January 27, 2023 | 4-minute read (769 words)
Three years in from the COVID-19 pandemic’s start, the IRS’s Employee Retention Credit program — which applies from 2020’s second quarter through 2021’s third quarter — is one of the period’s only remaining special incentives for businesses.
The ERC is a fully refundable tax credit that eligible employers claim against certain employment taxes. It was adopted early in the pandemic as part of the CARES Act, which also included the Paycheck Protection program.
Understandably, many business owners have overlooked or simply not taken advantage of the credit given the chaos of recent years. However, the statute of limitations on these credits will begin to sunset on July 31, 2023.
The good news is that small businesses may still be able to retroactively claim the employee retention tax credit. On the other hand, there are certain myths to be weary of and other issues to consider.
Watch out for scammers
A proliferation of ERC-related ads targeting business owners promise $26,000 in refundable tax credits per employee. Many firms behind these solicitations no doubt provide legitimate services that help businesses file accurate ERC claims, but the IRS warns of opportunists.
Some companies “are taking improper positions related to taxpayer eligibility for and computation of the credit,” an IRS news release warns. In general, these tend to be pop-up companies that calculate the credit in exchange for a contingent fee based on the amount of the credit.
While it’s true the maximum ERC amount per employee is $26,000, the rules that determine eligibility are tricky, and many other factors influence the refund amount.
Debunking 5 myths about the ERC
Myth 1: My business did OK during the pandemic, so I’m not eligible.
Fact: There are two methods by which a business may qualify for the ERC. The first is by satisfying the gross receipts test, which varies based on year. The second is by satisfying the government orders test, meaning a government order impacted your ability to do business.
About the gross receipts test: If your business had a 50% drop in gross receipts from 2019 to the same quarter in 2020, you qualify. Once that threshold is met, eligibility is maintained throughout the end of the quarter in which gross receipts have less than a 20% drop. For 2021, eligibility starts at 20%.
About the government orders test: The credit applies only for the portion of the quarter the business was suspended, not the whole quarter.
Myth 2: Eligible businesses automatically get $26,000 per employee.
Fact: The maximum credit per employee is $26,000. The maximum credit for each employee in 2020 is $5,000. The maximum for each employee for each of the three quarters the ERC existed in 2021 is $7,000. Therefore, the cap is set at $26,000 per employee when all eligibility requirements are met.
Myth 3: Businesses that got a PPP loan can’t take the ERC.
Fact: Although the CARES ACT initially prohibited PPP recipients from taking the ERC, that statute was changed so that employers who received a PPP loan could take the ERC, but not on the same wages paid with forgiven PPP loan funds.
Myth 4: It’s too late to apply.
Fact: Per statute, amended payroll returns can be filed within three years of the original filing date. The earliest date a quarterly return claiming the ERC could have been claimed was July 31, 2020, so the ability to claim that quarter goes away after July 31, 2023. The window to qualify for the ERC’s last quarter, the third quarter of 2021, expires Oct. 31, 2024.
Myth 5: Tax-exempt organizations are ineligible.
Fact: While many federal tax credits are taken against income tax liability, the CARES Act acknowledges that tax-exempt organizations may be considered an eligible employer.
Determining ERC eligibility can be thorny
Eligibility requirements for the ERC may look straightforward. But because eligibility is based on an individual business’s facts and circumstances, as well as different government shutdown orders, applying these requirements is complex.
The IRS has a five-year window in which to audit an ERC return, the likelihood of which should not be ignored, given “the IRS’ near-automatic acceptance of these filings (and payment of the credit, of which the firm usually collects 25% or more),” attorneys Scott Foster and Jacob Kosakowski write in BusinessWest.
This means finding a professional with expertise in filing ERC returns should be a priority. To find a reputable ERC firm, be sure to do your due diligence and tread carefully before engaging with a company that promises a large credit with assured eligibility.