During the COVID-19 crisis, American businesses have done their part to keep our economy on track. Many companies kept employees on the payroll, even when they weren't able to do the jobs they were originally hired to do. Now, thanks to the Employee Retention Credit (ERC), these businesses can reap the benefits of keeping people gainfully employed. Recent tax law changes have created a significant opportunity for more businesses to claim the ERC than were originally included.
Just how many more businesses qualify?
Congress has significantly expanded the ERC meaning many more businesses will qualify in 2021 than in 2020. If you were affected by a governmental order (directly, or in some cases, indirectly) or had a decline in gross receipts (sales) – you may very well qualify.
So what’s the scoop?
With the passing of The Cares Act, the Consolidated Appropriations Act, and now, The Rescue Act, the ERC is a refundable tax credit that has quickly become one of the most lucrative tax credit opportunities for employers who have recently experienced tough times.
Key Considerations:
Timeframe to Capture: This credit is for employees you paid between March 13, 2020, and September 30, 2021. To determine if a business is eligible, we look at shutdown/shelter-in-place orders or corresponding calendar quarters' gross receipts during 2019 or the immediately preceding calendar quarter (in the case of 2021).
Expanded Examination Period: Typically, the IRS has up to 3 years from the date of filing to audit a claim. This period has been extended to 5 years for the ERC. The IRS will be keenly looking at this credit to ensure taxpayers follow the letter of the law.
Facts and Circumstances: The IRS has issued 40 example scenarios under which businesses would qualify (or not qualify) for the ERC – several of which have ‘fact-based tests’ attached. This means you will need documentation and analysis to prove-up your position.
No Double Dipping: A denial of double benefit exists between the ERC and various other incentives, including the R&D credit, where the same wages cannot be used to calculate both credits. This means you will need to optimize what credits you take based on factors such as the size of the credit and its usage (refundability/tax liability/planning).
Changes in PPP Rules: Previously, if you took a PPP loan and it was forgiven, you couldn’t take the ERC. This rule has changed! If the business received a PPP loan, it can claim the ERC with qualified wages NOT paid with proceeds from the forgiven portion of the loan.
No Profit, No Problem: Non-profits and chambers are eligible to take this payroll tax credit, and if you didn’t incur tax liability generally, the credit is refundable.
Commonly-Owned Businesses: Control groups apply with this credit, so you must look at all businesses with common ownership.
Startups Qualify, Too: Businesses started after February 15, 2020, with gross receipts under $1,000,000 can qualify for Q3 and Q4 in 2021.
Business Size Is Important: There are specific rules that apply to employers of more than 500 full-time employees.
Eligible Businesses:
For 2020: Any business that was partially or fully shut down due to government orders/mandates during 2020 OR any business that saw a 50% reduction in gross receipts for any one quarter in 2020 as compared with the same quarter in 2019.
But we don’t meet the gross receipts test and my business wasn’t shut down! Just because your business wasn’t directly shut down, several scenarios could have happened to impact your business with a partial shutdown. A conversation with our team could help you determine whether your business qualifies.
2020 Value: Up to $5,000 per employee, applied to employer’s Social Security payroll taxes. Any excess credit will be issued as a refund.
For 2021: Any business that saw a 20% reduction in gross receipts during any of the first 3 quarters of 2021 (compared to the same quarter in 2019).
OR
A small business that was started after February 15, 2020, with gross receipts under $1,000,000 (The ERC for a “recovery startup business” is available in 2021 Q3 and Q4).
OR
A “severely financially distressed employer” who has experienced a reduction in gross receipts of more than 90% compared to the same quarter in 2019. They can treat all wages paid to employees as eligible regardless of the size of the employer or the number of employees.
2021 Value: Up to $7,000 per employee, per quarter, applied to Social Security in Q1 and Q2 and applied to Medicare in Q3. Any excess credit will be issued as a refund.
Conclusion:
With 50 state mandates and various counties that issued shutdown orders, it will be important to know what law you are following and how you are calculating gross receipts depending on the method of qualification you use. Merely stating that you were affected by an order just won’t cut it. With clear supporting documentation, you will need to prove exactly how your business was impacted.
Our expertise and unique process enable us to calculate and substantiate these credits so you can access them now. You can rest assured that our audit defense team will stand ready to defend your claim if the IRS takes a look at it down the road.
More information on our website can be found here.
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