It’s Not Too Late to Claim the Employee Retention Credit
The economic effects of the COVID-19 pandemic on businesses have primarily passed. The last parcel of federal relief, the American Rescue Plan Act, provided one final economic boost for individuals and businesses, and since then, popular federal relief programs, including the Paycheck Protection Program, Shuttered Venue Operators Grant, and the Employee Retention Credit (ERC), has expired.
On September 30, 2021, the ERC was terminated early to permit Congress to redirect funding to new infrastructure and job creation programs. However, despite its early termination, many businesses and nonprofit organizations can retroactively claim the ERC for qualifying activities, the details of which are summarized below.
What is the ERC?
Fully refundable tax credit against the employer’s share of certain employment taxes (originally employer’s Social Security taxes later changed to employer’s Medicare taxes). The credit amount is different depending on what year qualifying wages were paid. For example, the credit amount is equal to a maximum of 50% of qualified wages paid in 2020 and a maximum of 70% for qualified wages paid in 2021. In other words, an employer can claim a 2021 maximum of up to $21,000 per eligible employee.
What are the Eligibility Criteria?
Businesses and nonprofit organizations can claim the ERC for the second quarter of 2020 through the third quarter of 2021 unless they are a recovery start-up business. A mainstay of eligibility determination is whether a business experienced a current quarter gross receipts decline of a certain percentage against the same quarter in 2019 (in other words, pre-pandemic). For 2021, an organization is considered eligible if there was a decline in gross receipts of 20% or more compared to the same quarter in 2019.
There is also an alternate quarter election rule that permits employers to determine eligibility by looking at the prior calendar quarter performance and comparing it to the same quarter in 2019 to determine a sufficient decline in gross receipts.
For those not in operation in 2019, eligibility is determined by comparing the decline in gross receipts in a 2021 calendar quarter to the same time in 2020.
What are Qualified Wages?
Wages paid to employees during the calendar quarter when the business experienced a decline in gross receipts. However, depending on the number of full-time employees, not all wages paid are eligible. For example, in cases where the business has less than 500 average full-time employees who were providing and not providing services, all wages paid qualify. For those businesses with more than 500 average full-time employees in 2019, only the wages paid to employees not providing services apply.
What if a Business or Nonprofit Received COVID-19 Loans or Grants?
Previously under the initial passage of the CARES Act, you couldn’t claim the ERC if you received a Paycheck Protection Program (PPP) loan. However, the Consolidated Appropriations Act, 2021, changed previous regulations and now allows a business or nonprofit organization that received a PPP loan to claim the ERC.
Suppose you received a Restaurant Revitalization Fund or Shuttered Venue Operators Grant. In that case, the wages you pay with grant funds cannot be used to claim the ERC, but you can use grant funds until 2023 to pay any business-related expense outside of payroll costs.
There is also an interplay between companies that received a credit for paid family medical or sick leave during 2020 or 2021. The various interplays and determining the qualified wages make the calculation of the ERC a little tricky. You may think that you don’t qualify, but you actually may.
How is the ERC Claimed?
In 2022, the credit is claimed by submitting amended quarterly returns, form 941X, to the IRS. This form has to be filed on paper by mail. Once received and processed, the eligible credit amount will be provided.
However, businesses and organizations should act quickly, as there have been delays in processing individual, business, and amended returns at the IRS. Due to a confluence of factors, including severe staffing shortages, it is unclear how long it will take to review amended returns. Unfortunately, until this happens, the credit cannot be approved.
It is important to note that accrual basis companies should technically show the credit receivable on their December 31, 2021 books once the amount is determined. The opportunity to claim the ERC is welcome news for businesses with eligible activities. The amount of tax savings can be significant in certain circumstances. As the tax filing deadline quickly approaches, now is the time to assess your eligibility.
Contact Us
If you have questions about the material outlined above, need assistance claiming the ERC, or filing an amended return, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
©2022 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.