Businesses, Nonprofits Have Until 2024 to Claim Valuable Employee Retention Tax Credits by Andreea Cioara, CPA
Posted on January 12, 2023
When COVID-19 set off a domino effect of business closings in March 2020, the U.S. government responded with a series of economic stimulus programs to help affected organizations stay afloat. Now, as we enter 2023, one of those relief measures is still available for businesses and nonprofits to apply for retroactively when they meet eligibility requirements that have undergone numerous changes over the past three years.
What is the ERC?
Congress first introduced the Employee Retention Credit (ERC) as a part of the CARES Act to help those businesses that continued to pay employee wages and certain group health insurance costs despite suffering interruptions to normal operations or a significant decline in gross revenue. Subsequently, Congress expanded the qualifications for the credit to include start-up businesses and recipients of Paycheck Protection Program (PPP) loans while also increasing the credit’s value and extending the coverage period to include the first three quarters of 2021.
Today, qualifying businesses and nonprofits may be eligible to apply retroactively to receive a credit that could be as much as:
- 50 percent of up to $10,000 in qualified wages paid to each employee between March 12, 2020, and Dec. 31, 2020, or a maximum of $5,000 per employee for the year, and
- an additional 70 percent of up to $10,000 in qualified wages paid to each employee during the first, second and third quarters of 2021 for a maximum credit of $7,000 per employee per calendar quarter, or $21,000 per employee in 2021.
All told, a qualifying business could receive up to $26,000 per employee in refundable ERCs for 2020 and 2021. Therefore, an employer with 50 employees can receive as much as $1.3 million in tax credits for wages paid in 2020 and 2021. Moreover, because the ERC is refundable, qualifying recipients can use it to reduce their federal income tax liabilities dollar-for-dollar, even to the extent that the credit creates a refund for taxes the recipient paid throughout those years.
Do I qualify for the ERC?
The law requires eligible businesses to demonstrate they maintained and paid staff qualifying wages while suffering either of the following consequences:
- The business experienced a partial or total shutdown during 2020 or 2021, or
- The business experienced a significant decline in gross receipts.
It is important to note that eligible taxpayers need not meet both criteria. Instead, they may be eligible for the ERC if they closed temporarily during the coverage period but did not experience any decline in gross receipts or if they remained open through the pandemic but did meet the gross-receipts test.
While the law has a broad definition of a “partial shutdown,” including employees’ inability to meet, conduct sales or travel for work purposes, it narrowly defines a qualifying decline as one in which 1) gross receipts during any quarter of 2020 after March 13, 2020, were less than 50 percent of gross receipts for the same calendar quarter in 2019 and 2) gross receipts during any of the first three quarters of 2021 were less than 80 percent of what they were during the same quarter in 2019 or 2020.
It is also important to remember that Congress expanded the ERC in 2021 to include “recovery startup businesses” that 1) began operations after Feb. 15, 2020, and 2) had annual gross receipts averaging under $1 million for the three tax years preceding 2021. The credit available to eligible start-ups is $7,000 per employee per quarter, with a maximum of $50,000 per quarter for the third and fourth quarters of 2021.
How Do I Apply Retroactively for the Employee Retention Credit?
Eligible taxpayers have three years from their original tax return filing to claim a refund by filing IRS Form 941-X. Therefore, employers have until April 17, 2023, to file an amended payroll tax return and receive retroactive credits for the first quarter of 2020. For the 2021 tax year, employers can apply for ERCs through April 15, 2024.
What Else Do I Need to Know about Claiming the ERC?
Because the ERC and its eligibility rules have evolved since its introduction in 2020, it behooves businesses and nonprofits to meet with their advisors and CPAs to determine whether they may qualify. Doing so will also ensure employers have the appropriate records to substantiate their claims before the IRS, which has identified the ERC as a priority enforcement topic this year.
About the Author: Andreea Cioara, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors and CPAs, where she provides corporate-tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached at the firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.