Does your independent pharmacy qualify for the 2021 Employee Retention Tax Credit? Watch this video for more information. The tax credit is a continuation of the Consolidated Appropriations Act (CAA), which was signed into law to help businesses struggling under the COVID-19 pandemic. The American Rescue Plan Act expanded this credit further.
Scotty Sykes, CPA, CFP® discusses how pharmacies can approach obtaining this tax credit, which could save your pharmacy a lot of money—and foster pharmacy growth.
If you prefer to read this content, the video transcript is below.
Scotty Sykes: Hello, this is Scotty Sykes with Sykes & Company. Today, I’m going to be talking about the Employee Retention Tax Credit for pharmacies. And this is for 2021. We already have another video for 2020, because the rules are different for 2020 versus 2021. So this video here is regarding 2021 Employee Retention Tax Credit. Just a quick disclaimer, this is informational only. Please consult with your advisors on determining eligibility here and determining whether and how to file and claim this credit if you are eligible.
So the Employee Retention Tax Credit, again, this was in 2020 under the CARES Act. This was passed in the CARES Act. And then in the Consolidated Appropriations Act, at the very end of 2020, allowed pharmacies to go back and pretty much claim this credit, because originally if you had the PPP, you couldn’t get this credit. However, they changed that again under the Consolidated Appropriations Act at the end of last year and allowed pharmacies, if eligible, to go back and claim this credit for 2020.
Check out the other video to learn more about that, but for 2021, the American Rescue Plan Act expanded this credit even further. So it extended the Employee Retention Tax Credit for all of 2021, and certain small or startup businesses can also qualify here. So, that’s great news here, but this credit is very, can be very significant. So this is something you have to take a look at in your pharmacy on whether you’re going to qualify or not, but pharmacies can qualify. Even if you are an essential business, like a pharmacy, you can qualify here. So keep that in mind.
Now, there is not a lot of guidance whatsoever on this credit for 2020 or 2021. And again, they’re different credits essentially, but for 2020 and 2021, there’s two notices out there for 2021. It’s notice 2021-23. It’s about a hundred pages, and that’s going to be the one that is going to be able to lead you through determining your eligibility so on and so forth. But that’s really the only guidance out there. There are some FAQs on the IRS website as well, but those do not have authority, they’re more like safe harbors. So just something to keep in mind there.
But so what is the Employee Retention Tax Credit? This is a refundable tax credit against certain employment taxes equal to 70% of the qualified wages an employer pays to employees after 2020 and before 2022. So essentially, 2021. And each employee, for each employee, 70% of qualified wages up to $10,000 per quarter can be eligible. So that means a maximum credit amount per employee of $28,000 for 2021. So if you have 10 employees, for example, you qualify the whole year, and you’re paying over $40,000 in wages, you’re going to have $28,000 per person there of credit. So, this credit is again very substantial when we start running numbers here. And this is why you have to take a look, and see if this applies to your pharmacy.
What businesses qualify? You must carry on a trade or business in 2020 or 2021, and meet one of the following two criteria. You have to have a full or partial suspension of the operation of your trade or business, or a significant decline in gross receipts. Now, the option one there may be something pharmacies can look into for 2020. Again, I’m going to reference the 2020 video for that, but for 2021, it’s going to be safe to say that many pharmacies just are not going to qualify there being that you guys were required to be open essentially during this whole COVID. So for 2021, the focus shifts more on a significant decline in gross receipts. And so again, for 2020, pharmacies generally are not going to qualify under one and two for the 2020 rules. Although there are going to be some that do, so you have to take a look at that.
