ERC: It's Not Too Late
With extended tax return deadlines in the rearview mirror, it’s time for business owners to begin thinking about year-end tax planning. This year, one additional item should be added to the planning list: the Employee Retention Credit (ERC). Over the past two years, this program has provided tremendous benefits to businesses, and, contrary to popular assumptions, there is still time to realize those benefits.
What Is the ERC?
The ERC is a refundable credit amount based on qualified wages paid to employees by eligible employers. For 2020, the credit amount is 50% of qualified wages and healthcare costs up to $10,000 per employee for the year. The credit amount was increased for 2021 to 70% of qualified wages, and the $10,000 per employee wage limit applies per quarter for the first three quarters of 2021 rather than on a per year basis. In other words, if a business qualifies in every quarter of 2020 and 2021, this credit could be up to $26,000 per employee.
Due to changes in the law, much confusion has surrounded the ERC. When the program was initially launched in March 2020, companies that received a Paycheck Protection Program (PPP) loan were not eligible. In December 2020, the Consolidated Appropriations Act expanded eligibility to companies that received a PPP loan, only restricting that the companies couldn’t put the same dollars towards both programs. Because of this confusion, many business owners did not realize their companies qualified.
Am I Too Late?
No. In fact, many companies are just now realizing that they are eligible, and they are filing a Form 941-X (an amended payroll tax filing) to claim the credit. The credit is claimed on payroll tax filings, meaning that a business has until the statute of limitation closes to retroactively claim the credit.
A timely filed payroll tax return has a three-year statute of limitation. Treas. Reg. 301.6501(b)-1 provides a special rule for payroll tax returns that states if quarterly filings are required, the statute does not begin until April 15 of the following year. For example, a Q2 2020 941 statute would be considered as having been filed on April 15, 2021. This means that the statute is open until April 15, 2024.
In addition to amending a payroll tax return, an amended income tax return would also be needed. The law does not allow a business to take a credit and a deduction for the same dollar. The amount of the credit reduces the deductible wage expense in the year that the credit relates to. So, while the credit is not “income” for tax purposes, it is effectively taxable because it reduces deductions.
How Do I Qualify?
Employers may qualify if they suffered a significant decline in gross receipts – or if their business was fully or partially suspended due to a governmental order related to COVID-19.
- Significant decline in gross receipts: In 2020, a business taxpayer is eligible for a quarter where its gross receipts are less than 50% of the same calendar quarter in 2019. In other words, the gross receipts dropped by more than 50%. The taxpayer continues to qualify in 2020 until the calendar quarter after its gross receipts exceed 80%. In 2021, the rules were modified so an employer only needs a 20% decline in gross receipts for a quarter in 2021 as compared to the same calendar quarter in 2019. The modified rules also include an election that allows an employer to qualify for a quarter in 2021 based on the prior quarter. This allows employers that have a 20% decline for one quarter in 2021 to automatically qualify for two quarters.
- Full or partial suspension: Businesses with operations that are either fully or partially suspended due to a governmental order qualify during the period in which business operations are restricted due to such government order. It is important to note that this is much broader than being “fully shutdown.” Examples include:
- A restaurant having to restrict its indoor dining due to social distancing requirements or capacity restrictions.
- Medical providers having to limit the number of patients that can be seen in a day due to social distancing requirements or elective surgery prohibitions.
- The inability to produce goods or provide services due to supplier shutdowns: COVID-19 caused global supply chains with ripple effects throughout the United States and the world. If a business was unable to operate even a portion of its operations due to supplier shutdown, it might be eligible.
To determine if your business qualifies for the ERC program, reach out to your KSM advisor or complete this form.
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