Join Troy Taylor as he discusses how companies can find additional liquidity with the Employee Retention Credit (ERC) and who is eligible for this tax incentive.
[00:00:09] JL: Welcome to today's edition of DHG’s GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.
[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.
[00:00:58] ES: Welcome back to DHG’s GrowthCast. I’m broadcast time Eric Soderberg, filling in for your host, John Locke. My guest today is Troy Taylor, a Senior Manager in DHG's Tax Services Group. Troy has been with DHG for about a year and half, and has recently been focusing on the Employee Retention Credit that was part of the CARES Act which was passed back in March
Troy, welcome to GrowthCast. How are you doing today?
[00:01:21] TT: I’m doing great, Eric. Thanks for having me on.
[00:01:23] ES: Well, thanks for being here. I did mention the Employee Retention Credits right in the top there. That’s what we’re talking about today, so tell our listeners a little bit more about the specifics of this credit and what our listeners need to know.
[00:01:37] TT: Yeah, absolutely. The Employee Retention Credit, it’s meant to help employers that have been impacted by the COVID-19 pandemic, and it's a way for the government to get cash in the hands of these employers who are still paying their employees. They have continued operations and they’re at least covering the healthcare costs if their employees are furloughed. Those who qualify for the credit, it can be up to a $5,000 per employee. If you have a number of employees, then it can be a pretty significant credit.
[00:02:13] ES: One of the things we've covered quite a bit here in the last few months has been PPP loans. Tell me, how is the ERC different from the PPP program?
[00:02:24] TT: Yes. To start, if you qualified for the PPP loan, you can't take the retention credits. You can't take both of those. That’s one of the most important things about this. Secondly, employers that are claiming the retention credit, they have to show that they are an actual, an eligible employer. Not everyone just qualifies for this credit. They can qualify one of two ways. They can show that they have experienced at least a partial suspension of business operations that can be tied directly to a government order.
The second way to qualify would be to show a 50% decline in gross revenues from a quarter in 2020 compared with the same quarter in 2019. Now, the majority of clients that we’ve engaged with to help on the ERC credit, they have been qualifying through the business suspension criteria, not reduction in gross receipts criteria. I think most companies that have shown a 50% reduction in gross receipts, a lot of those will end up going out of business. We haven't seen very many of those luckily, but the major difference between the PPP loans and this credit is the fact that it is a credit. It’s not a loan. It’s a 50% credit per employee on up to $10,000 of qualified wages, so a $5,000 per employee.
[00:03:47] ES: A lot of the people who are qualifying for this are because they've been forced to shut down or have some sort of a reduction in business.
[00:03:55] TT: Yeah, and that’s the key. Some sort of reduction in business. It doesn’t have to be a complete shutdown. The IRS gives examples of restaurants where they have closed. They have been forced to close their indoor dining but they’re still allowed to do takeout and delivery service. That’s a partial suspension or a retail location that has to close its retail storefront but they can still operate online. You can still operate and still have revenue and make a profit. But the government orders have to specifically affect you in some way and suspend a portion of your operations.
[00:04:30] ES: Now that we've got a lot of states starting to open back up, is there any less of a demand for this credit?
[00:04:37] TT: We haven't seen less of a demand yet. It’s actually the opposite right now. A lot of employers are taking another – They’re revisiting the Employee Retention Credit. They’re just realizing now that they actually qualify. They could qualify. Everybody's been so focused on the PPP loan program. That’s kind of been the shiny object out there that everybody's been chasing after, and a lot of people looked at the retention credit when it first came out, and there was really no guidance. There was no understanding as to how you could qualify for the program. Well, the companies didn't think they would qualify.
What we’re seeing now, though, that a lot of employers are qualifying for the credit that we hadn't really anticipated originally, especially those that are deemed essential businesses like manufacturers, hospitals, car dealerships, companies that were allowed to maintain operations and continue operations but they are able to make that tie back to a government order that suspended a portion of their operations. Since you take this credit against your payroll taxes, the quarterly payroll Form 941 is due at the end of July, and so a lot of companies are taking a look at this credit again because there's lines on that new Form 941 that talk about it, and they’re realizing now, “Well, maybe I do qualify for this credit.”
Luckily, if they've already filed those Form 941s, you can still take the credit. You just take it on an amended Form 941. You’re not going to miss out on anything if you didn't take the credit originally. You can always amend. Then as so many states are actually realizing maybe they opened too early and they’re rolling back some of their reopenings in their faces, we could be seeing this quite a bit going forward. The program runs through the end of 2020. So if you qualify in the third quarter or the fourth quarter, depending on your facts and circumstances, you can still take the credit.
[00:06:30] ES: That's good news that if you do find yourself in that situation, you do have an opportunity to claim that credit later on in the year.
