EPISODE 48: DHG's John Chennoor discusses the recent changes to the Employee Retention Credit as a result of the recently passed Consolidated Appropriations Act, as well as subsequent opportunities for eligible employers to take advantage of the credit in 2021.
[00:00:09] JL: Welcome to today’s edition of DHG’s GrowthCast. I’m your host, John Locke. At DHG, our strength relies on 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.
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[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.
[00:00:57] JL: Joining us today is John Chennoor, a director in DHG’s Tax Services Group. John focuses on research and development tax consulting, specifically research and development credits and the employee retention credit, which we’re going to specifically discuss today. John, thanks for being with us today.
[00:01:17] JC: Thank you very much for having me. I’m happy to be here.
[00:01:21] JL: Let’s get right into it and start with some background regarding the recently passed Consolidated Appropriations Act, which has had some impact in changes to the employee retention credit. Will you tell us more about the Consolidated Appropriations Act and how that differs from the well-known CARES Act?
[00:01:41] JC: Absolutely. Generally speaking, with regards to the employee retention credit in the Consolidated Appropriations Act, I’m going to call it the COVID Relief Bill. The fundamental differences are, one, there has been an extension. The government has extended the employee retention credit for the first two quarters of 2021. In other words, it was supposed to end 2020. Now, they’ve extended for the first two quarters of 2021. The second is, there has been more inclusion. The government also expanded it to be more inclusive by updating the qualification criteria, so that more employers will qualify. These are the fundamental differences. We can get more into the details in more questions.
[00:02:42] JC: Sure. John, there are many people in our audience that I’m sure have heard the term employee retention credit, but there might be a few who don’t really understand the definition of that term. Can you share with our audience a little bit more about what is the employee retention credit?
[00:02:57] JC: Sure. The employee retention credit is a refundable tax credit against certain employment taxes, specifically it is equal to 50% of the qualified wages an eligible employer pays to employees for specific periods. Those specific periods are, in 2020, it started from March 13th until the end of the year of 2020. Then it was further extended into 2021 for the first two quarters of 2021. That’s a summary of this employee retention credit.
[00:03:45] JL: Great. That’s very helpful. Thank you. I want us to also touch base on some of the important changes to the employee retention credit that resulted from the passing of the Consolidated Appropriations Act, because there are some important updates and changes under the CARES Act. An employer qualifies for credit only if their offices were closed due to government order or they could prove that they experienced a decline in gross receipts from the same quarter in 2019. Has this change under the new Relief Bill?
[00:04:17] JC: Some changes, John, sure. Let me summarize it for you. There are two things, either or that an employer needs to satisfy to be able to call themselves an eligible employer. One is the government mandate test, specifically if your offices were closed or if your operations were actually suspended by the government, then you are an eligible employer. That is the same for both 2020 and for the first two quarters of 2021. The second item is, either you can hg have this government mandate or the second item is, gross receipts.
In 2020, the law says, if you experienced a 50% or more decline in gross receipts compared to your same quarter of 2019, well, you qualify. For 2020, for the gross receipts, which is applicable to the first two quarters, they have made it easier for you, I should say. They have expanded it to include more employers. What I mean to say specifically is, even if you experienced a 20% decline in your gross receipts in 2021 first quarter in comparison to your 2019, you qualify. To summarize that change in gross receipts. In 2020, it was 50% of reduction in gross receipts for you to qualify. In 2021, you only need to have just 20% of reduction in gross receipts for you to qualify for each quarter.
There are some other differences as well. Let me get to that. Which is the eligibility period. I talked about it before, but let me summarize it one more time so that we get it right. For 2020, the eligibility period is starting on March 13, 2020 until December 31, 2020. For 2021, it is the first two quarters of 2021. Okay? I have one more item that’s important here. The credit percentage for 2020, it was 50% off the qualified wages that was qualified as a credit. For 2021, they’ve increased that to 70% of the qualified wages applicable obviously for the first two quarters of 2021.
These are the three different big changes that has happened. The eligibility of the employer, the eligibility period and the credit percentage.
[00:07:31] JL: That’s really good information, John. Thanks for sharing that. I want to dive in briefly to the qualified wage limit that has also changed and I think it’s increased from 10,000 per employee to 10,000 per quarter per employee in 2021. Tell us more about the technical definition of qualified wage and how that is changed with the new Relief Bill.
