During COVID, federal legislatures rallied to pass aid to businesses through the Coronavirus Aid, Relief and Economic Security (CARES) Act; since the beginning of the pandemic, the act has been revised to benefit businesses even more.
The CARES Act offered businesses the chance to receive the Paycheck Protection Program (PPP) or the Employee Retention Tax Credit (ERTC). Originally, it was an either-or situation, so the ERTC was often overlooked.
In December, the Consolidated Appropriations Act (CAA) was signed into law, causing significant changes to the ERTC allowing businesses to take advantage of both PPP and ERTC, retroactively.
With this revision, companies have the potential to receive a 50 or 70 percent payroll tax refund, said Certified Public Accountant (CPA) Jesse Broderick.
Broderick is the managing principal CPA of SumIt Credits, LLC based near Baton Rouge, Louisiana. Broderick has over 20 years of experience navigating the complicated world of taxes and specializes in government incentives like the ERTC.
“The goal of the stimulus package was to infuse cash into the economy and encourage spending and growth,” Broderick said. “What I have seen from companies that have benefited from this program, is they got PPP money, but it just wasn’t quite enough to get them back on their feet, or to get their employees back; this particular credit has helped fill the gap.”
Broderick said this tax credit is more of a refund of payroll taxes than an income tax credit. After qualifying for the ERTC, companies receive a check from the IRS which business-owners may spend how they wish.
“There are no stipulations on how you have to spend the money, it is cash” he said.
To qualify, companies had to be operating during 2019 through June 30, 2021, and — according to the SumIt Credits website — experienced either:
1. The full or partial suspension to operate a trade or business during any calendar quarter due to a governmental order,
2. A decline in gross receipts of 50 percent or more within a 2020 calendar quarter as compared to the same calendar quarter in 2019, or
3. A decline in gross receipts of 20 percent or more in Q1, Q2 or Q3 of 2021 as compared to the same calendar quarter in 2019.
A challenge with ERTC, is that larger employers are limited in which wages will qualify towards the ERTC refund, Broderick said. Larger companies have to meet a different set of criteria than smaller businesses do, he said.
“Companies that have over 500 employees can still take advantage of the ERTC but it’s a lot less lucrative because they can’t take the credit on wages paid to their employees unless, those employees were not working, and that is a real high threshold to hit unless, you have employees being paid to not work,” Broderick said.
Businesses with under 100 full-time employees in 2019,for 2020 qualified wages, or under 500 full-time employees in 2019, for 2021 qualified wages, do not have the same restrictions on wages paid to employees.
“As long as one of the qualifying criteria stated above is met, companies can capture the credit for all wages paid, whether employees were working or not,” he said.
The ERTC is geared toward small businesses, he said.
“From my perspective, for those small businesses that qualify, it has been very beneficial and very helpful in getting them back to pre-COVID pandemic financial security,” Broderick said.
The ERTC has also given small businesses the chance to reinvest.
“For others that maybe didn’t necessarily need the ERTC, maybe they could have survived and made it through the COVID pandemic without it, but if they still qualified because they met all the requirements and criteria of the program, it is an opportunity for growth; it is an opportunity to take that money and reinvest,” he said.
In addition, incentives like the ERCT level the taxation playing field, Broderick said.
“Every state is different, and they have their own tax regimes — they have property tax, sales tax, they have income tax — and when you total all those together you have a tax burden that companies and businesses are stuck with,” he said.
According to the Tax Foundation’s 2022 State Business Tax Climate Index, New Mexico falls 28 overall, with one being best and 50 the worst. This rank considers a state’s corporate, individual income, sales. property and unemployment insurance taxes.
Plus, Broderick said incentives like the ERTC allow businesses in states like New Mexico compete against higher ranked states like Texas, which is ranked 14, according to the Tax Foundation report.
“In order for other states to compete with Texas and their low tax regime they kind of need these incentives to help businesses get them in the door and say, ‘OK, look from a tax standpoint we are going to make you whole, or we are going to level the tax regime playing field.’ Once you get a company to your state, generally, they are going to stay there and continue to grow there,” he said.
Broderick and CPA Ron Saavedra with Axiom — a New Mexico-owned accounting firm — will be presenting more on the ERTC in a webinar for Sandoval Economic Alliance partners and economic-based business in the community February 10, 8-9 a.m. Email firstname.lastname@example.org, for more information.