The Employee Retention Credit (ERC) continues to be a hot topic and provides potential for large cash refunds for those farming operations that can demonstrate the required decrease in gross receipts or other COVID-19 related shut-down parameters from Q2 2020 through Q3 2021. GreenStone has helped numerous customers to receive this credit, with some exceeding $100,000 in refunds!
The ERC was designed to help businesses that stayed open and kept their employees on the payroll during periods of COVID-19 related shutdowns. The rules surrounding the ERC changed numerous times since its initial release – at first you could not claim it if you also received a Payroll Protection Program (PPP) loan, then it was set to expire in 2020, next it was changed so PPP recipients could also receive the ERC, and so on. Remember how crazy the PPP rules were and how frustrating it was with all of its revisions? The ERC was similar. For that reason, the ERC may have fallen off your radar. Luckily, the IRS allows employers to claim the ERC by filing amended employment tax returns (941-Xs or 943-Xs).
More detailed information on the ERC can be found at: https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart.
How is eligibility determined? In order to be eligible in any given quarter, a farming operation must have paid nonrelated party employees, have paid payroll tax, and have experienced the following calendar quarter gross receipts reduction:
- A 50% reduction when comparing 2020 to 2019
- A 20% reduction when comparing 2021 to 2019
Note: The ERC is not allowed for H2A employees, wages paid to owners, or on self-employment income. Gross receipts are tested using aggregation rules similar to what was used for PPP2 loan eligibility. Additionally, if you are eligible for any quarter based on gross receipts reduction, you are automatically eligible for the following quarter as well.
How large can the credit be?
- For 2020: You may claim up to 50% of wages (up to $10,000) per employee paid after March 13, 2020 and before January 1, 2021 (maximum credit of $5,000 per employee for the year).
- For 2021: Beginning January 1, 2021 to September 30, 2021, you may claim up to 70% of wages for a credit of $7,000 per employee per quarter (maximum wages of $10,000 per employee per quarter).
The ERC may be claimed on qualified wages regardless if the employee worked or not. This includes health plan costs to provide and maintain a group health plan, but only to the extent that those amounts are excluded from employees’ gross income. Health plan costs may be counted as qualified wages regardless if the workers worked or did not perform services. For workers who did not work, health plan costs are subject to the wage cap per year per employee for the credit.
These wages are limited if amounts were used as part of any PPP forgiveness applications (i.e. a customer cannot “double dip” with these wages and receive an ERC for wages already used in the PPP forgiveness process).
What information do farming operations need to provide to determine eligibility and complete any necessary payroll form and income tax return amendments?
- Quarterly income statements for 2019, 2020, and 2021
- Income tax returns for 2020 and 2021
- All payroll reports for 2020 and 2021, including payroll registers and filed payroll tax forms
- Details of PPP loans and forgiveness applications and expenses utilized, if applicable
When does a 941/3-X need to be filed? According to the Form 941/3-X instructions, employers may correct overreported taxes on a previously filed Form 941/3 if the Form 941/3-X is filed within three years of the date Form 941/3 was filed or two years from the date you paid the tax reported on Form 941/3, whichever is later. This means customers could have up until January 31, 2024 (for the year ending December 31, 2020) or January 31, 2025 (for the year ending December 31, 2021) to file 941/3-Xs to claim the ERC. However, our recommendation is to do this sooner rather than later.
What else do you need to know? This credit is taxable in the year that any credit you receive relates to - so if your farming operation receives $20,000 in ERC refunds for 2021 and you have already filed your 2021 income tax returns, you will need to get those amended and recognize the refunds as a reduction to payroll expenses.
Buyer beware – what are we seeing in the marketplace? There are providers flooding the marketplace to assist you in securing these credits. Be incredibly careful of who you work with in the ERC process – not all providers have the same experience and knowledge. We have seen the following occurring:
- Certain providers are taking an extremely aggressive position by ignoring gross receipts reduction requirements or defining “nominal” impact due to COVID in a way that qualified nearly everyone.
- Certain providers are charging fees on a contingent basis as a percentage of the credit that the employer receives – fees as high as 30% of a credit.
- Certain providers are not explaining that if you qualify and receive this credit, it is taxable to and you need to recognize it in taxable income – which means there are tax filing impacts and likely a requirement to amend previously filed tax returns.
- Certain providers asking for strange information from employers – we have seen some asking for drivers’ licenses and copies of bank statements. No provider should need this information for purposes of filing for the ERC on your behalf.
Please be careful with whom you are working with and be conscious of the information you give them. Make sure you are collaborating with a provider that you trust and who has your best interests in mind. The IRS has a statute of limitations of 5 years to audit ERC’s and they have already communicated that it will be a point of emphasis for them. Make sure you are eligible if you proceed with the credit. Keep excellent documentation to support your eligibility and the credit you receive.
If you are interested in learning more about anything you read within this article, contact your CPA or a local GreenStone tax accountant. GreenStone offers a full array of accounting services for farmers and other business owners and are ready to assist you in accurately understanding what ERC benefit may be available to you!
*Written for the Michigan Farm News Dollars and Sense Column