The enhanced ERC

THE ENHANCED EMPLOYEE RETENTION CREDIT

Opportunities for employers

Enacted in December 2020, the Consolidated Appropriations Act 2021 (CAA) intends to provide COVID-19 relief to individuals, businesses, health care providers and more. The legislation offers nearly $1 trillion in relief. Coupled with the Coronavirus Aid, Relief and Economic Security (CARES) Act and other bills passed this year and last year, Congress ushered in nearly $5 trillion in stimulus and relief. There were several provisions introduced in the CAA that were designed to assist struggling businesses. One of the more significant opportunities included an enhancement of the employee retention credit (ERC) under the CARES Act. The CAA made key changes to the credit, impacting both businesses and employers. This article addresses these changes and highlights how employers can realize new savings.

Background

The ERC provides an incentive for employers impacted by the pandemic to retain their workforces. The focus of the ERC, as with the Paycheck Protection Program (PPP) loan, was to keep employees working. Designed differently than the PPP loans, the ERC offered payroll tax credits that could be realized immediately by employers when meeting various requirements (rather than through a government loan). While structured differently, the ERC and PPP loans shared a common goal of paying employees. The CARES legislation stipulated that an employer could not obtain a PPP loan and an ERC. However, a monumental change made by CAA now permits employers to claim the ERC even if they received a PPP loan — for both 2020 and 2021. Please note that while an employer can now obtain both a PPP loan and the

By Jim ERC, they cannot claim the ERC on the same wages that were Brandenburg, forgiven for PPP loan purposes. As a result, an employer might

CPA, MST seek to specify nonpayroll costs (up to the 40% threshold) as part of their PPP loan forgiveness application. The ability of an employer to claim the ERC in 2020 or 2021 is causing many employers to evaluate the ERC in 2021, reevaluate 2020 and possibly amend their 2020/2021 payroll filings. The ERC presents the following key hurdles for employers to navigate:

Eligible employer

An employer is entitled to the ERC if they have met one of two requirements: (1) They experienced a significant reduction in gross receipts (> 50% in 2020; but only > 20% in 2021) in a calendar quarter compared with 2019, OR (2) their business operations were fully or partially suspended by a government order imposing restrictions by curbing travel, commerce or group meetings because of the pandemic. The reduction in gross receipts test is mechanical and straightforward in its application. The CARES Act, however, did not clearly define provisions concerning the full or partial suspension of operations; but the

IRS did issue Notice 2021-20 to offer guidance and examples on when the ERC is or is not available.

Qualified wages for ERC

A key feature of the ERC is determining whether the employer is a small or large employer. For 2020, a small employer is one with 100 or fewer employees, while in 2021 a small employer is defined as 500 or fewer employees. Congress uses full-time employees as defined in Section 4980H established by the Affordable Care Act for this calculation. The distinction between a small and large employer is critical in determining the ERC: • Small employer: Wages paid to all employees are eligible for the ERC, whether the employee is working or not. • Large employer: Only wages paid to an employee for not working are entitled to the ERC. If the employee is working and being paid, for large employers, these wages are generally not eligible for the ERC.

Employee wages

After identifying which employee wages are entitled to the ERC, the wages are limited to $10,000 per employee per year in 2020; this is expanded to $10,000 per employee per quarter in 2021. Finally, the ERC credit factor is applied. The ERC factor is 50% in 2020 but rises to 70% in 2021. Thus, the maximum ERC is $5,000 per employee in 2020 ($10,000 x 50%) but jumps to $28,000 per employee in 2021 ($10,000 x 4 x 70%). It is important to note that employee wages for ERC purposes include “qualified health care plan costs.” The IRS specifies that the amount of qualified health plan expenses considered in determining the amount of qualified ERC wages “generally includes both the portion of the health care costs paid by the eligible employer and the portion of the

COMPARISON CHART: PPP AND ERC

WITH KEY TERMS FOR PPP LOANS AND EMPLOYEE RETENTION CREDIT (ERC) - UPDATED MARCH 29, 2021

FIRST DRAW PPP LOAN

SECOND DRAW 2020 EMPLOYEE RETENTION CREDIT

2021

Number of Employees Employee Count - How Determined Employee Count - When Determined Affiliations - Employee Count Affiliations Determination

