Employee Retention Tax Credit (ERTC) for Breweries and Other Small Businesses
By Patrick O'Reilly, Principal, Tax & Business Services
Could your brewery use some more cash these days? At the end of 2020, the federal COVID relief bill known as ‘The CARES Act’ was revised. As part of the revisions, the federal government made available the Employee Retention Tax Credit (ERTC) to more businesses – including those who received PPP loans.
What is the ERTC?
The employee retention tax credit is a refundable tax credit to reward businesses that maintained employees during the ongoing COVID-19 pandemic. There are two sets of parameters to calculate the available credit, one for 2020 and one for 2021, each outlined below.
How do I know if my business qualifies?
For 2020, most, if not all, breweries would qualify for the credit. The limit on the size of the business is 100 full time equivalent (FTE) employees. Beyond that the business only has to meet one of two criteria:
- If your business was fully or partially suspended or had to reduce business hours due to a government order (which applies to all restaurants and tasting rooms), or
- If your gross receipts in a calendar quarter resulted in a 50% or greater reduction when compared to the same calendar quarter in 2019.
For example in the 3rd quarter of 2019 you had $150,000 in sales but in Q3 of 2020 it was only $70,000, you would be eligible.
For 2021, the size limit is no more than 500 FTE’s and you must meet one of the following two requirements:
- If your business was fully or partially suspended or had to reduce business hours due to a government order, or
- If your gross receipts in a calendar quarter represent a 20% decline in gross receipts when compared to the same calendar quarter in 2019. For example, if Q3 2019 was $100k and Q3 2020 was only $65k, you would meet this requirement.
If I opened my brewery in 2020, can I qualify?
Most, if not all, breweries would qualify for the credit as a trade or business that was fully or partially suspended or had to reduce business hours due to a government order. If for some reason you do not meet this criteria, you may qualify based on a significant decline in gross receipts. For new businesses, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter for which they do not have 2019 figures because you were not yet in business.
For example, if you opened in Q1 2020 you can use that quarter as your baseline to compare the other quarters against in your calculations.
What changed in the law?
One of the key changes in the law was making the ERTC available to businesses even if they had a PPP loan. Under the previous version of the CARES Act, a business could only participate in one of the two programs, ERTC or PPP. Now you can apply for both, with some restrictions, as outlined below.
The other significant changes extended the provisions into 2021 and also increased the amount of credit available.
What does the credit offer?
Employers who qualify can claim the credit for 50% of qualified wages paid, up to $10,000 per employee for wages paid between March 13 and December 31, 2020. You read that right – this is a refundable credit of up to $5,000 per employee.
If the business had a PPP loan that was forgiven, or anticipated to be forgiven, the amounts of PPP funds used to pay payroll must be excluded from the ERTC calculation. That is, any PPP loan proceeds used to pay payroll should be excluded from ERTC calculations.
Employers who qualify, including PPP and PPP2 recipients, the new law expands the credit and allows them to claim a credit against 70% of qualified wages paid. The 2021 credit applies to the same $10,000 per employee but at 70%, the maximum per employee is at $7,000 per employee.
Furthermore, the credit was expanded to be allowable each quarter for the first two quarters of 2021. Therefore, the maximum per employee for 2021 increases to $14,000 per employee.
The same allocation of any PPP funds against eligible wages applies in 2021.
How do I calculate the credit?
If your business is eligible, take the total eligible wages paid to each employee and reduce them by any amounts paid using PPP loan proceeds. Any eligible wages remaining, up to $10,000 for each employee, would be available for the calculated 50% credit. The actual calculation is a bit more complicated because the credit must be claimed on a quarterly basis on an amended form 941.
Once eligibility has been determined, calculate the total wages paid to each employee in each of the first two quarters. Again, reduce those amounts for any payroll paid using PPP or PPP2 loan proceeds that are or are anticipated to be forgiven.
The resulting wages, up to $14,000 per quarter, are eligible for the 50% credit. That is $7,000 maximum for the first quarter and another $7,000 for the second quarter, per employee.
If you have applied for a PPP2 loan and are currently in the payment period of those funds, you can do some planning to maximize the amount of non-payroll expenses to use when applying for forgiveness of the second PPP loan. The goal is to maximize the amount of payroll that may be eligible for the ERTC for the first half of the 2021 year. Best practice is to consult your tax professional and your payroll provider before applying for an ERTC.