But for 2021, I think we’re going to have a few more qualify, because of the decline in gross receipts threshold has changed, and a decline in gross receipts for 2021, the quarterly gross receipts decline needs to be more than 20%. On there, it says revenue, it should be gross receipts. The gross receipts decline needs to be more than 20%. Gross receipts is going to be very similar to revenue, but there’s going to be a couple of adjustments in there as well, including PPP, if you did get PPP forgiveness there. So you’re going to compare your 2021 quarterly gross receipts, and compare that to the same quarter for 2019. If there’s more than a 20% drop, you may qualify. So that’s something to definitely take a look at in your pharmacy.
Now, there is a special rule for 2021. So you may use the gross receipts in the prior quarter versus the same quarter in 2019. So in this second quarter 2021, you can use second quarter 2021 versus second quarter, 2019, or you can use first quarter of 2021 versus first quarter of 2019. So you have two options there to see if you can qualify under the gross receipts rule for 2021. And there may be some pharmacies out there that have a 20% drop, and that 20% drop in gross receipts, there is no requirement that decline is due to COVID-19. There’s absolutely nothing that COVID-19 has anything to do with it, really. If you have a drop of 20%, you could qualify. You need to be consistent with how you’re determining your gross receipts, et cetera. So, you got to be careful there, but something to definitely consider.
Now affiliated groups and rules are used to determine revenue decline or gross receipts decline. So, if you have several pharmacies, and you’re an affiliated group or a controlled group, you need to know that. If you are, there are several tax implications from that, but there’s also implications here for the credit that you have to combine your group, and see if there’s a revenue or gross receipts decline there or not. If you have over 500 employees, there are limitations to consider as well.
Here’s just a quick example. So pharmacies got a significant decline of gross receipts. The pharmacy qualifies for two quarters. They have eight employees, our qualifying wages are on the left column or the left side there. The wage amount, which is 70% of the wage column is the credit amount. So you can see here, the pharmacy credit amount is going to be close to $70,000 here. And again, this is some serious money. This is reasons why you need to look at this. Now, some important considerations, the IRS is actually checking these manually. Their systems are down for this credit. So, they’re manually checking these. So, you definitely want to have your facts, circumstances and gross receipts well-documented that prove your eligibility. They have extended the audit statute of limitations for this credit. And so they’re going to be checking these I’m sure and auditing these. So you have to be careful here. Make sure you’re eligible.
I mentioned the affiliation roles. Those are the two notices you’ll see there. Notice 2021-20, and 2021-23. Really, between those notices and the FAQs on the IRS website, that’s all the information available on this credit, and what you need to know. So if you have questions, that’s going to be your best source of information. You’re going straight to the source there. Now, I mentioned there’s no clarification on PPP, including in gross receipts, if not forgiven. So, if you have not gotten that PPP forgiven yet, does that account for gross receipts and that calculation for your decline? And that’s not clear yet. So that’s an unknown. There’s no clarifications on owners qualifying. There’s two lines of thought that says, owners do qualify. There’s another line of thought that says, they don’t. So that is an unknown. You’re going to claim this by filing your payroll tax return Form 941, or you can get an advanced credit on Form 7200 if you are applying before your tax return due date for your 941.
Of course, you need to consider the impact of this credit for other relief provisions and tax credits. For example, last year, the PPP and the ERTC could not overlap. So you had to plan around that, just be careful that there’s other things that impact that use wages for credits and so on. So, you have to be careful not to overlap. Those are double dip, if you will. And lastly here, you need to watch out for people that are going to sell these credits. This is going to be more, you’re going to hear more and more and more about the ERTC, and you’re going to have more and more groups selling this that, oh yeah, you qualify, you qualify, everybody qualifies, just be careful there. There’s going to be a lot of people out there selling and charging these pretty large fees to get you this credit. So just be careful there.
And you can always reach out to Sykes, [email protected] to get our opinion, or any recommendations on someone who may be reputable. But that concludes the quick ERTC for 2021. Check those gross receipts. Talk to your advisor. See if you qualify. Some big money is on the table here for 2020 and 2021 potentially. So, this is definitely something to take a look at. If you have any questions, give us a shout [email protected] Thanks.