater-than-50% owners.

Further attribution complexities arise when owners are also partners in another enterprise, when multiple layers of ownership exist, or when reattribution is limited, but these topics are beyond the scope of this article.

Often in the end, unfortunately, family attribution of ownership produces unfavorable results by generally disqualifying more wages for ERC. It is always possible that Congress could change the law or the IRS could provide new guidance – but until that happens we are unfortunately stuck with the rules as they are. Advisers and taxpayers should take a close look at these rules before claiming ERC.

About the Author

Daniel Chodan also wrote a guest blog post about the interplay of the Employee Retention Credit and PPP Affiliation Rules available here: ERC and PPP Affiliation Rules May Make Acquisitions More Attractive.

More biographical and contact information appears here.

Need More Information or ERC Training for Staff?

If you realize some of your staff need more training about how the employee retention credits work, no problem.

We’ve got economical $14.95 paperback book that represents a great way for staff, managers and partners to learn how employee retention credits work: Maximizing Employee Retention Credits.

We’ve also got a number of related articles and blog posts about the employee retention credit and many may be useful for folks still getting up to speed.

The post Owner Wages and Employee Retention Credit  appeared first on Evergreen Small Business.

Cases, hospitalizations and fatalities have collapsed in the U.S. since the beginning of the year.

In the U.S., we no longer look for a light at the end of the tunnel. We are moving out of the tunnel.

But the pandemic ending—or more accurately, the end of local and regional epidemics across much of the U.S.—isn’t just good medical news.

The pandemic ending means small businesses need to quickly adapt to a new post-pandemic economy.

This blog post shares thoughts about this post-pandemic economy and small businesses.

Tip #1: Understand Competitors May Be Ahead

A first comment—which isn’t something to freak out about—but rather something to know: Competitors may be ahead of you on this. But let me explain.

The collapse in cases, hospitalizations and fatalities? That’s been apparent to some owners and managers for weeks or even months.

The line chart below—which comes from the CDC data tracker—shows Covid-19 cases in the U.S. since the beginning of 2020. And many scientists and mathematicians were saying even before the peak in cases at the year end that infections would or were collapsing. (See our earlier blog posts here and here for the names of those folks.)

Now obviously people disagreed. One could often read news coverage earlier this year that suggested the pandemic was worsening. In February 2021, for example, one particularly popular pessimistic prognosticator said we still faced a “category 5 hurricane.”

But the point isn’t that the collapse was 100% certain. Even if the collapse looked mathematically likely.

Rather, the point is smart executives and savvy entrepreneurs included that “pandemic ends soon” scenario in their planning.

At this point, those foresighted managers and leaders have already responded. And you and I don’t want to get left behind.

Tip #2: Stay on Top of Local Guidance

A first concrete step you can take? And starting right now? Get disciplined about staying on top of state and local guidance.

Public health policies will change as things get better. Restrictions will end in your markets if they haven’t already. You want to be ready to respond quickly.

Already in online social media networks, you can see people talking about businesses quickly adapting to and recognizing the newest guidelines.

Example: You can find people saying they will shop someplace like Costco or Wal-Mart (which nearly immediately updated in-store policies for new CDC guidance related to vaccinated customers). And those customers will in effect indirectly penalize Costco and Wal-Mart competitors who delay.

By the way? I think you might choose to lose vaccinated customers to quick moving competitors. Maybe you serve customers who often can’t get vaccinated, for example. But you’d want to consciously make this decision. Ideally for strategic reasons.

Tip #3: Watch Your Supply Chains

A quick caution: you want to stay alert to the possibility your supply chains break or get stuck as the economy restarts.

CPA firms, for example, buy lots of technology products. So tons of hardware and software.

And one of the things we’ve noticed? You can’t quickly buy computers right now. (The order wait time runs months.)

And then the bigger point: Other stuff you and we need? We may experience the same supply chain problems.

Even things like retailers changing hours or consolidating outlets can really change the way we all need to operate going forward.