[00:07:56] JC: Sure. This is a great question. I’m going to talk about three things. One is the qualified wage limit and then I’ll also talk about the qualified wages definition. And the three, I’ll talk about, what is the maximum potential for this credit because of this. Okay. Going to the first question; qualified wage limit. For 2020 and or the CARES Act, the qualified wage was limited to $10,000 per employee for the entire 2020. In 2021 under the COVID Relief Bill or CAA, it’s been further expanded to $10,000 per quarter per employee for the first two quarters. That would mean, there’s $20,000 for the first two quarters. What does that mean?
Item number two I want to talk about is the maximum potential credit. In 2020, the maximum potential credit was 50% of the $10,000, which is $5,000 for the entire 2020. Well, in 2021, it’s 70% of the $20,000 that would qualify across two quarters. That would be $14,000. Let me sum it up for you.
In 2020, you could get $5,000 and in 2021, you could get another $14,000 per employee. So that makes it $19,000 per employee. And if you have 100 employees, that would be $1.9 million. This adds up fairly quickly.
[00:09:42] JL: Yeah. That’s a significant number isn’t it to pay attention to.
[00:09:45] JC: Absolute. And you also ask about one additional thing, which is the definition for the qualified wages. In 2020, under the CARES Act, the definition of qualified wages was for employees with no more than 100 employees. In other words, if you are a small company under 100 employees. And if you are a qualified employer, this could apply to all employees. You don’t have to substantiate there’s been deception and people are not working, et cetera. Well, in 2021, they made it available for companies up to 500 employees.
Let me summarize that one more time. In 2021, if you were an employer with up to 500 employees, and if you’re a qualified employer, meaning your gross receipts have been impacted and it’s 80% of the gross receipts in 2019 first quarter. Well then, all of your 500 employees could potentially qualify. This is a very important aspect of it.
[00:11:01] JL: Yeah. That’s important to stay on top of and recognize the impact it can have on an organization. I’m sure there’s got to be also impact on the PPP loans as well on these employee retention credits. Can you tell us a little bit about that impact?
[00:11:16] JC: Sure. This is another great opportunity where the government is supporting the difficulties that we’re having. In 2020, under the CARES Act, the companies that received a loan under the PPP or Paycheck Protection Program, they were unable to claim the employee retention credit. Even if such loan was not forgiven. That was 2020. In 2021, government says, companies are retroactively back to the orders of the CARES Act date. Okay? Retroactively eligible to claim both an employee retention credit and a PPP loan. So you are allowed to double dip in other words.
However, there are some nuance to it. Any wages used for the forgiveness of the PPP loan are ineligible to also claim a CRC. I think that’s fair. But interestingly, there are special provisions included for the handling of prior quarters, cumulative effect resulting from this change. We are highly recommending that you consult your tax advisors to assess the next steps. In summary of this, PPP loan, if you have taken that, you still qualify for employee retention credit. That’s a great opportunity.
[00:12:48] JL: Yeah, that’s good news for a lot of people right now, considering here we are in a new year, looking at ways to save money and kid of restart this economy, so that’s really great news. Remember before we started recording, you were also telling me about DHG’s research and development team, which you are part of, and that there are some issues of overlap that are worth mentioning today. Can you tell us more about what is the overlap between R&D credits and the employee retention credit?
[00:13:18] JC: Thank you for asking this question. This is an interesting aspect for me. I’m an engineer so I like to put together some processes, and see and find efficiencies. Here it is. Let me summarize it for you. For the employee retention credit and for the R&D credit, we will require similar data. And there are lots of process touch points as well. We may be talking to the same people. What we thought about was, why don’t we come up with an approach where actually we can touch upon both the project at the same time. The data is similar, the process that involves talking to department heads, such as legal, engineering, tax, finance, et cetera. They are also similar, so why talk to them twice?
Then overlap between these two projects, when it’s handled as this one project, this will be one team, one process but two credits for you. That will make it much less invasive for you as a customer for you to conduct both the R&D tax credit and the employee retention credit study. This will be much more efficient.
[00:14:40] JL: That sounds like some great synergies to put into place and resulting in some wonderful outcomes. What a great model. I really appreciate you explaining that a little bit further. I also just want to thank you in general for your time today. This was extremely valuable information. We’re just so appreciative of your expertise and insights on these topics, John. Thanks for being with us.
[00:15:06] JC: Thank you, John. Thanks for being here today and thanks for having me.
End of Episode
[00:15:10] JL: Thank you for joining us today in our discussion on employee retention credits and the CARES Act with John Chennoor, a director in DHG’s Tax Services Group. We hope that you have a better understanding of ERCs and the new Consolidated Appropriations ACT recently enacted by Congress. I’m your host, John Locke, and I look forward to reconnecting with you soon on another edition of DHG GrowthCast.