In the realm of tax credits, the Employee Retention Credit (ERC) has garnered significant attention, despite warnings from authoritative bodies like the IRS, the American Institute of CPAs, and other professional tax preparer societies. This article aims to shed light on the ERC, offering valuable insights for businesses contemplating this credit. Read on to unravel the complexities of ERC and understand why caution is crucial in navigating this landscape.
Understanding the ERC
The ERC is a refundable tax credit crafted for businesses that maintained employee payments during the COVID-19 pandemic’s shutdown or experienced substantial declines in gross receipts between March 13, 2020, and Dec. 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return within this timeframe.
For 2020, the credit amounts to 50% of qualified wages, capped at $10,000 per employee. In 2021, the credit increases to 70% of qualified wages, also with a $10,000 per employee cap per quarter. Recovery startup businesses have a separate rule for the 4th quarter of 2021.
ERC Eligibility Criteria
To qualify for the ERC, employers must meet one or a combination of the following criteria:
- Business Operations Curtailed: Sustained a full or partial suspension of operations due to government orders limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021.
- Significant Decline in Gross Receipts:
- For 2020, employers with gross receipts less than 50% of the same quarter in 2019 are eligible. The decline ends when 2020 gross receipts reach 80% of the same quarter in 2019.
- For 2021, a 20% decline in gross receipts compared to the same quarter in 2019 qualifies. Employers can use the immediately preceding quarter for comparison.
- Qualified as a Recovery Startup Business: Eligible for the third or fourth quarters of 2021.
Ancillary Issues
Qualifying for the ERC involves complexities beyond amending payroll returns. Consider the following:
- No Double Dipping: Tax law prohibits claiming double benefits. Wages deducted on federal income tax returns must be reduced by the ERC amount.
- Personal Return Amendments: Reducing business return wages may impact personal returns, potentially increasing 1040 taxes.
- Exclusion for PPP Loan Forgiveness: ERC cannot be claimed for wages covered by PPP loan forgiveness.
- Self-Employment Tax Implications: Self-employed individuals may face increased self-employment tax due to reduced payroll expense deductions.
Claiming the ERC: A Holistic Approach
Claiming the ERC isn’t limited to amending payroll tax Forms 941. Both business and personal income tax returns must be amended. This underscores the importance of a comprehensive approach in navigating the ERC landscape.
Not Qualified for the Credit: Risks and Consequences
If the IRS refunds an ERC claim but later determines in an audit that the taxpayer didn’t qualify, the taxpayer must repay the refund, including interest and potential penalties. Moreover, the refund statute of limitations might expire, hindering full wage recovery. ERC promoters’ fees may also become irrecoverable.
Conclusion
In conclusion, understanding the ERC is paramount for businesses navigating the intricate terrain of tax credits. Caution and diligence are essential, especially in light of misleading claims and potential consequences. If you find yourself with queries on this matter, feel free to reach out to our office for assistance. We’re here to provide the guidance you need.