Eligible Organizations

Gross Receipts Test Gross Receipts Measurement Period Gross Receipts Definition Gross Receipts - Affiliations Payroll - Application (l)

Payroll - Determination

Payroll - Affiliations Related Party Wages Eligible Wages (l) Available for Non-payroll Costs? Eligible Non-payroll Costs Limit on Non-payroll Costs Full or Partial Shutdown Required Effective Date of Provision

Ending Date of Provision Maximum Loan or Incentive

How Incentive Obtained

Forms to File

Government Oversight ≤ 500 Employees (a) Headcount - FT and PT

≤ 300 Employees (a) Headcount - FT and PT

Loan Application Date (Uncertain) Loan Application Date (Uncertain) Yes Yes

≤ 100 Employees (b) Average Monthly FTEs (d)

2019

Yes

≤ 500 Employee (c) Average Monthly FTEs (d)

2019

Yes

SBA guidelines (k)

Business Concerns, Sole Proprietors and Non-Profits (m) SBA guidelines (k)

Business Concerns, Sole Proprietors and Non-Profits (m) IRS guidelines (§§414, 51) Trade or Business, which can include a Non-Profit (n) IRS guidelines (§§414, 51) Trade or Business, which can include a Non-Profit (n)

No Gross Receipts Test ≥ 25% Reduction in G/R > 50% Reduction in G/R > 20% Reduction in G/R

N/A

N/A

By Quarters - 2020 vs. 2019 (h) SBA guidelines (k) By Quarters - 2020 vs. 2019 IRS guidelines (§448) By Quarters - 2021 vs. 2019 (e) IRS guidelines (§448)

N/A

2.5 Months - 2019 Payroll

Average Monthly Payroll SBA guidelines (k) IRS guidelines

IRS guidelines 2.5 Months - 2019 or 2020 Payroll (f) Qualified Wages and Health Insurance Qualified Wages and Health Insurance

Average Monthly Payroll By Quarters for G/R; Dates for Shutdown (g) By Quarters for G/R; Dates for Shutdown

Exclude wages of foreign affiliates Exclude wages of foreign affiliates Exclude wages of foreign affiliates Exclude wages of foreign affiliates Permitted Permitted Excluded Excluded

$100,000/employee annualized Cap $100,000/employee annualized Cap Yes Yes

Rent, Interest, Utilities, PPE costs (j) Rent, Interest, Utilities, PPE costs (j) 40% of total costs 40% of total costs $10,000 per year No

N/A

N/A $10,000 per quarter No

N/A

N/A

No

March 27, 2020

May 31, 2021 $10,000,000 No

December 27, 2020

May 31, 2021 $2,000,000 Yes (unless meet drop in G/R Test) Yes (unless meet drop in G/R Test) March 13, 2020 January 1, 2021

December 31, 2020 (i) December 31, 2021 (i)

No limit No limit

Apply with Bank (& SBA Review) Apply with Bank (& SBA Review) Tax Filing

Tax Filing No IRS Forms; but SBA Form 3508 Series No IRS Forms; but SBA Form 3508 Series Form 941 Series (941, 941X, 7200) Form 941 Series (941, 941X, 7200)

Yes - SBA Yes - SBA Yes - IRS Yes - IRS

Footnotes: (a) - Exceptions: (1) SBA size standards could result in higher employee count; (2) Employee count for NAICS Code 72 (Hospitality) is per location. (b) - 100 or less employees, all employee wages are qualified whether employee working or not. If over 100, then only eligible if paid for NOT WORKING. (c) - 500 or less employees, all employee wages are qualified whether employee working or not. If over 500, then only eligible if paid for NOT WORKING. (d) - FTEs determined with 30 hours per week as full time, or 130 hours per month. Determined under §4980H. (e) - Special rule for 2021. Option to also use most recent quarter instead of current quarter’s gross receipts in 2021. This special rule is elective. (f) - If under NAICS Code 72, then 3.5 months of salary can be used in PPP Loan Application. (g) - Quarterly wages included through quarter the gross receipts are > 80% of comparative quarter. (h) - As an alternative, the entire gross receipts for 2020 can be compared with 2019. Annual tax filing forms can be used. (i) - Eligible ERC wages paid through these dates are entitled to the ERC, but claims can be filed after these dates to obtain ERC (amended returns). (j) - Other costs include: Worker Protection – operating or capital expenditures; Property Damage - caused by vandalism not covered by insurance; Supplier Costs – essential to operations; Operation Expenses – business software, etc. (k) - See below detailed descriptions. (l) - Payroll costs and qualified wages include health insurance provided by the employer. See IRS Notice 2021-20. (m) - A Non-Profit organization for PPP loan purposes includes: a non-profit organization under Section 501(c)(3); veterans organization under §501(c)(19); Tribal business concern; housing cooperatives, small agricultural cooperative; eligible §501(c)(6) organization; destination marketing organization; or an eligible non-profit news organization. A new category added called “additional covered non-profit entities” applies to non-profits under Section 501(c) other than 501(c)(3); 501(c)(4); 501(c)(6); or 501(c)(19), and exempt under 501(a). (n) - For purposes of the ERC, a tax-exempt organization described in Section 501(c) that is exempt from tax under Section 501(a) is deemed to be engaged in a “trade or business” with respect to all operations of the organization.

