ERC Update

  • Agribusiness
  • 1/4/2021
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We update our 2020 ERC example from our previous post and provide some more details on what is a gross receipt and a related party.

Some observant readers brought to my attention that our example on the Employee Retention Credit (ERC) for 2020 in our last blog post was incorrect.  We had indicated that the fourth quarter would not qualify since the revenues exceeded 80%.  However, the correct answer is that quarter still qualifies.  It would be the next quarter that would not qualify (IRS FAQ #39)

Plus, since the credit for 2020 is based on a maximum of $10,000 of wages per year during the quarters that qualify, there should be no reduction in the ERC since there is plenty of wages.  

Here is the updated example:

Janis is a Schedule F farmer and has four employees that each receive $10,000 per quarter in wages.  She received an PPP loan on June 1, 2020 in the amount of $55,000 of which $35,000 related to her employee’s wages.  Her gross receipts for each quarter compared to the same quarter in 2019 is as follows:

  • First – 105%
  • Second – 47%
  • Third – 73%
  • Fourth – 87%

Therefore, she will qualify for the ERC in the all but the 4th quarter.  The maximum wages allowed are $40,000 (4 employees at $10,000 per employee).  We would normally have to reduce these wages by the amount of wages used for PPP loan forgiveness (a minimum of $21,000 ($35,000 multiplied by 60%), but since there is more than $61,000 of wages paid in the last three quarters, there is no reduction in the ERC.  50% of this amount is $20,000 which can now be claimed on the 2020 Form 943 filed in January 2021.

Also, note that in the last two paragraphs dealing with the 2021 rules that 2020 should be 2021 (when you rollover into a new year it takes a few days to get used to the using 2021 instead of 2020).

What is Gross Receipts?

The IRS FAQ on the ERC indicates that gross receipts are all sales (after discounts and returns).  The company would not reduce these sales for any costs of goods sold and it also includes net gains from all asset sales including trading in farm equipment (you are allowed to reduce sales for any tax basis). 

We believe that farm hedging losses would be allowed to reduce gross receipts since those losses are reported as a negative gross income on Schedule F and this truly is the net amount of sales reported by the farmer.

What about PPP loan forgiveness.  This appears to technically not be a gross receipt since it not part of gross income.  We may need to get clarification from the IRS on this type of income since including it in some calculations may put farmers over the 80% number in the first two quarters of 2021 (if forgiveness occurs then).

What is a related Party?

IRS FAQ #59 lists the following as related parties to an employee of an employer:

  • A child or a descendant of a child;
  • A brother, sister, stepbrother, or stepsister;
  • The father or mother, or an ancestor of either;
  • A stepfather or stepmother;
  • A niece or nephew;
  • An aunt or uncle;
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

As you can see a spouse is specifically not listed and when you go the IRS Section cited, they are not listed there.  This may allow self-employed farmers to employ their spouse during the first two quarters of 2021 and qualify for a $14,000 ERC.  Congress may have intended for spouses not to qualify but this is not how they wrote the law.

This blog contains general information and does not constitute the rendering of legal, accounting, investment, tax, or other professional services. Consult with your advisors regarding the applicability of this content to your specific circumstances.

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