Tip #4: An Awkward Comment About Quality

So something internal to be aware of… and gosh this is awkward…

Quality problems  with both services and products seems to be growing. That’s based on largely anecdotal evidence. (Which, yes, you should suspect…)

But working from home, burdened by restrictions, struggling through supply chain glitches? Yeah, this sort of stuff seems to push down product and service quality.

Probably customers and clients will just need to accept this. At least for a little while.

But you and I need to work diligently to prepare customers or clients for quality reductions. And then work diligently to return to earlier quality standards.

Example: An area where professional service firms have unfortunately reduced quality? Turn-around times. Many of us have struggled mightily to deliver in our usual timeframes. We need to get better, soon as we can. And we need to keep customers and clients informed in meantime.

Tip #5: Plan for Possible Labor Shortages

You would think workers are widely available. Nearly a third of small businesses appear to have closed according to Opportunity Insights’ Track the Recovery website.

The ten million small businesses who possibly closed presumably employed workers who should now need employment.

But one reads news reports that suggest regional labor shortages are stalling small businesses reopening or are pausing growth.

Example: Prior to the pandemic, we were often able to advertise a job opening online and get dozens of applicants within a few hours. The last time we did this, however? Four applications.

Tip #6: Keep Eye Out for Inflation

Former Treasury Secretary and Harvard Economist Lawrence Summers warns significant inflation is underway.

Whether Secretary Summers is right or wrong? Who knows. (I would bet he is, in case you’re interested.) But maybe the actionable point is, we want to consider the possibility that inflation unlike anything we’ve recently seen may become a “thing” over the next few years.

You and I therefore don’t want to be in a situation where we lock in flat or even just stable prices for customers but then need to buy production inputs that continually increase due to inflation.

Tip #7: Consider Sustainable Growth

A final caution: In many business categories (for example, food, accommodation, some brick and mortar retailing) firms got really beat up by the pandemic.

Overall, small business revenues declined by about 30 percent according to Opportunity Insights.

If you’re in the group that got beat up, you need to assess if you have enough working capital on your balance sheet to resume normal operations.

You may need to secure new funding. Or start slow and re-build your working capital by reinvesting profits.

Tip: If you were right-sized in terms of working capital before the pandemic, in the post-pandemic economy, you’ll probably need to have that same working capital to operate comfortably.

Two Final Comments about Post-pandemic Economy

The pandemic is over many places in the U.S. That’s really good news!

But that means for many small businesses, a big new challenge appears. Restarting operations and returning to a normal.

The post The Post-Pandemic Economy and Your Small Business appeared first on Evergreen Small Business.

I want to talk about this research. Because while you might think Covid-19 scientific research a strange topic for a small business blog? It’s really not.

What researchers Alex Washburne, Justin Silverman, Jose Lourenco and Nathaniel Hupert have done? They’ve identified a rule of thumb that suggests when Covid-19 cases peak and then decline.

That should help you plan. But let’s talk about the research first.

The Natural Epidemic Endpoint

If you like science, you want to read the paper (see link at end of this post). The math gets pretty dense. But the charts the paper includes? Many readers will find them understandable—and extremely useful.

And what they show? Through the time period the scientists examined, the Covid-19 epidemic in an area peaked when the fatalities hit the grim milestone of one in a thousand.

For example, when the United States Covid-19 fatalities rose to 330,000—that’s the one in a thousand threshold—these scientists’ work suggests the epidemic probably peaked.

Two notes about this. First, if you look at any of the graphs that plot Covid-19 cases in the US, cases did peak at one fatality per thousand.

Second, the researchers’ work is not them simply “looking into the rearview mirror.”

This weird coincidence. I happened to exchange emails with Alex Washburne over Christmas 2020. And he shared then that their research suggested Covid-19 cases were peaking or had already peaked in many areas.

In comparison, at that time, other scientists like Michael Osterholm of the Center for Infectious Disease Research and Policy, were suggesting the opposite. (From Osterholm’s podcast at same time, “terrible trajectory continues!…)

The Actionable Planning Insight

You want to read the paper probably. And pay attention to the charts since those are easiest for nonscientists to process.

But here’s the planning insight you can glean from this research.

While covid-19 cases peaking and then collapsing doesn’t mean everything instantly gets better?

