Do You Qualify? Is it worth it?
If you qualify, the tax benefits are generally very substantial. We are seeing small businesses qualify for anywhere from $50,000 – $500,000 in refundable tax credits. The government wants to give this money to deserving business owners during these difficult times. If you own or manage a business that has either been partially or completely shut down OR has had a substantial decline in revenue, you may be entitled to your fair share of tax credits.
Initially enacted under the CARES Act to encourage businesses to keep employees on their payroll, there have been substantial developments in favor of businesses. Under the CARES Act, businesses were not allowed to claim ERC if they had taken a Paycheck Protection Program (PPP) loan. However, substantial changes and expansions benefitting business were made with the subsequent enactment of the Consolidated Appropriates Act followed by additional guidance with IRS Notice 2021-20 just published on March 1, 2021.
Under the Coronavirus Aid, Relief, and Economic Security Act (CARE Act) from March 2020, businesses needed to meet one of the following requirements to qualify for credit:
- Had operations that were fully or partially suspended due to a COVID-19 government order.
- Had a decrease in gross receipts that were less than 50% of gross receipts in the same quarter of 2019 (e.g., a business with $100,000 gross receipts in the second quarter of 2019 and $49,000 gross receipts in the second quarter of 2020 would be eligible).
Previously, businesses that received a PPP loan were not eligible to claim the credit.
Under the Consolidated Appropriations Act (CAA) from December 2020, businesses with PPP loans are now eligible for the credit. Businesses are eligible for the credit if they meet one of the following:
- Suffered from operations that were fully or partially suspended due to a COVID-19 government order (NEW IRS guidance issued 3/1/2021!).
- Suffered from a decrease in gross receipts that were less than 80% of gross receipts in the same quarter of 2019 (e.g., a business with $100,000 gross receipts in any calendar quarter of 2019 and $79,000 gross receipts in quarter two of 2021 would be eligible). Need to include the 20% 2021 gross receipts reduction.
CARES Act: The credit was originally calculated based on 50% of qualified wages (including cost of health benefits) up to $10,000 per employee, annually for qualified wages paid after March 12, 2020 and before January 1, 2021. The total annual credit was capped at $5,000 per qualified employee ($10,000 qualified wages x 50%).
CAA: The credit is now calculated based on 70% of qualified wages (including cost of health benefits) up to $10,000 per employee, per quarter for qualified wages paid on or after January 1, 2021 and before December 31, 2021. The total annual credit is now capped at $14,000 per qualified employee ($10,000 qualified wages x 70% x two quarters). This has been expanded from July 1, 2021 to December 31, 2021.
ERCs are typically claimed on a quarterly federal tax return (Form 941) or special forms that allow you to claim the credits in advance. In the latter case, eligible employers will file Form 7200, Advance Payment of Employer Credits Due to COVID-19, with the IRS to request an advance refund. Note, in some cases, the credits would need to be claimed on amended returns.
These credits are valuable, and it is important that you maximize the amount of credits due to you. Even if you do not qualify based exclusively on the substantial decrease in gross receipts test, you may qualify under a partial or complete shutdown order. The rules can be very technical, and you will want to make sure to maximize your benefits while also minimizing your risk to audit. And in the event of an audit, we can help with IRS audit defense as well.
Complete this form for assistance with Employee Retention Credits.