Uncle Sam's Cash Kitchen: The Mind-Blowing Opportunity in CARES 2.0 Almost No One is Talking About

As a finance writer, my job is to cut through the static and bring big-picture clarity to confusing situations. I'm interrupting 7 Ways to Take Your Accounting to the Next Level in 2021 to highlight an important "sleeper" provision buried in CARES Act 2.0.

There’s a new provision in CARES 2.0 that I can’t believe hasn’t received more attention. 

First let me review what I’m not talking about:

Not Talking About: PPP Round 2.0

This is a mind-blowing opportunity in itself, but has received an appropriate amount of attention. PPP Round 2 requires a 25% decrease in sales in any quarter of 2020 (compared to 2019).

In many cases it's not hard to find a 2020 quarter with a 25% decrease, even in an otherwise good year. If you meet that criteria, and can certify economic uncertainty in your business, simply reach out to your Round 1 banker for a second draw.

IMPORTANT SIDE NOTE: The door is also open to apply for PPP Round 1 if you didn't apply (or didn't qualify!) the first time. Ask your banker or CPA about this opportunity, particularly if you are in agriculture or recently acquired a business.

Not Talking About: Non-taxation of PPP Round 1 (and 2) forgiveness 

This is a huge benefit, but it doesn't need any attention because you'll automatically receive it when you apply for PPP forgiveness. CARES 2.0 put into law what Congress intended in the first place - no tax consequences for receiving PPP forgiveness.

Those two items are both huge benefits of CARES 2.0, but not the "sleeper" issue I have in mind.

Employee Retention Credit (ERC)

The topic today is our old friend from last spring - the Employee Retention Credit (ERC). 

Maybe you’re thinking, I’ve totally forgotten ERC. Could you refresh my memory?

Sure. To claim the ERC, your company needed to have experienced:

1. Partial or full shut down due to a government mandate, OR,
2. A 50% decline in revenue (the decline did not need to be COVID-related!) in any calendar quarter of 2020 (compared to 2019).

If either of those things happened (and you didn’t receive a PPP loan), you were eligible for a refundable credit of up to $5,000 per employee on your quarterly payroll tax forms. 

It was a good deal if you qualified, but often not quite as good as a PPP loan. Since you couldn't do both, most companies went with PPP.

Here is the major new development under CARES 2.0:

1. You can now claim the Employee Retention Credit even if you received a PPP loan.
2. You can claim the credit for 2020 retroactively (i.e. claim it now for wages paid in 2020).

Further, you can claim the ERC again in 2021. Unbelievably, the eligibility requirements are easier to meet in 2021, and the credit is substantially larger than 2020! 

Basically, as long as 2021 Q1 and Q2 revenue is at least 20% less than the same period in 2019, you are eligible for a credit of up to $7,000 per employee, per quarter! That is in addition to the $5,000 per employee you may be eligible for in 2020.

These changes have potential to create a major cash windfall for companies that experienced a sales dip or paid wages during a partial government shutdown.

Let's illustrate with two examples:

Scenario 1

Gordon’s Restaurant is having a great year. When local authorities shut down in-restaurant dining, Gordon’s pivoted to takeout and delivery. Sales have never been better, even though in-restaurant dining remains restricted.

Because Gordon’s Restaurant is subject to partial local shutdown restrictions, Gordon’s is eligible to claim a 50% credit on the first $10,000 in wages paid to each employee between March 13, 2020 and December 31, 2020. 

Gordon’s has 25 employees who all received at least $10,000 during this timeframe. That means the company is eligible for a $125,000 credit (25 employees x $10,000 x 50%). 

For a small restaurant, $125,000 is a huge deal! 

Of course, the definition of “partial shutdown” really gets into the technicality of the rules. However, if your company needs help, I recommend digging into this law at length. This detailed IRS Q&A guide with examples is a good starting point.

In the guide you'll find a wide range of ways to qualify for "partial shutdown" status. For example, even if you were not shut down, but a critical supplier was, there seems to be an opening to claim the credit. If you own two businesses, and one was partially shut down, the other appears to be eligible for shutdown status as well. Read the guide.

Scenario 2

Marshfield Metal Manufacturing has 30 employees, who are each paid $10,000 per quarter ($40,000 per year). They are an essential business and were never partially shut down. However, they did experience a big sales dip in Q2 2020.

Because of the 50% sales decline in Q2, wages paid in that quarter are eligible for a 50% refundable credit. For Marshfield Metal, that will mean a $150,000 cash infusion (30 employees x $10,000 x 50%). This is true even though 2020 revenue is higher overall than 2019.

Furthermore, management is projecting the following revenue totals for 2021 Q1 and Q2:

Both quarters are projected to be down more than 20% compared to 2019. If this turns out to be true, Marshfield Metal can claim a $210,000 credit (30 employees x $10,000 x 70%), and the same $210,000 credit again in Q2 2021!

For MMM, the 2020 and 2021 credits add up to a $570,000 windfall, all due to a simple new tweak in the law! This is on top of both PPP rounds, assuming they qualify for those as well.

A Few Key Points:

1. The Employee Retention Credit is tax law, not a program (like PPP). You do not need to certify economic hardship. You simply need to meet the conditions of the law. Cyclical or commodity-based industries (e.g. construction, farming, and mining) might benefit whether they've been impacted by COVID or not. In those industries (and really any industry!) it is possible to have an ERC-qualifying quarter even in an otherwise good year. This will be especially true for Q1 and Q2 2021.
2. Whether you claim the ERC due to partial shutdown status or an eligible decline in sales, you will want to leave a good trail of documentation. Do not simply claim the ERC without doing your homework.
3. You cannot claim the ERC on wages paid with PPP-forgiven funds. For 2020, this shouldn't be a problem in most cases. For 2021, though, if you receive a PPP Round 2 loan, and are eligible to receive the ERC credit in both Q1 and Q2, it may take significant gymnastics to maximize both opportunities.
4. Only companies with less than 100 employees are eligible for the full version of the ERC in 2020. In 2021, that limit rises to 500 employees.
5. The easiest way to claim the ERC for 2020 wages is on your company's Q4 Form 941. Unfortunately, as of January 18, 2021, that form has not been updated to permit this. It won't hurt to file Form 941 like you normally would, then go back and amend it later to claim the ERC.
6. HUGE Point: When it comes to determining whether your company might be eligible for the ERC, you're probably on your own. This provision is not getting a lot of press. Bankers are focused on PPP Round 2, and CPA firms are in the middle of busy season. Besides, neither your banker or CPA has ready access to quarterly sales information, or inside knowledge of how you might qualify for partial shutdown status.

These are strange times and the sandwiches in Uncle Sam’s Cash Kitchen seem to be bigger than ever. However, don’t expect the cash to jump into your account by itself. As a business owner, it’s up to you to do the legwork to see if you company qualifies.

You're reading Work-Life: Down-to-earth insight for business owners, accountants, and aspiring entrepreneurs. Subscribe here.

Do you own or manage a US-based $3M to $30M business? Look us up.