Employee Retention Credit Strategies

On Sunday December 27, President Trump signed the Coronabus bill which officially authorizes the additional stimulus targeted to small businesses and craft breweries. In our last blog post, we discussed the major items in the bill that impacted craft breweries. In this issue, I wanted to focus in on a couple of the strategies related to PPP 2.0 and the Employee Retention Credit (ERC) and how to effectively handle these programs, assuming they pertain to your business.

Refresher on PPP and ERC
Before diving in, here is a quick refresher on these two programs.

Paycheck Protection Program 2.0
PPP 2.0 is very similar to the first version of the PPP. This program provides a forgivable loan for 2.5x your average monthly payroll costs based on either the 2019 calendar year or the trailing 12 months from when you get the PPP 2.0. In certain cases where your NAICS codes is under the restaurant and hospitality code s.ection (starts with a 72) you can get a PPP loan with 3.5x average monthly payroll costs. The major qualification difference here is that you must show a decrease in revenue of 25% quarter over same quarter in the prior year.

Employee Retention Credit
The ERC is a refundable tax credit that you can obtain through your payroll tax returns. The 2020 iteration of the ERC provides a credit of 50% on wages up to $10,000 per employee if the business has been fully or partially shutdown due to government lockdowns or shows a decline of revenue of 50% quarter over same quarter in the prior year. The 2021 iteration provides a credit of 70% on wages of up to $10,000 per employee per quarter through June 30, 2021. The qualifications are the same except that the decline in revenue just needs to be 20%.
Prior to the latest bill being passed, you could not get the PPP and the ERC. However, the recent bill changed this to allow you to get both as long as you are not using the two programs concurrently. For example, you could use the PPP funds for payroll costs for January and February and then implement the ERC for March’s payroll. The other big change was that you can retroactively go back and apply the ERC in 2020 for the periods you did not use the PPP in.

So lets now talk about the strategies that need to be considered with regards to the PPP and ERC based on the new law.
Strategy 1: Retroactive Application of the ERC for 2020

The first thing you want your brewery to do is to apply the ERC retroactively for the periods in which you did not use the PPP to cover payroll funds. In order to determine this, we first need to determine how much in non-payroll costs we had that were allowable for PPP forgiveness purposes. With the PPP, you could use up to 40% of the PPP loan on non payroll items like rent, utilities, and mortgage interest. This becomes important as we want to free up potential payroll from being included in forgiveness. Assuming we have enough non payroll costs to get us to that 40% threshold, that means we then need to determine when our payroll costs meet the 60% threshold.

For example, lets say our PPP loan was for $100,000, which was received on May 1, 2020, and we had enough qualifying non-payroll costs to meet the 40% threshold. We would then want to identify which payroll period is the one that we finally get to $60,000 in payroll from the time of the PPP loan origination. If that was the June 30, 2020 payroll period, that means from July 1 to December 31, we can retroactively apply the ERC to those periods.

In order to do so, you will likely need to amend your Q3 941 payroll tax return and either amend the Q4 941 payroll tax return or at least notify your payroll company about wanting the ERC to be effective for Q4 so it can be processed when they file the Q4 941. I would strongly recommend reaching out to your payroll company if you are wanting to have retroactive application of the ERC for 2020.
Strategy 2: Optimization of the PPP and ERC in 2021
Now is time to think about optimization of the PPP and ERC in 2021. You will first want to make sure you qualify for PPP 2.0. We are finding a lot of breweries do not have a qualifying quarter with revenues down by 25%, so this might end up being moot, but if you do, then we need to decide if it makes sense to take the PPP 2.0 (it may not in some circumstances) and if so how do we optimize usage between the PPP 2.0 and ERC in 2021.
The first potential strategy here is to roll the dice and hope the PPP 2.0 funds will still be around come March/April. In this strategy, the plan would be to do the ERC for Q1 and Q2, apply for the PPP 2.0 so you get it starting in April and then elect the 24 week covered period and start using the PPP 2.0 funds in July (after the ERC expires). This allows you to maximize the usage of both, however, you risk trying this and PPP 2.0 runs out of money before you are able to get it, which would result in no PPP funds.

The second potential strategy is to use both the PPP and ERC during Q1 and Q2 with a scenario being you do the ERC for January and February, do PPP for March and April and then go back to ERC for May and June. This works especially well when your employee make at least $60,000 per year as they would only need two months of pay each quarter to meet the wage threshold for the ERC.

However, I imagine that most breweries and small businesses have average salaries that are less than $60,000 per employee which means we will have a potential trade-off situation where we would be using the PPP for a period of time and that would not allow us to fully maximize the ERC. This then brings up the question on whether the opportunity cost of forgoing the ERC for the PPP makes sense. If there is a concern that it will take a while to use up the PPP funds (at least over two months of time), then it may make sense to not do the PPP and just do the ERC for the two quarters.

We put together a spreadsheet you can use to help determine if you qualify for both the PPP and ERC and if so, does it make sense to do the PPP depending on how long it takes you to use up the PPP funds. Please see the link below for this spreadsheet tool you can use.

Note that if you want to do the ERC during any point in time during 2021, please notify your payroll company as soon as possible so you can start benefiting right away from the payroll tax credits and refunds you will receive.
If you have any questions on these two programs, please feel free to reach out to me at josh@lancecpa.com