The Employee Retention Credit (ERC) is a program created in response to the COVID-19 pandemic and economic shutdown. It provides a refundable tax credit to businesses for maintaining payroll during 2020 and 2021.. The credit is available from March 13, 2020, through September 30, 2021, and in some cases through December 31, 2021.
The ERC is truly unique in that neither employees nor employers are required to repay it. It is a paymentin the form of employer credits, so it is money owed to businesses by the government!
Many of us accountants and tax professionals, the highly regarded, skilled professionals of this industry, are not able to fully comprehend the nuances and complexities of this credit. As a result, we are unable to adequately educate and assist our clients.
Businesses have received tens of thousands of dollars in ERC tax credits. This infusion of cash has made a world of difference for organizations struggling to keep employees on payroll and their doors open.
It’s not too late to make credit claims – even for 2020. It is imperative that we, as accountants and tax professionals , question our efforts in educating them on the new ERC enhancements. Did we assist them adequately in obtaining the ERC? Did we do our best to help them in obtaining the necessary documentation so that they could qualify for the ERC and pass muster with the IRS?
Let’s take a look at how we can do better. Following are some lesser known details about the ERC.
You can claim both! The limitation on only claiming one or the other was removed by the Congress in the Consolidated Appropriations Act (CAA) of 2021. PPP was spread out over 6 months and only accounted for 2.5 times your monthly payroll expenses. Naturally, this leaves a lot of unclaimed wages availablefor ERC.
The CAA has changed the qualifications so that a 20% reduction is now acceptable as well, for 2021 claims. But keep in mind, there are other ways to qualify for the ERC if your business has been suspended in part or entirely due to a government order. Keep reading to know more.
Even a partial suspension order issued by the government (federal, state, or local) against your client's business may qualify. A partial shutdown,limited capacity, shutdowns of their supply chain or vendors, government-mandated reduction in services offered, reduction in hours to accommodate sanitation, shutdown of some locations but not others, and shutdowns of some members of a business are all scenarios that may still qualify for the ERC.
Here, the key considerations are whether or not your client's business was able to continue its operation in a comparable manner as a result of the government-ordered partial (or full) suspension, and whether or not this resulted in a considerable impact on their business operations. Remember that, in addition to the reduction in gross receipts test, the partial or full suspension is an alternative way to qualify for the ERC.
Even if your client's business is deemed essential, an impact or change in their business may still qualify them. For example, they may still qualify if they were open but their vendors were closed or they couldn't go to their client's job site. Alternatively, if a portion of their business was considered non-essential and was affected by a government-ordered suspension, they may be eligible. The scenarios discussed in point no. 3 may also apply here.
Even if your client's business expanded during quarantine, they may still qualify, if their business was suspended completely or partially.
The Employee Retention Credit allows eligible small businesses to claim 50% of the first $10,000 in wages per employee for tax year 2020. This amounts to a maximum credit of $5,000 per worker, and you can apply for it now in 2022.
Eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee during the first three quarters of 2021. This works out to $21,000 per employee.
|Year||Max per employee||How the ERC is calculated|
|2020||up to $5,000 per employee||50% of first $10,000 in wages per employee|
|2021||up to $21,000 per employee||70% of first $10,000 in wages per employee (quarters 1, 2, 3)|
|total||up to $26,000 per employee|
The IRS defines certain health care expenses as part of an employee’s wages.
This is a refundable credit. In practice, this means that any credit overage that exceeds the taxpayer's tax liability is refunded to the taxpayer/business owner.
An organization that opened its doors during the pandemic is eligible for the credit. If you meet the following criteria, your startup may be eligible as well.
Furthermore, if you purchased an existing business that was in operation on or before February 15, 2020, you may or may not be considered a recovery startup business. It all comes down to your specific circumstances.
Charities are often excellent candidates for the ERC. It can also benefit churches, nonprofit hospitals, museums, and so on.
A company that was eligible for a PPP loan was initially ineligible for the ERC.
However, with the advent of the Consolidated Appropriations Act, 2021, a business that received a PPP loan may also apply for the ERC retroactively to 2020.
The catch here is that you cannot use the wages that qualify you for PPP loan forgiveness to calculate your ERC. Substantial proof is needed to showcase that you are not “double dipping” or using both programs to cover the same wages.
Assume you used your PPP funds to pay $50,000 in wages and are looking to be eligible for ERC. You would not be able to use those $50,000 of wages towards ERC.
The Employee Retention Credit (ERC) as a crucial tool has helped numerous businesses facing financial distress due to the COVID-19 pandemic. CPAs can play a crucial role in helping their clients. The clients with losses, reduction in business turnover, those affected by the shutdown and partial shutdowns, essential businesses, businesses who received claims, startup companies, and non-profits can all be eligible for such benefits.
However, ERC can be complex in its consequences and it is not a cup of tea for just everyone. In order to ensure that your clients stay on the winning side of the table after the beatings of the pandemic, you don’t just need any tax professionals but ERC specialists. Jason Dinesen, EA, LPA, and his team are the right blend of knowledge and experience that can get this help for you and your clients.
Book a 15 min no obligatory call with Jason to speak on how ERC Credit experts can help you. Jason and his team can help you to maximize ERC benefits.