Iowa employers may want to take a second look with their tax adviser at whether their business might qualify for the Employee Retention Tax Credit in 2021, says Terry Merfeld, a tax partner with Eide Bailly in Des Moines.

The tax credit provisions have changed substantially this year compared with last year’s rules, and some lower thresholds could enable qualifying businesses to claim as much as $28,000 in payroll tax credits per employee if they meet the criteria for all four quarters of 2021.

“It’s a much more significant size when you compare it to other types of employment-type credits that are out there,” Merfeld said. Some larger clients are looking at potentially between $500,000 and $600,000 in paid or owing payroll taxes they can put back in the bank, he said.

Last year, the two primary qualifications for receiving the credit were that a business must have been shut down by government order due to the pandemic and that the business must have experienced at least a 50% decline in sales. While a number of businesses were shut down by government order in Iowa last year, many found that they did not meet the 50% threshold, Merfeld said.

This year the revised threshold is a minimum 20% decline in sales, a number that Merfeld said is enabling many of his clients to take the credit for particular quarters this year that couldn’t take it last year. To the extent that employers have paid more in payroll taxes than the amount of the credit, they may actually get cash back from the refundable credit.

One of the most common questions that businesses have about the Employee Retention Credit: Is this money back going to be taxable to the company? The answer, unfortunately, is yes, Merfeld said. Any amount received from the credits must be subtracted to figure a net deduction. “So in effect, they’re going to pay more federal and state income taxes because of this.”

Regardless of that fact, most clients are taking the credit if they can, Merfeld said. The most significant caveat is that if a company takes out a Paycheck Protection Program loan, or uses other COVID-related credits — and uses that funding for payroll to keep people employed  then they can’t use the same payroll to qualify for the employee retention credit.

“In some situations, some companies would rather have the Paycheck Protection loan and some companies would rather have the credit,” he said. “I have found most of them would rather have the PPP loan than the tax credit if they’re given a choice.”