With the end of the second quarter, clubs will be preparing Form 941 to claim the employee retention credit (ERC) for April, May, and June. The ERC has been one of the most valuable tax benefits for clubs since COVID-19 restricted indoor gatherings and forced clubs to adapt to modified operations. Most state and local governments have been lifting COVID-19 restrictions, leaving club management wondering how and if they still qualify for the ERC, especially in the quarter that restrictions are lifted.
Background on the Employee Retention Credit
Club management by now have become familiar with 2020’s version of the employee retention credit (ERC): a 50 percent credit against the first $10,000 in wages paid to eligible employees, with a total yearly benefit of $5,000. There were also limitations based on how many employees the club had prior to COVID-19.
2021’s version of ERC expanded the employer benefit. An increased 70 percent deduction against $10,000 in qualifying wages – per quarter – provides the potential for a maximum of $28,000 yearly, per employee. Qualifications for the credit were also expanded to increase the limitations related to the number of employees and decrease the experience in decline of gross receipts.
Many Clubs have qualified for the ERC in both 2020 and 2021 based on the stipulation that the operations are suspended, in part or in full, as a result of federal, state or local orders or regulations. The IRS defines this as experiencing at least a ten percent revenue or hour loss amounting to “more than nominal effect,” according to the IRS. Originally set to expire on June 30, 2021, the American Rescue Plan Act extended ERC until December 31, 2021.
This year to date, as most clubs have still been at least partially closed due to governmental orders, the ERC has been an effective way to maintain cash flow and payroll during the ‘off’ months. It can even be used when the amount of the credit exceeds payroll for the quarter, which then results in an almost immediate cash refund.
How to Claim the Employee Retention Credit Now
As of May 28, 2021 Governor Northam of Virginia lifted restrictions and all businesses are permitted to reopen. As of May 14, North Carolina eased most of its COVID-19 restrictions, followed by Maryland on May 15. By June 4, 2021 New Jersey had lifted all of its indoor gathering restrictions, and the Washington, D.C. region lifted most of its remaining restrictions on June 11, 2021. These are only a few examples of state that have lifted coronavirus restrictions.
Many club managers have been asking, “What now?” Qualifying for ERC can still be accomplished using one of two methods: either the government mandate, or a decline in gross receipts. With the lifting of restrictions in quarter two, the only options going forward for the third or fourth quarters of 2021is to show at least a 20 percent decline in gross receipts compared to the same quarter in 2019.
When government restrictions were lifted in the middle of the second quarter, it left many clubs qualifying under the suspended operations stipulation wondering how to apply the rules and whether they would still qualify. A club would still qualify to apply for the ERC for the entire quarter if it was an eligible employer at any point during the quarter, regardless of when government orders were lifted. However, clubs can only use the government order qualification on qualified wages up until restrictions are officially lifted. This means that the ERC can only be calculated on qualified wages paid through May 27, 2021 in Virginia’s case; or May 14 and May 15 in Maryland and North Carolina, respectively. Clubs in Washington, D.C. have the most latitude here as indoor gathering restrictions weren’t lifted until June 11, 2021. Qualified wages for ERC can’t be claimed past the date that restrictions are lifted.
Moving forward, clubs will need to prove the decline in gross receipts for the third and/or fourth quarters to qualify for ERC. When calculating the revenue reduction, clubs are instructed not to prorate revenue through the suspension date. Wages should be prorated so that only payroll applied to periods before restrictions are lifted are used to claim ERC for the second quarter. While it could be harder for clubs to qualify for the ERC that doesn’t mean that clubs shouldn’t carefully track revenue and compare it to 2019 levels.
Clubs that claim the ERC in any part of 2020 or 2021 should maintain records for at least four years. Acceptable records include those that demonstrate the club’s eligibility – like copies of governmental orders or financial records showing the decline in gross receipts – plus payroll records. Payroll records should denote qualified wages by employee and any qualified health plan expenses. Clubs should also maintain copies of Forms 941 used to claim the credit.
Already filed and didn’t include the ERC? In September 2020, the IRS re-issued an update Form 941X amending the quarterly payroll tax filing form. Generally, taxpayers may correct overreported taxes on a previously filed Form 941 if they file Form 941-X within three years of the date Form 941 was filed or two years from the date they paid the tax reported on Form 941, whichever is later.