That peak and collapse signal the point at which you need to plan how to return to normal operations.

You won’t know the exact when.

For that, you need to wait until state and local public health officials come to the same conclusion and “unlock” your state or county.

You may also need customers, clients, and employees to emerge from their hibernation.

Finally, uncertainty still exists as the world moves forward.

But at the point cases peak and then collapse? You want to be getting ready.

And this last comment? In many areas, as hinted above, Covid-19 cases may have already peaked and collapsed.

Other Resources

A current draft of the research paper from Washburne, Silverman, Lourenco and Hupert appears here: Analysis and visualization of epidemics on the timescale of burden: derivation and application of Epidemic Resistance Lines (ERLs) to COVID-19 outbreaks in the US

Silverman, Hupert and Washburne’s earlier paper that spotted way more Covid-19 infections were occurring than case statistics suggested appears here and is interesting: Using influenza surveillance networks to estimate state-specific prevalence of SARS-CoV-2 in the United States. (This paper was widely covered in the press.)

The post The Covid-19 Epidemic Endpoint: New Research Gives Hope appeared first on Evergreen Small Business.

Call us crazy. But we love the way they help entrepreneurs reduce payroll taxes (thereby making it easier to grow a business). And the way they create W-2 wages (which successful small businesses need to get a Section 199A deduction).

But the time of Covid-19 throws a monkey wrench into the gears. Why? Well, usually, you can easily make an S corporation election. Even a late one. But now? Yeah, now that doesn’t really seem to work.

Accordingly, this blog post explains the rules for making S elections. And then it discusses how late elections worked in the past and why the “old way” probably doesn’t work well anymore. Finally, it ends with an approach we think you can still use to make timely or late S elections in this era of Covid-19.

Note: This blog post doesn’t explain at a granular level how you save money with an S election. But you can poke around this blog and get lots of information. A good place to start your research? Million Dollar S Corporation Mistake.

Eligibility for S Corporation Tax Treatment

The S corporation rules work like this. An eligible entity (so usually either a corporation or a limited liability company) can make an election to allocate the entity’s income and deductions to its owners—and thereby make them pay the income taxes.

A couple of important points though. First—and people miss this sometimes—you need an eligible entity in existence at the point you want to make the S election and at the point you want to make the S election effective.

Example: Two business owners, Adam and Ben, want to elect S status. Both operate as limited liability companies. Adam formed his LLC on January 1, 2020 while Ben formed his on December 1, 2020. In early 2021, both entrepreneurs decide to make an S election. The earliest effective date Adam can use? January 1, 2020. For Ben? December 1, 2020.

A second point: Only eligible entities may make the election. The rules get a little complicated for firms operating in weird situations. But the usual eligibility rules, provided by Section 1361 of the Internal Revenue Service, highlight the main qualifications:

• No more than 100 shareholders (in general–but families count as one shareholder usually).
• No nonresident aliens for shareholders (so all owners need to be U.S. citizens, permanent residents, and other taxpayers that are really close to these things).
• A single class of stock (so all shareholders and LLC members get shares of income and deductions and of distributions proportionate with their ownership percentage).

Electing S Corporation Tax Treatment

If an eligible entity wants to make an S election? Well, thankfully it’s pretty easy.

In most cases, the corporation or LLC files a fairly simple three-page form, the 2553, which identifies the entity, specifies the effective date desired for the election, and then includes signatures from all the shareholders.

And then the other thing to note: Timing rules exist. Specifically, a 2553 election can be filed in the tax year before the date the entity wants the election effective.

Example: Adam decides he wants to start operating as an S corporation in 2021. He can file the 2553 anytime during the preceding tax year, which is calendar year 2020.

And a firm can also make an S election by filing after the year starts. Specifically, by the 15^th day of the third month. That works, too.

Example: Ben wants an LLC he formed on December 1, 2020 to operate as an S corporation starting on January 1, 2021. He can file his 2553 on or before March 15, 2021. (Note that he can’t file his election before December 1, 2020.)

