Employee Retention Credit

Over the last few years, the COVID-19 pandemic did not discriminate against the businesses it has affected. Whether large or small, businesses were forced to reduce their operations. In some cases, they had to shut down completely. Thankfully, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. The act implemented many relief packages to help American families and businesses. Some of the more well-known programs include the paycheck protection program (PPP) and economic injury disaster (EDIL) loans. However, there were tax credits created to help as well. One of those tax credits is the Employee Retention Credit (ERC).

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a fully refundable payroll tax credit. It was designed to encourage employers to keep employees on their payroll during the pandemic. The credit is for qualifying employee wages. Qualified wages include wages and some health expenses paid to employees during eligible periods. Small businesses, with less than 100 employees, can treat all wages paid to employees as qualified wages. However, larger businesses, with more than 100 full-time employees, can not treat all wages paid as qualified.

An employer can claim 50% of the first $10,000 in wages per employee that were paid in 2020. For 2021, they can claim 70% of the first $10,000 in wages per employee for quarters 1-3. In total, a small business can receive up to $26,000 in credit per eligible employee. The ERC is not an income tax credit and does not relate to a business’s profit or loss.

Who Qualifies for the Employee Retention Credit?

To qualify for the ERC, a business needs to meet certain criteria. A business must have had their operations partially or fully suspended due to the government orders regarding the COVID-19 pandemic. Or a business must have experienced a significant decline in gross receipts during the calendar year compared to the same periods in 2019.

Businesses can also qualify for the ERC even if they have received other CARES Act assistance, such as the PPP Loan. However, the credit cannot go towards wages that were claimed in the PPP Loan application.

A business must complete a multi-step process to receive the employee retention credit. This process includes determining if the business qualifies for the credit, as well as calculating qualified wages. The amended payroll tax returns need to be filed. It can be a lengthy and tedious process, but it does not have to be. Our team members are here to assist you!

Contributed by Elizabeth Partlow

Indirect Costs: Overhead vs G&A

As a government contractor, have you ever sat there and thought to yourself, ‘Gee it would be so much easier not having to worry about the allocation of all my business’ costs?’ Surely, you are not the only one. Being compliant with FAR can be time consuming, but it is important. First, identify if a cost is direct or indirect. An important question to ask is: Is the cost specific to only one cost objective? Cost objectives can include a contract, a task, or a contract line item. Direct costs are costs that are specific to one cost objective. Examples of direct costs are direct labor and material. These items are exclusive to specific cost objectives.

Indirect costs are not specific to a cost objective. These costs typically are split into 3 categories: Fringe, Overhead, and General and Administrative (G&A) costs. Fringe costs usually are the easiest to identify. They relate to employee costs, such as payroll taxes and compensated absences (sick and vacation time). People struggle the most with identifying overhead and G&A costs because they have similarities. So, what exactly are overhead and G&A costs?

Overhead Costs

Overhead costs directly relate to contracts but are not specific to one contract. People often refer to these costs as contract support. If a government contractor does not have any contracts, then they will also not have any overhead costs. Examples of overhead costs include:

• Travel costs
• Recruiting expenses for direct employees
• Training
• Conference fees (specific to contract support)

Labor can also be an overhead cost. An example of overhead labor is a meeting with project managers that is not specific to one contract.

General and Administrative (G&A) Costs

 General and Administrative expenses are the indirect costs that a business incurs to run its daily operations. These costs are not identifiable to a project, contract, or a product. This means that they exist even if a government contractor has no contracts. Examples of G&A costs include:

• Accounting services
• Marketing
• Office supplies
• Bid and proposal (B&P)

In some instances, employee labor is a G&A cost for a business. For example, employees who only perform administrative functions record their labor as G&A.

Identifying and properly classifying indirect costs is important as a government contractor. At times this can be a tricky task, but it does not have to be. If this is a challenging area for you, Cheryl Jefferson & Associates would love to assist you.

Originally written by Elizabeth A. Wells

Updated and additional content provided by Elizabeth Partlow

The New Lease Standard

The New FASB Lease Standard

Year-end finally feels like a distant memory, and you can breathe again. Do not get too comfortable though. As one door closes, another opens… the new lease standards. You remember hearing about the new lease information years ago. So why is it important now and does it even affect your business? These are just a few common questions many have about the new lease standard: ASC 842 – Leases.

Why Replace ASC 840?

ASC 840 is the guidance for lease accounting prior to ASC 842. It recognizes leases as either capital or operating. The major difference between ASC 840 and ASC 842 is how operating leases are recognized. Operating leases were reported in the footnotes of financial statements, not on the balance sheet. When the accounting scandals of the 2000s took place. It became apparent that the way operating leases were reported was not efficient. To ‘close the loophole’ the Financial Accounting Standards Board (FASB) began to develop a new lease standard.

FASB issued the new lease standard, ASC 842, in 2016. The purpose of ASC 842 is to ‘increase transparency and comparability’ by recognizing lease assets and lease liabilities on all leases – financing and operating. Short-term leases, less than 12 months, are the exception. It also enhances lease disclosure requirements. ASC 842 for public business entities took effect for fiscal years beginning after December 15, 2018. There have been delays for non-public business entities effective date due to the COVID-19 pandemic. The effective date is for fiscal years starting December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Adoption of the Lease Accounting Standard

With the deadline approaching quickly, it is important to start the implementation process. There are specific requirements that a lessee must complete to recognize financing and operating leases in accordance with ASC 842. Challenges may occur for businesses when implementing the new lease standard. According to FASB, many preparers are observing unanticipated costs and complexities. Other challenges businesses may face are:

• Determining if a contract is a lease or contains a lease
• Separating lease and non-lease components
• Lacking a qualified team to complete implementation
• Creating and/or revising processes and procedures

The implementation of ASC 842 is not only timely, but costly too. To some it may feel like an overwhelming task. At Cheryl Jefferson & Associates, we have the expertise you need to make the transition run smoothly.

Contributed by Elizabeth Partlow.