The Employee Retention Credit (ERC) can offer a business as much as $26,000 in tax refunds for each employee. Although the program has now been canceled, that doesn’t mean that a business cannot retroactively file for this credit. The window for filing alone is open till 2024, but for the company to qualify, it had to have paid employee wages during the period between March 12, 2020, and September 30, 2021, or December 2021 for certain organizations.
That is all good, but many businesses still have difficulty understanding what ERC is, its relevant details, and its eligibility requirements. This article effectively clarifies these questions for businesses to file their claims before the deadline expires in 2024.
What is the Employee Retention Credit (ERC)?
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed, and the ERC was a part of it. Under this tax credit scheme, companies can claim refunds on certain wages that qualified and were paid during the periods, including the year 2020 and the first three quarters of 2021. Under the program, companies could get as much as $26,000 per employee, depending on whether they qualify. There may be no limit for funding, but only firms with decreased revenue or hit directly by a COVID event fell under the qualification criteria for this scheme.
The ERC Lookback Period Statute
Under the ERC, there was only a certain window during which a company could qualify for a tax credit if a company paid salaries. And while this period ended long ago, the chance for filing is still open under the ERC Lookback Period Rule. This special regulation allows companies to look back at their payrolls between 2020 and 2021 to retroactively claim the credit by filing returns until the tax deadline of the year 2024. In some cases, the opportunity is also open till 2025.
In order to apply, an amended 941-X form needs to be submitted by the taxpayers for each applicable quarter. This form is the Adjusted Employer’s Quarterly Federal Tax Return and requires an eligible employer to submit details about qualified wages paid during the applicable period. Employers can find more information through the IRS Notice 2021-20, which details everything there is to know about ERC, including retroactively filing for tax credits under the program.
How to retroactively file for ERC
Employers who get a Paycheck Protection Program (PPP) loan from the government can claim the tax credit under ETC. However, the program is not limited by this condition. The IRS Notice that was mentioned earlier contains detailed FAQs about various aspects of the ERC program. It also cites particular examples for each scenario, like filing the 941-X and how employers can determine which of their wage pages qualify for a tax credit under the program.
In general calculations, the IRS combines the minimum wage price of an employer with their eligible expenses. Therefore, the wages that qualify for ERC and are included in the payroll costs detailed in the application you submitted can only be utilized under conditions where the expenses were more than needed to justify PPP loan forgiveness. The IRS is also clear that any eligible expenses that were not part of the application will no longer be factored in.
So, in case you haven’t filed the tax credit application yet, make sure that you analyze it carefully with assistance from an ERC consultant.
How to tell if an employer qualifies for ERC?
Under the American Rescue Plan Act that Congress passed, numerous organizations like colleges, hospitals, 501(c) companies, and universities could qualify for the tax credit. More detailed guidelines show that there are three main factors that can determine whether an employer is eligible for ERC refunds or not. These include:
Employers ordered by the government to shut down operations
Any business that had to either completely or partially suspend trade and other operations following government orders qualifies under the ERC. Even businesses that had to reduce working hours can qualify, but it doesn’t apply to the full quarter but only a portion during which operations were suspended.
A few businesses were excluded from this qualification, especially those that shuttered physical locations but continued remote work along with essential businesses unless their supply of raw materials was affected in a way that didn’t allow them to sustain operations effectively. Still, it isn’t the end of the line. Businesses that don’t qualify under this condition can explore the second one:
Businesses that experienced a substantial decrease in gross receipts
The IRS introduced the Revenue Procedure in August 2021, under which businesses were given safe harbor. In order to show a significant decline in gross receipts, the employer simply has to exclude the PPP loan forgiveness, Shuttered Venue Operators Grant, or Restaurant Revitalization Fund amounts from the business receipts to determine if they are eligible or not.
Moreover, gross receipts need to be shown across the following:
– CARES Act 2020: This law states that an employer qualifies for ERC if their receipts fall below 50% of the level that they were during the same time in 2019. In case the receipts were more than 80%, the business does not qualify,
– Consolidated Appropriations Act 2021: Established businesses that were impacted by COVID and saw a drop of 20% in gross receipts during the eligible quarter as compared to 2019 also qualified. At the same time, startups can also apply under this act.
This eligibility clause was added for the third and fourth quarters of 2021 only under the American Rescue Plan Act. Although it offers as much as $50,000 to each business for the quarter in case they qualify, the eligibility criteria include businesses that continued trade after February 15, 2020, and not be qualified for ERC under the aforementioned two conditions.
The ERC is designed to offer businesses as much relief as possible for the hit they took during the COVID-19 pandemic. These were tough times when many employers couldn’t even survive. The ones that did can now get some rebate from the government if they meet certain criteria. It is most pertinent to note that 2024 is the deadline for retroactively filing and claiming refunds under ERC, after which the window will close permanently. If you have not explored this option yet, it is best that you start today.