Navigating Employee Retention Tax Credit | Jamie O’Kane
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Navigating Employee Retention Tax Credit | Jamie O'Kane
5 things to know about the credits businesses are overlooking
Our completely informal polling of tax professionals indicates that small businesses are overlooking this pandemic payroll tax credit that could give them on average $50,000-$75,000 in cash to move towards their goals. I know it sounds like a gimmick, but y'all know we don't roll like that. One of Jamie's very favorite things is helping business owners grow and thrive.
The ERC Eligibility Estimator is available below.
Are you interested in claiming the ERC? We're happy to help you! To access our Employee Retention Credit Analysis & Filing Services, please visit:
Jamie O'Kane: $37,500 to put towards your business. I don't know about you, but I would take the free money and pay the tax on it.
Introduction: I'm Jamie O'Kane, CPA, small business advance tax planning, and compliance extraordinaire. This is the Abundant Beans Podcast, the podcast that takes my love for learning what makes people tick while digging into the good, bad, and ugly of small business ownership. We strive to give you the insight that only those in the trenches of being and working with entrepreneurs can provide.
Jamie O'Kane: Hey, everyone. This is Jamie, Abundant Beans Tax and Accounting Podcast. We're doing a little bit of a different episode this week. It's a solo episode, they call them so you get to just hear me talk to you all and myself in my headphones.
I really wanted to talk about the Employee Retention Credits for our US-based listeners, especially our veterinary and dental listeners. The Employee Retention Credit is a credit that we believe many business owners are overlooking due to some intersection with their PPP loan. I wanted to talk about that. This week is just going to be a shorter episode obviously but I wanted to make sure that I was putting the information out there for you because we really believe that most business owners that are qualified for this are maybe leaving $50,000 to $75,000 on the table.
I, completely and formally anecdotally, pulled some tax professionals and some tax groups that I'm in. The numbers that they're seeing in Employee Retention Credits for their clients it's astronomical. I want to make sure because that's what we do here, putting money back in business owners' pockets, that I talk about. If you're not US-based, thank you for tuning in. You're welcome to hang out with us. I also have some slides that I'll be presenting. Obviously, my listeners can't. If you're just listening, you won't see these, but you can hop over to YouTube and look at the slides. Nothing groundbreaking. I'm probably just going to go over most of the info.
The big thing we do have for you is a downloadable just free spreadsheet. You can put some information in and see if you may qualify for the Employee Retention Credits and how much you might qualify for. Again, this is just something that's not being talked about enough for business owners and I just want to make sure that we're putting that information out there. Without further ado, I'm going to do this real quick. I'm recording this on a Sunday so there might be people and things and cats running around just so you know. The usual, we keep it real authentic around here. Me talking to me, so this will be fun as usual. Not my favorite thing, but here we go.
What is the Employee Retention Credits? Again, I do have some slides. If you can hop over to YouTube look at these, hit those downloadables, I'm going to highly recommend you do that. Otherwise, I'm going to go over them. The Employee Retention Credit is a refundable payroll tax credit for eligible businesses. There's two tests. This credit is good for 2020 and 2021. I'll go over the credit amounts in a minute. There's two tests. The one that we think people are really missing out on is the first one.
The first one is you had to have your business fully or partially suspended in operations during the year or the quarter, so these tests are done quarterly to see if you qualify, due to orders from an appropriate governmental authority. What does that mean? It means that if you have a business that had reduced capacity, reduced hours you could work, reduced number of patients you could see in a day due to governmental orders around the pandemic, you may qualify for this credit, you might be eligible. It's a payroll tax credit, so it's a refundable credit.
We have clients sitting on $80,000 to $150,000 in credits that they're waiting for from the IRS. This is the big one, especially for veterinary and dental clients. We know many of you were shut down because you weren't social businesses for at least a little while. You also had reduced capacity. You couldn't see as many patients, you couldn't have too many people in your hospitals, or in your clinics, or in your practices. That's the one we think most people are missing out on because for two reasons. One, they don't meet test. Two, so these are or tests. You have to have one of these things. The second test is a reduction, a significant decline in gross receipts over the same quarter in 2019.
For 2020, that's a reduction of 50%. That's a large reduction. A lot of our clients didn't have a 50% gross receipts. Some of them even made more income in 2020 than they made in 2019. For 2021, it's a 20% reduction of gross receipts. You only have to have made about that 80% of 2019. 2021 is the year where we get most of the credits. There's a large credit amount per quarter. We just want to make sure that if any of those make sense to you, maybe take a minute, hit the downloadable, see if you might be eligible in any of these credits.