cost paid by the employee with pre-tax salary reduction contributions.” It does not include amounts paid by employees with after-tax dollars.

ERC mechanics

Eligible employers do not need to wait until the end of the year to realize the ERC; instead, they can receive this credit during the year on their payroll tax filings. This would offset the payroll tax deposits. If the ERC exceeds other payroll tax deposits, this amount could be refunded. IRS Form 941, Form 941X and Form 7200 are used to claim the ERC.

Aggregation rules

The CARES Act adopted aggregation rules for the ERC that provide that all parties treated as a single employer under the tax law [Sections 52(a) or (b) or Sections 414(m) or (o)] are also treated as a single employer for ERC purposes. The significance of aggregating entities as a single employer is for purposes of addressing the following ERC provisions: • Determining whether the employer encountered a significant decline in gross receipts • Determining whether the employer had a trade or business operation that was fully or partially suspended due to government orders related to COVID-19

• Determining whether the employer averaged ≤ 100 full-time employees in 2020 (≤ 500 in 2021) • Determining the maximum credit amount per employee in 2020 or 2021

Key takeaways

The CAA enhancements to the ERC make this a tax incentive nearly every employer should evaluate. Whether an employer obtained a PPP loan or not, we encourage you to consider the ERC for 2020 and 2021. There are many rules to follow in claiming the ERC. Please reference the following helpful resources: • IRS Notice 2021-20 • IRS Notice 2021-23 • IRS Notice 2021-49 • IRS Rev Proc 2021-33 • A side-by-side comparison of the PPP loan and ERC for 2020 and 2021 (pg. 19)

James D. Brandenburg, CPA, MST, is a tax partner with Sikich LLP, Brookfield. Contact him at 262-754-9400 or jim.brandenbug@sikich.com.

memorials

Eugene M. Recknagel, CPA

(1923–2021) Eugene M. “Gene” Recknagel, CPA, of Waukesha, passed away on Wednesday, Aug. 11, at age 98. Recknagel graduated from Waukesha High School in 1941 and attended Carroll College in 1941 and 1942. He graduated from the University of Wisconsin–Madison in 1948 after serving three years in the U.S. Army as a combat engineer sergeant during World War II. His service time included two years in the Pacific, for which he received four Battle Stars for action on four islands and was awarded the Bronze Star during the Battle on Guam. Recknagel was a retired partner of Ernst and Young and an active member of the WICPA for many years, including serving as board president in 1964–1965 and as WICPA Educational Foundation president in 1974-1975. Throughout his career and retirement Recknagel and his wife of 62 years, Georgia, were longtime active members of Grace Evangelical Lutheran Church and members of Merrill Hills Country Club. Recknagel also belonged to many other professional and charitable organizations.

He is survived by three children, seven grandchildren, nine great-grandchildren, and other relatives and friends.

