As businesses throughout the country continue to feel the massive impact of COVID-19, the IRS’s Employer Retention Tax Credit (ERTC) aims to provide much needed relief for businesses who have kept employees on the payroll, even if they were not working during the covered period due to the effects of the coronavirus outbreak.  Extended through the end of 2021, the provision is designed to support the business community in its ongoing struggle to recover.

The IRS’s Employer Retention Tax Credit (ERTC), included in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, allows business owners to obtain a refund of payroll taxes paid from March 13, 2020 through the end of this 2021 calendar year. However, the requirements to obtain this tax credit have evolved substantially since it was first unveiled, making it difficult to obtain for many owners. 

Let’s start with the question on everyone’s mind- How much of a tax credit can you expect to get?

You or your clients could be saving up to 70% in payroll taxes this year. As businesses throughout the country continue to feel the massive impact of COVID-19, the IRS’s Employer Retention Tax Credit (ERTC)- included in the CARES Act- aims to provide much needed relief for businesses who have kept employees on the payroll. Link in bio for all things eligibility, filing, and credit amounts.The maximum amount of credit for 2020 is $5,000 for the year for every eligible employee.  For 2021, you can claim $28,000 for the year for every eligible employee. 

Now the fun part begins.... eligibility. There are 3 separate periods for you to have eligibility and thus 3 different sets of requirements.  

The number one qualifier for the first eligibility period is the ability to demonstrate a reduction in gross receipts of 50% when comparing quarters in 2020 and 2019.   This same percentage is reduced to 20% for the second and third eligibility periods. The third period is a bit more complex than the others because other criteria have been added to allow more businesses to qualify.  

For the third period, which began on July 1, 2021 and ends on December 31, 2021, there are two other types of businesses that can qualify for this credit.  The first is called a Recovery Startup Business.  If your business did not start operating until after February 15, 2020, you can still claim the credit as a Recovery Startup Business.   In order to qualify, your gross receipts must be less than $1 million.  You don’t have to demonstrate a loss in gross receipts in order to qualify.  

The second business is called a Severely Distressed Employer.  If your business experienced over a 90 percent loss in gross receipts when comparing a quarter in 2020 against the corresponding one in 2019, you are a Severely Distressed Employer and are not subject to the previous period caps and maximums.

When it comes to eligibility, there are a few other important criteria to keep in mind:

1. Employees who are family members are not eligible.
2. You cannot ‘double dip’ and use PPP qualified wages as ERTC wages.
3. Only full time (30 hours per week or 130 hours per month) employees are eligible.

Now let’s talk about your options for obtaining this credit. 

If you are eligible, the credit is obtained by amending previously filed payroll tax returns (Form 941-X).  They have also presented an option to request an advance of the credit by filing Form 7200 so that you don’t have to wait for the IRS to process the 941-X.  The advance would be requested first and then reported on the 941-X.  This involves determining which employee wages qualify and a calculation of the credit for each employee.  This credit is also eligible for advance payments by filing Form 7200.  If advance payments are made, the actual credits will need to be calculated after the quarter ends and a reconciliation made between the advance credits and the actual credits.  These amounts are reported on an amended employment tax return (Form 941-X).   You would also use this form if you have already filed your taxes and did not claim the credit.  The IRS is allowing you to retroactively claim the credit as well.  

In true pandemic and post-pandemic fashion, this provision is continuously evolving to address the struggle. The IRS is expected to issue additional guidance for this credit, so make sure you receive the most up to date information when applying for these credits. It is an incredibly strenuous time to be in business, but please know you don’t have to go it alone!  Having trusted advisors and a team of professionals to help you navigate these challenging times can make all the difference.  Please don’t hesitate to reach out if you have questions about your tax situation and the credits your business may qualify for.

In the meantime, if you are wondering whether or not your business qualifies, Daszkal Bolton has some great Q&A flow charts for each of the three different periods to help you determine your eligibility.

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