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On March 27, 2020, the CARES Act, officially called the Coronavirus Aid, Relief, and Economic Security Act, was enacted. This legislation introduced two distinct programs aimed at supporting businesses in maintaining their workforce: the Payroll Protection Program (PPP) administered by the Small Business Administration and the Employee Retention Tax Credit (ERTC) administered by the Internal Revenue Service.

Under the PPP, funds are allocated based on 2.5 months of payroll expenses, and a minimum of 80% of the funds must be utilized for payroll costs to be eligible for loan forgiveness. Importantly, the PPP funds are not considered taxable revenue, and businesses can still claim deductions for the payroll costs covered by the program.

On the other hand, the ERTC offers tax credits, or refunds, based on a percentage of payroll expenses for each qualifying quarter. Specific rules govern the eligibility criteria on a quarterly basis, and there are limitations on the maximum amount that can be claimed for each employee.

Originally, under the CARES Act, businesses had to choose between applying for the Payroll Protection Program (PPP) or claiming Employee Retention Tax Credit (ERTC) credits, as both options could not be utilized simultaneously.

For most businesses, the PPP was considered more advantageous compared to ERTC due to various reasons that won’t be elaborated upon here. Consequently, the majority of businesses with fewer than 500 employees opted for forgivable PPP loans.

However, on March 11, 2021, the American Rescue Plan Act of 2021 was enacted, introducing significant modifications and expansions to existing stimulus programs. Notable changes relevant to business owners included:

1. Businesses that obtained and received PPP funds could now also claim ERTC credits.
2. Retroactive ERTC credits could be claimed by businesses that met the eligibility requirements in 2020.
3. ERTC credits were extended until September 30, 2021, with reduced qualification criteria.
4. The maximum amount of qualifying wages per employee increased from $10,000 for the entire year 2020 to $10,000 per quarter for the first three quarters of 2021.
5. The refundable credit amount rose from 50% of qualifying wages in 2020 to 70% in 2021.

In summary, the answer is “Yes.” You can claim ERTC even if you have received PPP funds.

Unlike the Payroll Protection Program, which involves a formal application process administered by the Small Business Administration, claiming the Employee Retention Tax Credits (ERTC) does not require a separate application procedure.

The process for claiming the ERTC tax credit is similar to any other tax credit. You assert your eligibility to the IRS by including the credit on the appropriate tax form. Just as you claim a child tax credit on your Form 1040 Personal Income Tax Return, you claim the ERTC tax credit on your Form 941 Employer Quarterly Tax Filing.

To claim the ERTC for previous quarters, you need to file an amended form called the Form 941-X. This allows you to adjust your current quarter’s tax contribution and request a refund for any excess credits, which is highly likely in many cases.

One advantageous aspect of the ERTC is that since you can often estimate these credits in advance of disbursing payroll, you can file a Form 7200 to receive a cash advance. This way, you can obtain the funds before the end of the quarter, eliminating the need to wait until the quarter’s end to apply for the refund.

Before making this decision, it’s important to consider a few factors, even if your revenue appears to have returned to normal:

Firstly, even if your 2021 revenues have normalized, you may still qualify for retroactive credits based on your eligibility in 2020. This eligibility was determined by factors such as revenue decline from 2019 or business closures due to government mandates.

Secondly, when assessing revenue levels, it’s crucial to compare Q1 2021 to Q1 2019, particularly if 2019 marked a period of growth for your business. In such cases, your revenue levels from two years ago may be significantly lower than those in Q1 2020.

Lastly, if your Q4 2020 revenues were down by just 20% compared to Q4 2019, you may also be eligible for Q1 2021 credits. Few advisors are discussing a safe harbor provision, which means that many businesses qualify for $7,000 per employee in Q1 2021.

While it may seem too good to be true, the government aims to incentivize and reward businesses for maintaining employment and stimulating the economy’s recovery and growth.

The provision you are likely referring to is a part of the CARES Act, which allowed employers to defer the deposit and payment of their share of Social Security taxes. However, it’s important to note that Employee Retention Tax Credit (ERTC) credits operate differently.

ERTC credits are not deferrals; they are direct credits that offset the wages you have paid. These credits can be used to reduce future tax contributions or, if eligible, you can receive a refund check. The choice is yours.

Unlike deferrals, you are not required to repay these funds unless you fail to provide sufficient documentation during an audit. As long as you meet the necessary requirements and provide the necessary documentation, the ERTC credits are not expected to be repaid.

When it came to obtaining your PPP funds, your banker, CPA, or Financial Advisor likely provided valuable assistance since they were involved in securing an SBA-guaranteed loan. The bank received administrative fees from the SBA based on the PPP loans they issued, which motivated them to guide you through the program and ensure all necessary documentation was in order.

In contrast, the calculation for the ERTC was relatively straightforward compared to the PPP. With the PPP, it involved multiplying your average monthly payroll, including health insurance and state unemployment taxes, by 2.5.

Based on our discussions with bankers, they generally prefer not to get involved in matters related to your employment tax compliance. They consider it a potential liability and beyond the scope of their usual services.

Your tax accountant, whether a CPA or EA, typically focuses on preparing your Federal and State Income Tax Returns. However, when it comes to claiming ERTC credits, a different set of expertise is required. These credits are claimed against Employment Taxes on Form 941 and can involve cash advances through Form 7200.

The ERTC program is known for its complexity, and most tax accountants we’ve spoken with have emphasized the challenges of keeping up with the ever-evolving income tax code while also becoming experts in the ERTC program.

If your tax accountant is confident in determining your eligibility on a quarterly and yearly basis, calculating your credits, and preparing the necessary documentation for an IRS audit, then it may be appropriate to entrust them with handling these tasks.

However, if you would like an additional perspective or a second opinion, we are more than willing to provide our expertise and take a look at your situation.

Your bookkeeper likely has access to the necessary information required for accurately calculating your eligible ERTC claim. They should have your financial reports, payroll registers, and PPP loan forgiveness documents at their disposal.

However, the critical question is whether they have the time to dedicate to this complex task. It involves delving into the text of multiple legislations such as the American Rescue Plan Act of 2021, along with related laws like the CARES Act, Families First Act, Payroll & Healthcare Enhancement Act, PPP Payroll Flexibility Act, and the Consolidated Appropriations Act. They would need to read and comprehend IRS interpretations, FAQs, and cross-reference definitions with those provided by the Small Business Administration in their bulletins and IFRs.

Additionally, they would need sufficient time to ensure accuracy in determining eligibility, maximize computation, and create supporting documentation that can withstand an IRS audit of employer taxes.

While we have yet to come across a bookkeeper who can handle all these responsibilities while managing day-to-day bookkeeping tasks, if yours is capable, it is worth considering their offer. We are also available to provide a second opinion and review if needed.