These tests, again, are applied each quarter. Let's say you weren't shut down in Q2 of 2020, but you were shut down in Q2 of 2021, or you had reduced capacity. It's a quarter by quarter, so you may qualify one quarter and not qualify the next quarter. That's okay, you don't have to qualify in every quarter to receive some of these credits. I think that's an important thing to know. How much are the credits? For 2020, there's a maximum available credit of 50% [chuckles] of up to $10,000 of eligible wages for each qualified employee for the entire year.
What does that mean? I love how they do these. 50% of up to this amount. It's always like this. Why can't they just say $5,000 per employee? Of course, if you have clients that don't make $10,000, you don't get the $5,000, but it's up to $5,000 per employee for 2020. This is the big one. For 2021, there's a maximum available credit of 70% of up to $10,000 of eligible wages per quarter. Let's do the math. 7,000 times 4 is $28,000 in credits per employee. That's bonkers. Do you have a ton of employees? Do you think maybe we could qualify? This is nuts. Why are we not doing these? I'll tell you why. Just a second. That might be my next slide. No, it's not.
How do we claim the credits? Let's talk about that real quick and then we'll talk about why nobody's talking about these. We claim the credits on the 941 filings. Those are payroll tax filings that are quarterly filed. If you've already filed those, totally fine. We just amend them, and then we mail them, and then we wait for the IRS to refund your money. Do we all know that the IRS is totally backed up right now and it might take a little while? We do, but it's cash coming to you. We promise. I work with some payroll companies, I've been doing a ton of these, and they're still waiting on some of them but some people have got them.
We have a couple of clients also waiting right now, but the IRS is working on processing these right now. They said that they've put some things in process to make this happen. That is how we do the filings. Here's the big reason that this was missed. With the original creation of these credits with the CARES Act way back in 2021, our first set of pandemic legislation, if you've got a PPP loan, you couldn't take these credits. Many businesses, because that's all that was talked about, rushed to go get a PPP loan, and then they did not qualify for these credits.
Here's what changed. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 enacted in December of 2020 and the American Rescue Plan Act of 2021 expanded the eligibility of the credits to also PPP loan recipients. That means if you missed out on these credits because you had a PPP loan or you didn't know anything about these credits, you can still apply for them retroactively. We just can't use the same wages. If you use the same wages, if you already applied for your PPP loan forgiveness, we have to take that out, the wages you used on that amount to not apply to the employer retention credit.
If you have not applied for your PPP loan forgiveness and you think you might want to double-check and see if you can get these credits or not, I highly recommend it. There's some strategy we can do with PPP loan one and PPP loan two to maximize your credits and your forgiveness. If you've already applied, it's already been approved, there's not much we can do with it. We have seen people apply for the PPP loan forgiveness. The easiest way to do that was to just give them 100% payroll. Unfortunately, we can't go back and change that, so that's a missed out credit for a lot of businesses.
This is why I want to talk about it. People are missing out on these credits, they're not understanding the intersection with PPP loans, and we need to look at these especially for our service-based in-person businesses. Our dentists, our veterinarians, coffee shops are one of the big ones that are looking at these. Restaurants, reduced capacity due to governmental orders of any type. If you can work from home, doesn't count. You can't see patients from home. You can't do takeout from home. We take the takeout to home, but you can't do that. If you were in any of those businesses that had governmental orders, you have to look at these.
Also if you know you had a reduction in gross receipts, you need to look at these. Again, I promise this is going to be fast so I'm going to wrap up here. I do want to talk about everybody's always like, "Is it taxable?" The big question around PPP loans is do we get to deduct the expenses or is the forgiveness taxable? For the Employee Retention Credit, the total credits are a reduction of wage expense. A lot of people will be like, "That means it's taxable." Realistic so one-half dozen of another. Let's talk about what that means dollar-wise. I did an example because I think it's important to talk about how much dollars we're getting back in our pocket even if it's a reduction of expenses.
Let's say you received an Employee Retention Credit of $50,000, and your effective tax rate is 25%. That means that you would probably pay just simply because we know flip tax isn't a thing, $12,500 in taxes. That leaves you $ 37500 to put towards your business. I don't know about you, but I would take the free money and pay the tax on it. I recommend you do too. I think that might be it. Oh, so what businesses do we think are missing out? I already talked about this, but our in-person or product industries that had partial or fully reduced operations or capacities. Dentistry, veterinary, non-essential medical, we had a lot of non-essential medical that was put on pause in the middle of the pandemic.
