This credit was part of the March 2020 COVID Relief bill, but folks had to choose between the credit or the PPP loan. However, the December 2020 Economic Aid Act changed that restriction so that folks who received a PPP loan may take the credit too, but the earnings submitted on the PPP Forgiveness Application are excluded from this credit calculation.
This credit is significant for the wine industry because you qualify if your operations were fully or partially suspended due to government orders. Thus every winery in California was shut down beginning March 17th, and some were shut down on March 15th. It is also available for businesses with a 50% revenue decrease, but please check the IRS website for the details on those rules.
Recent updates are at the end of the post.
Here are the IRS rules
This is how I calculate the potential credit:
- Create a report showing the earnings for each employee on a row and each pay run in separate columns.
- Exclude any close relatives who are not owners (sorry, this is a thing … see the IRS rules)
- Calculate the total wage earnings for March 17 to December 31, 2020
- Map the dates the tasting room was fully open and not required to close or partially close. At this time we are counting outdoor only sales and limited indoor seating as partially closed. Calculate the total for the open dates (you might need to allocate days within a pay period, but it is likely that you were never fully open after March 17)
- Calculate the earnings for the PPP covered period – this is the period you will include on your Forgiveness Application**
- Take the total from Step #2 and subtract Steps #3 and #4
- For each employee that earned over $10,000 calculate $5,000
- For each employee that earned under $10,000 calculate half of their earnings
- The total of Steps #7 and #8 is your total credit
- Contact your payroll service and request an amended 941. This will need to be broken up for each quarter, but they can calculate that. Your payroll service with charge a fee for the amended forms, but it is well worth the aggravation.
- The earnings may include certain health plan costs, but I have found that most full time employees exceed the $10,000 limit. Go ahead and include it if needed.
- Spouses are not on the list of “excluded relatives”. The owner has to own at least 50% of the business to have relatives excluded. This means that minority owners’ relatives are not excluded. And if, say 3 family members own an equal share of the business, then no one owns at least 50% so no family members are excluded.
- In 2021, the credit is $7,000 max per employee, per quarter. (yes, per quarter!)
- You might want to submit the maximum 40% of other expenses on your PPP Forgivingness application so that your payroll earnings are higher, BUT if you have a loan over $150k, this will likely create a lot more paperwork. If your loan is under $150k, the application is supposed to be a simple one-page submittal (but I haven’t seen this yet)
- For 2021, you could apply to have the credit reduce your 941 payments, but I think this will cause a lot of extra time and effort, because you have to request it for each payrun. If you miss one payrun you will need to submit an amended 941 anyway, so might as well just plan on it.
- The activity that was shut down had to have accounted for at least 10% of your total revenue. So even if you were able to pivot to online sales or continue your winemaking operations, if you sold me than 10% through the tasting room, then your entire payroll may be used towards this credit. Most of you were able to keep your key employees and your winery crew, and that is why this credit is adding up t a lot of money.
- If the covered period on your PPP Forgiveness Application included more wages than you needed, the wages that are excluded are only the wages needed to match the loan amount. So the maximum exclusion due to the PPP Loan is the amount of the PPP Loan itself.
- Remember that on the PPP FA, you had to reduce the wages paid to high salary folks. That limit does not apply to the ERC. However, you can only claim $10,000 of wages per employee, and those folks likely earned much more than that.
- For 2020, you will need to submit an amended 941 for each quarter. You cannot combine quarters.
- Some CPAs have interpreted the rules such that on your 2020 Income Tax Return, you need to count the credit AS IF you had received it. The ERC is a reduction of your payroll taxes, and you will receive a check from the IRS for having over-paid your payroll taxes.
- Many of these “rules” only apply to businesses with less than 500 employees.