By Carole C. Foos, CPA, OJM Group

The passage of the Consolidated Appropriations Act of 2021 has taken a good thing and made it better as it relates to the Employee Retention Credit (ERC).

The ERC was originally passed as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act to encourage employers, including medical practices, to retain employees through a shutdown and/or business downturn due to COVID-19. It was a way to reward employers for keeping employees off the unemployment rolls. Originally, it allowed an employer to take a refundable credit for 50% of eligible wages of up to $10,000 per employee. Wages paid from March 12, 2020, to December 31, 2020, were eligible.

Therefore, if a medical spa had to comply with a full or partial government shutdown due to COVID-19 or the gross receipts for any quarter in 2020 decreased 50% when compared to the same quarter in 2019, the business would qualify for the credit. The maximum credit per employee was $5,000 (50% of the $10,000 maximum).

Determining What You Can Claim

If either a shutdown or a decrease in gross receipts occurred, the medical spa owner or practice manager must first determine its average full time equivalent (FTE) employees for 2019 in order to determine qualifying wages. If the average number of employees is less than 100, all wages paid to employees (up to the $10,000 per employee max) qualify for the credit. If there were more than 100 employees, only those wages paid to employees for non-working periods—i.e., wages paid for employees not to work—are eligible.

For both the number of employees and the gross receipts tests, aggregation rules apply. Therefore, employers with greater than 50% common ownership will need to look at all companies in the group in determining if they have more than 100 employees or a greater than 50% revenue decline.

For 2020, a company with a 50% decline in gross receipts is eligible until the quarter after their receipts exceed 80% of the base level. For example, if Q2 2020 gross receipts are $48,000 compared to $100,000 in Q2 2019, the company qualified beginning in Q2 2020. If receipts are $81,000 (81% of $100,000) in Q3 2020, the company will still qualify in Q3, but will be ineligible in Q4 2020.

CAA to the Rescue

Under the CARES Act, the ERC could not be claimed if the business or medical practice received a Paycheck Protection Program (PPP) loan, even if the business had qualifying wages that were not paid for with PPP loan proceeds. This provision prevented many medical practices from claiming the ERC in 2020.

Along came the Consolidated Appropriations Act (CAA) of 2021, which was signed into law on December 27, 2020. The CAA lifted the PPP restriction so that a business, such as a medical spa, can claim the ERC even if it received a PPP loan. However, the business cannot double dip—wages paid that qualify for PPP forgiveness cannot be used in claiming the ERC. However, if the PPP is not forgiven, or if a portion is not forgiven, wages paid with unforgiven PPP proceeds can be used for the ERC.

The CAA also extended the period that eligible wages can be paid, so that wages paid from January 1, 2021, to June 30, 2021, qualify. Under the CAA, the credit is increased to 70% of wages paid, and wages per employee is increased from $10,000 total to $10,000 per quarter. Thus, in 2021, an employer could receive a credit of up to $14,000 per employee (70% of $20,000 wages). In addition, the gross receipts threshold changed from a 50% decline in a quarter to a 20% quarterly decline. The 100 FTE employee threshold also increased to 500 employees under the CAA.

For 2021, a business can use gross receipts for the current quarter compared to the corresponding quarter in 2019—Q1 2021 receipts must be less than 80% of Q1 2019 receipts—or it can compare the prior calendar quarter's receipts to the corresponding quarter of 2019. So, in Q1 2021, the business can choose to use Q4 2020 receipts compared to Q4 2019 receipts to qualify.

The CARES Act prevented an employer from claiming the ERC on wages paid to an employee that were greater than wages the employee would have received during an equivalent period in the 30 days prior to the shutdown or receipts decline. The CAA removed this provision, so bonuses or raises paid to employees are also eligible for the credit.

Qualified health plan expenses paid by the employer are eligible wages for the ERC—even those paid for furloughed employees. Generally, gross wages subject to Social Security tax plus allocable group health benefits are considered wages. Employer contributions to employee health savings account (HSA) plans cannot be included. In determining gross receipts, a business must include gross revenue from sales and services, less returns, refunds and allowances plus investment income.

In order to claim the credit, an employer can reduce their quarterly 941 deposit; this will generally be the fastest way to collect. An employer can also file Form 7200 to request an advance payment, although for 2021 it appears that employers with more than 500 FTE employees cannot take advantage of this option. Alternatively, a refund can be requested on Form 941.

Employers that did not claim the credit previously, particularly those who were not eligible due to PPP loan participation, can amend previous 941's to claim the credit.

Consult the Experts

It will be important for medical practices to consult with their advisors in determining how to best claim the credit vs. utilizing wages for PPP loan forgiveness or for paid sick leave credits. Calculations can be done with the assistance of tax advisors to determine what will be most advantageous for the practice.

Carole C. Foos, CPA, is a tax planning consultant and author of more than a dozen books for doctors, including Wealth Planning for the Modern Physician. She is a partner in the wealth management firm OJM Group, where she can be reached at 877.656.4362 or carole@ojmgroup.com.

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