Our home health companies, we have some of those we're looking at ERC for. Restaurants, bakeries. Anything that's in-person services that was shut down and not deemed essential, or had reduced capacity. Again, less chairs, less people, less hours, more social distancing required, therefore you had to put your appointments further apart. It's a reduction in capacity or a reduction in your operations. Think about if your business had that, there was no way around it because you can't see patients from home. Think about that, and think about maybe looking into the ERC.
The other people that are missing out are the businesses that took PPP loans. That's the big one. Those retroactive laws done at the beginning of this year and the end of last year, us tax people have been bonkers, but we're all [chuckles] right now because tax season's finally over, looking at this for a lot of our clients. I want to make sure that you are too. You're making sure that you're looking at it for you. Also, the big one here is businesses that didn't qualify for the second PPP loan due to the gross receipts test. You had to have a 25% reduction over any quarters in 2020, over the year 2020, over 2019.
We had a lot of businesses that didn't qualify for the second loan, so the next thing we did was make sure that they could get ERC or make sure that that made sense for them. For 2021, the reduction in gross receipts is much lower than for 2020, and the credit's much higher. Please, please, please, please, again, the reason I'm doing this episode and talking to myself and feeling extremely awkward is I want to get this info to you guys. The Employee Retention Credits are tons of money probably being left on the table from businesses. Again, tax professionals I've talked to, the average credits that they've helped their clients file for is $50,000 to $75,000.
Would that have a big impact on your business? It would have a big impact on my business, but I can work from home. [chuckles] I do work from home, you guys know this. What are your next steps? The next steps are determine if your business is eligible for the ERC. That's all you're going to do. You got to determine if your business is eligible for the ERC. I'd like to say this is super simple, it's not. However, I did create a spreadsheet for y'all. It's super-simplified, there's a bajillion other what if, thens, what have yous in the law but it's super simple, download it, check it out, see if you might be eligible.
The next thing is to calculate credits. That's the second tab on the spreadsheet I gave you. Again, super-simplified. I could go down to a rabbit hole and create the most ridiculous spreadsheet for you, but I'm not going to do that because that would be rude. Calculate your credits. See if you can get any dollars. It'd be amazing. File the proper reports to claim the credits. Those 941s, the amended 941s, and then amend any additional required filings. If you go back and get credits in 2020, and you've already filed your 2020 tax returns, we will have to amend those because we have to apply those credits to the year that they belong to.
The fifth thing you can do after all of that is wait for the IRS to write you those checks. Patience, we're going to all need patience on this one, but they're coming. We have people receiving them. I'm watching the tax Twitter, I'm watching our groups, people are getting their checks, and it's going to be a huge impact on their business for 2021. That's it. Do you want help with these? We can help. Again, we partnered with a couple of payroll companies. We're going to have capacity to do these for a bunch of people because I want them done and I want them done correctly.
Two things, free tool. I created an ERC eligibility estimator tool for you guys. It's a spreadsheet. You can download it. It walks you through how to enter this stuff. Will also be a couple of emails that come after that, A, talk you through it and, B, to talk about a few more of these things that I've already talked about, but in text form. Then we have ERC analysis and filing services. Again, we've created some capacity for this because I want it done. I want this done for you guys. I want it done properly and we can help. We have a payroll company that has done a ton of things, like I said, and is ready to help us once we hit capacity. We want these done for you.
Those links will be down in the description boxes of YouTube, of your podcast, of everything. There's going to be a whole landing page that our lovely Laura already created for you with those services and the accessibility here, so abundantbeans.com, ERC. Again, we'll just drop everything in the description box for you. Thank you for sticking around for this solo episode, and me and all the ums and the awkwardness and talking to myself. Please, if you think that any of this might apply to you and your business, download the tool. It's free. I made it free for you. Of course, you're going to get some emails. Free is never free my friends.
Thank you so much for being with us today. We want to put more money in your pockets, we want to create business impact through cash dollars. However we can help you do that, the better we feel about our impact on small businesses. Have a great week and we will see you next week for another great interview, I think. I don't even know who's coming up. I think we might have Clint Latham coming up. We're talking about cyber security. Our favorite topic that likes to freak me out. Thank you much for listening and have a great day. Bye.