The Late S Corporation Election Exception

Okay, so here’s something else you want to know if you’re thinking about all this. And believe it or not,  lots of tax accountants don’t know this.

You can file your S election late. Really late. Embarrassingly late.

That “15^th day of the third month” rule? Ignore that.

What you don’t want to ignore, however? The IRS’s current rules for making a late S election (currently published in Revenue Procedure 2013-30.) You can get a good understandable overview here at the IRS website: Late Election Relief.

The two main things to know about late elections no matter what? First, you need to follow the revenue procedure for making the late S corporation election. (Mostly that means you need to justify your bungle of the timing and then flag the election as being a “LATE ELECTION FILED PURSUANT TO REV. PROC. 2013-30.”)

Second, you need to have reported your income consistent with the S corporation accounting rules. And the “consistent with the S corporation accounting” thing? What that boils down to, in many cases, is you paying shareholder-employees payroll during the year you want to elect S corporation tax treatment for.

Example: Charles had an LLC for all of 2020 and wants to elect S corporation tax treatment for 2020. It’s January of 2021, however. So nearly a year late. He may be able to make a late election. But he practically needs to have paid himself as a shareholder-employee during 2020.

And then there’s the one other thing to consider. The Covid-19 impact on S elections. Which is really the reason I’m even writing this blog post.

But first a quick digression…

The Late S Election Statement

To make a late S corporation election, your 2553 needs to include a statement on page 1 that says:

The corporation intended to be classified as an S corporation as of the date entered on line E of Form 2553. The corporation failed/fails to qualify as an S corporation on the effective date entered on line E of Form 2553 solely because Form 2553 wasn’t filed by the due date. The corporation has reasonable cause for its failure to timely file Form 2553 and has acted diligently to correct the mistake upon discovery of its failure to timely file Form 2553. Form 2553 is being/will be filed within 3 years and 75 days of the date entered on line E of Form 2553.

Your statement needs to describe the reasonable cause. Something like, “I thought my accountant was handling the election.” Or, “I called the IRS and misunderstood what the customer service person said.”

Finally, the corporation must, according to the Form 2553 instructions, confirm the following statements are true:

The corporation and all its shareholders reported their income consistent with S corporation status for the year the S corporation election should have been made, and for every subsequent tax year (if any), at least 6 months have elapsed since the date on which the corporation filed its tax return for the first year the corporation intended to be an S corporation and neither the corporation nor any of its shareholders was notified by the IRS of any problem regarding the S corporation status within 6 months of the date on which the Form 1120-S for the first year was timely filed.

By the way? That quoted language above comes directly from the 2553 form instructions.

Covid-19 Late S Corporation Elections

During the Covid-19 pandemic, the IRS has struggled to keep up with the paperwork.

And S elections filings (using that 2553 form)? They’ve gotten bogged down too.

An eligible entity filing a 2553 form in the usual manner—such as with a paper by-mail filings or by faxing in the 2553 form—can find the IRS takes, gosh, months? Or months and months?

Which means you can’t really know whether you’ll be able to timely file your first S corporation tax return by the deadline. Or even, if we want to pessimistic, by the extension deadline.

Example: Charles might think he can file a late S corporation election in the fall of 2020 using an effective date of January 1, 2020. But that election may not be processed by the March 15, 2021 deadline his 2020 S corporation tax return is due. If he does file his 1120S and the 2553 election hasn’t been processed, the 1120S filing fails.

Fortunately, you probably have a workaround. You can file the 2553 form that makes the S election with the 1120S tax return.

This approach of filing simultaneously the election and the first tax return should work whether you file by paper or electronically.

What the dual filing approach does? It prevents the IRS computers from trying to process your first 1120S S corporation tax return before the IRS has accepted your 2553 election.

Other Resources

S Corporations and the Section 199A Deduction

S Corporations, Section 199A, and the Optimal Shareholder-employee Salary

Downloadable Free LLC Formation Kits (which business owners can use to get an S Corporation setup)

Finally, step by step instructions for completing the 2553 Form for Washington state appear here, Steps for Electing Sub S Status for Washington LLCs and Corporations, but you can probably use these step-by-step instructions for any other state, too.

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