Richard A. Fosso, CPA (1946 – 2021) Richard A. Fosso, CPA, passed away Tuesday, May 4, at age 74. He earned his bachelor’s degree in accounting from UW–Whitewater. Fosso began his career as vice president of Fiberdome Inc., later sold real estate for First Weber Realty and also maintained a successful tax and accounting practice for 40 years. He served as treasurer of various churches and local organizations and also was president of the Lake Mills Chamber of Commerce. Fosso is survived by his wife, Janet; nine children; nine grandchildren; two sisters; and two nieces and a nephew. Bart Halderson, CPA (1971 – 2021) Bart Halderson, CPA, age 50, passed away in early July. He was a tax managing director for BDO USA LLP in Madison. Halderson completed his accounting degree at UW–Madison in 1993 and was licensed as a CPA in 1998 while working for Baker Tilly LLP. He also served on the WICPA Tax Conference Planning Committee during that time. Halderson joined Schenck SC as a tax manager in 2005 and remained in that position until 2014, when he joined BDO USA LLP as a senior tax manager. In November 2020, he was promoted to tax managing director of the firm. Ralph D. Johnson II, CPA (1957 – 2021) Ralph D. Johnson II, CPA, passed away on Saturday, June 5. Johnson was a dedicated family man who worked as a CPA from 1978 until retirement. He enjoyed the outdoors and was a lifelong visitor of America’s national and state parks. Many family memories were had on road trips to places such as Cumberland Gap, Boundary Waters, Great White Sand Dunes, Devil’s Lake, Mammoth Cave and many more. Johnson is survived by his high school sweetheart and beloved wife of 41 years, Paula; their four children and seven grandchildren; and his mother and four brothers. Richard J. Johnson, CPA (1950 – 2021) Richard J. Johnson, CPA, passed away Tuesday, May 11. He earned a bachelor’s degree in accounting from UW–Madison in 1972 and a master’s in accounting from the Ohio State University in 1973. Johnson’s career began as an auditor with Arthur Andersen & Co. in Milwaukee, where he attained manager status and also obtained his CPA license. For the final 34 years of his career, Johnson was CFO at Barker Pacific Group, a commercial real estate development company based in California. In 2020, he was named Outstanding Alumnus by the Department of Accounting and Information Systems at UW–Madison. Johnson is survived by a sister, two sons, three grandchildren and one great-grandson. Paul C. McDonald, CPA (1940 – 2021) Paul C. McDonald, CPA, age 80, died Friday, June 18, at his home in Lac Courte Oreilles. He was a lifetime member of the WICPA. McDonald graduated from Marquette University High School and then earned an accounting degree from Marquette University. He began his career with Arthur Anderson & Co. and worked there as a CPA for two years before moving on to become the CFO of Tews Lime & Cement Co. in Milwaukee, where he worked for 29 years before retiring in 1997. McDonald is survived by his wife of 46 years, Elna; three children; four grandchildren; and nieces and nephews. David L. Mortensen, CPA (1942 – 2021) David L. Mortensen, CPA, passed away on Friday, May 21, at age 78. He earned his accounting degree at UW–Whitewater and then went to work for Houghton Taplick & Co. in Madison and ultimately became a licensed CPA. He eventually became a partner in the firm and remained there for 35 years through numerous mergers and acquisitions, ultimately retiring from RSM McGladrey. Mortensen is survived by his wife of more than 57 years, Cheryl; three children and five grandchildren; and a niece and nephews. William J. Raftery, CPA (1931 – 2021) William J. Raftery, CPA, passed away on Saturday, June 19, at age 90. Raftery served in the U.S. Army Reserves and afterward attended and graduated from Loyola College of Maryland. He became a CPA and later added a JD from the University of Baltimore. He served as controller for the state of Missouri from 1973–1977 and then entered public accounting, advancing to partner at several firms and ultimately retiring as a partner with KPMG in 1988. In 1989, he became controller for the state of Wisconsin, serving in that post for 18 years before retiring. Raftery is survived by two children; one grandchild; a sister; and his longtime companion, Esther Chapman. Howard Charles (Bud) Volz, CPA (1929 – 2021) Howard Charles (Bud) Volz, CPA, passed away Tuesday, April 20. He was 92 years of age and a lifetime member of the WICPA, having joined the organization in 1959. Volz was president of Volz Genrich Co. S.C. in Milwaukee for 30 years prior to his retirement. He loved to travel and had enjoyed more than 90 ocean cruises during his lifetime. In retirement, he enjoyed walking, playing golf and playing blackjack. Volz is survived by his wife of 70 years, Margaret; two sons; five grandchildren; five great-grandchildren; and a sister.

If you are aware of a member obituary and believe it should be included in Memorials, please send a copy of the obituary or contact Marcia Tillett-Zinzow at mtzinzow@icloud.com.