Lots has changed this year for taxpayers and small businesses. Here is a summary of what you need to know about the Employee Retention Credit (ERC) and how it may impact your tax return.
First of all- what is the Employee Retention Credit?
Per the IRS, “the Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021.”
Originally, the ERC wasn’t able to be applied to businesses who received a PPP loan. That changed. The new legislation that came out said that even if you received a PPP loan, you may still be eligible to receive an Employee Retention Credit.
While this sounds fantastic, it’s more complex than that.
Step 1 is determining if a business is eligible for the ERC.
So, how does a business qualify for the ERC?
The easiest way to qualify is if you had at least a 50% reduction in receipts in a quarter of 2020 compared to the same quarter in 2019. This would qualify you for the next quarter as well, so you would have 2 quarters to qualify for the ERC. The more periods we can qualify for, the greater our possibility of getting our PPP forgiveness as well as maximizing the ERC credit.
Another way to qualify is if you were shut down, even partially. For example, many restaurants didn’t shut down completely because they could still do carry out, but it is likely many of them will still qualify because they were partially shut down.
But what about the medical profession that does elective procedures? There is new guidance coming out every day adding clarification for the myriad of scenarios that are possible for what could be considered a partial shutdown as well as what can be considered essential versus non-essential.
Step 2 is determining whether there are enough wages.
When we apply for PPP forgiveness for our clients, we use wages, but we can’t use the same wages to calculate an employee retention credit. Ultimately, we have to determine if there are enough wages left over after the wages that are applied to the PPP forgiveness in order to qualify for the ERC.
The calculation of the ERC is this: for qualified wages up to $10,000, you get a $5,000 credit. This is per employee, and the total credit can be as much at $50,000 for the calendar year.
If you get the credit, we reduce the expenses on your tax return. So, even though we get the credit in the 2021 calendar year, it will impact the taxes on your 2020 tax return. What does this mean for you? If there is a chance you qualify, it might be in your best interest to extend your tax return so that we can evaluate together whether this is an opportunity to avoid potential amendments.
This is a significant credit that no business wants to leave on the table if you qualify for it. We can help and let you know if it’s something you qualify for.
If this all sounds confusing, that’s what we’re here for!
The tax deadline has been extended to 5/17. Click here or call us at (636) 532- 9004. We will help you sort through the confusion and keep the maximum amount of your dollars in your pocket.