[00:06:40] TT: Yup, absolutely.
[00:06:42] ES: Since there are likely to be more people looking at this as you mentioned, what does the application process look like for this?
[00:06:52] TT: There is actually no application process. That’s another difference between the credit and the PPP loan process is there’s no application. If you are eligible for the credit and you have qualified wages, you can actually just start taking the credit against your next payroll deposit. You just short pay that deposit. Or if you're at the end of the quarter, then you would just put the credit on your Form 941. They’ve revamped that form and they’ve put a line on there where you can put the Employee Retention Credit. It’s a very simple process.
[00:07:22] ES: Okay. It’s a lot less complex than applying for PPP loans and whatnot.
[00:07:27] TT: Absolutely.
[00:07:29] ES: Excellent. What is DHG doing to help clients figure out what to do with this Employee Retention Credit?
[00:07:38] TT: We’re going about these engagements in a phased approach. Very similar to what you would see with an R&D tax credit study. We’re doing it two or three phases. The first phase is focused almost exclusively on employer eligibility, helping the company to document their story, how did COVID-19 affect their business, and then sifting through the various government orders because a lot of our clients are in multistate. They’ve got manufacturing facilities in five different states around the country, so you want to look at the government orders in each one of those states. Then we go through the ERC guidance that’s out there. There’s IRS FAQs that can help them make that decision on whether they’re an eligible employer.
Then we packaged all that documentation together in a memo that if someday the IRS comes calling and they get audit on this credit, they can produce that memo and it says, “Okay, these are the steps that we took. This is the information we had in order to determine that we were an eligible employer.” Then phase two. Once you get over that eligibility hump, phase two is digging into the actual credit calculation. It’s determining what wages are qualified wages, what are the health care expenses, because you can add the healthcare expenses to those qualified wages that then apply to the credit. It can be as simple as looking at furloughed employees and then just calculating those healthcare expenses if the company is still paying those.
Then you also want to dig deep into your other employee base that is still working, because we can do interviews with those employees to determine are they working. Is their job description the same pre-COVID versus post-COBIT? Are they working from home now? Maybe they used to work 40 hours a week, but now they’re only working 30 hours a week from home. If that's the case, there's ways that you can capture those extra hours that they're basically being paid for not working, and that can be applied to the credit. If needed, if an employer needs us to help them with the Form 941 and actually filing for the credit, then that would be a phase three.
[00:09:44] ES: Okay. Who’s the ideal candidate for this credit?
[00:09:49] TT: What we’re seeing basically is if you didn't receive the PPP loan and you have employees, there's a good chance you would qualify for a pretty good credit. If an employer hasn't dug into the details of the ERC yet or looked at it when it first came out and didn't feel good about it or didn't think they qualified, it would be worth looking at it again. Then one of the things we’re also doing with a lot of our clients is we’re reviewing their calculation of the credit too. We’re finding that they really only scratched the surface on those credits and they didn't maximize the amount that they were eligible for. We’re digging into that and helping them increase their credits and be able to maximize the credits that they can claim.
[00:10:36] ES: It really does sound like this could be a great opportunity for some of our listeners here to get some of this credit back on their tax returns.
[00:10:45] TT: It really has been. We’ve seen credits all away from a hundred thousand dollars to in the millions, so it can be a significant benefit for those who were not able to take a PPP loan.
[00:10:57] ES: Is there anything else that our listeners should know about or keep in mind just relating to the Employee Retention Credit?
[00:11:05] TT: Nothing specific. The credit can be pretty complex on eligibility rules and credit calculations, so what I would strongly advise the listeners is whoever your tax provider is, consult with them. At least get their ideas on your eligibility and the credit calculation, and maybe they can help you to really take advantage of this credit.
[00:11:27] ES: Well, that is excellent. Troy, that is just about the time that we have for today, so thank you so much for taking the time to be part of GrowthCast. Before we let you go, if someone is interested in having DHG help them with this or with anything else tax-related, how would they get in contact with you?
[00:11:48] TT: They can always reach out to me directly. My email is email@example.com. Or they could send an email to our tax email at taxCARES@dhg.com.
[00:12:00] ES: Well, that is excellent. Troy, thanks again for taking the time to be with us today and fill us in on the Employee Retention Credit.
[00:12:09] TT: My pleasure, Eric. Thank you.
End of Interview
[00:12:11] ES: You’ve listening to DHG GrowthCast with our guest, Troy Taylor, Senior Manager with DHG’s tax practice. We hope you’ve gained some insight about how the Employee Retention Credit may be able to help your business during the current economy. Thanks for joining us today, and we hope you’ll come back next week for more insight from industry thought leaders here on DHG GrowthCast.