The Tax Credit That Could Change the Direction of Your Business

Congress passed the Employee Retention Credit (ERC) in March 2020 under the CARES Act to help businesses financially impacted by COVID-19. This tax credit brought a lot of promise for companies and business owners who have been struggling to stay afloat during the pandemic.

Unfortunately, many people are confused about whether or not they qualify for the credit and how to apply. In this article, we’ll break down the Employee Retention Credit, when it’s available, who qualifies, and more.

WHAT IS THE EMPLOYEE RETENTION CREDIT (ERC)?

The Employee Retention Credit is a refundable tax credit that businesses can claim on qualified wages that were paid in 2020 and 2021. This includes certain health insurance costs paid to employees. While the tax credit does not apply to wages paid after 2021, businesses can still retroactively claim credit until 2025.

For many organizations, the ERC provides a substantial amount of cash. You may be eligible to recieve up to $26,000 per employee, depending on how COVID-19 affected your business and how much your employees were paid in 2020 and 2021.

Eligible employers to relieve the ERC tax credit must have operated a business or carried a trade during the 2020 calendar year.

They also must prove that one of the following is true:

• They had to fully or partially close or suspend operations due to governmental authority that limited commerce, or:
• They experienced a significant decline in gross receipts and income in 2020 or 2021.

A significant decline in gross receipts is considered at least 50% less income in 2020 compared to 2019 or 20% less income in 2021 compared to 2019.

The Employee Retention Credit applies to qualified wages paid after March 12, 2020, and until Sept. 30, 2021.

IS THis BUSINESS TAX CREDIT STILL AVAILABLE?

While your organization’s ERC tax credit is based on what happened in 2020 and 2021, it’s not too late to claim it now! You can retroactively claim the ERC on an amended 941-X payroll tax return as long as the statute of limitation remains open.

Generally speaking, the statute of limitations is three years from the original filing date of the return. That means there’s still plenty of time to get the ERC.

6 COMMON MISCONCEPTIONS ABOUT THE ERC

Understanding the details of the ERC legislation can be challenging. The tax credit information is complex, confusing, and sometimes seemingly contradictory.

Below are six common misconceptions that people have about the ERC:

1. YOUR BUSINESS HAD TO BE COMPLETELY SHUT DOWN TO QUALIFY

Many business owners are under the impression that they do not qualify for the ERC because their operations weren’t completely shut down during the pandemic. You can still qualify if you only partially suspended business and operations during the 2020 or 2021 calendar year, or even if you didn’t suspend operations in some cases.

For example, if a restaurant closed indoor dining due to government orders but continued making take-out sales, it would still qualify for the ERC.

2. YOU MUST PROVE THAT YOU HAVE A LOSS OF REVENUE TO QUALIFY

The CARES act, and in turn, the ERC, is clear that there does not need to be a decline in overall revenue to be eligible for the ERC, only a decline in gross receipts.

Businesses must pass either the government orders test or the gross receipts test, which is passable even if you didn’t lose any revenue.

3. IF YOU GOT A PPP LOAN, YOU DON’T QUALIFY FOR THE ERC

In contrast with popular understanding, you can take advantage of both the Paycheck Protection Program loan (PPP) and the ERC.

4. BUSINESSES IN THE MEDICAL AND EDUCATION INDUSTRIES DON’T QUALIFY

Originally, when the CARES act was first passed, it excluded governmental employers, including public colleges, universities, and employers who provided medical or hospital care, regardless of whether they passed the gross receipts test.

The CARES Act was changed to allow nonprofitsand all of the sectors above to be eligible, although only for 2021.

5. AN EMPLOYER’S HEADCOUNT CLASSIFICATION AFFECTS ELIGIBILITY

An employer’s headcount classification can be either small or large. These classifications only affect the type of wages that are included in the ERC calculation, not your eligibility.

6. TAX-EXEMPT ORGANIZATIONS DO NOT QUALIFY FOR ERC

Unlike most federal tax credits, the CARES Act states that tax-exempt organizations may be considered eligible employers and therefore qualify for the ERC.

HOW TO QUALIFY FOR THE BUSINESS TAX CREDIT

If you can show that your business declined in gross receipts for any eligible quarter in 2020 or 2021, or that it either fully or partially suspended operations under government orders, you qualify for the ERC.

In order to get your refund, you may need to pass the revenue decline test. This test is different for 2020 and 2021.

For 2020, if your business wasn’t fully or partially suspended due to government restrictions, your revenue decline must be 50% less than your revenue from the same quarter in 2019. For 2021, the revenue decline must be 20% less in comparison to your revenue from the same quarter in 2019.

To apply for the ERC, you must fill out Form 941X, also known as the Quarterly Federal Payroll Tax Return.

You can expect the funds to arrive between six months to a year after applying.

At LG Resources, we can help you maximize your ERC tax credit refund. We have a dedicated team of ERC program specialists and provide audit protection. Our experienced professionals can help you find maximize any qualifications available to your company.

If you want to learn more about the ERC and how it can help you and your business, check out our ebook or the other resources on our website.