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EMPLOYEE RETENTION CREDIT – The “Almost-Forgotten” Refund

The Employee Retention Credit, known as the ERC, was created during the pandemic to provide companies who kept their employees on payroll with a refund—our experience in dealing with the dollar amount involved has shown that this refund is as significant as the PPP loans these same companies previously received.

HAS YOUR COMPANY LOOKED INTO THIS?

I labeled this credit as the “Almost-Forgotten” refund because when it was first introduced by Congress in 2020, all companies who had received a PPP loan were automatically disqualified from receiving the ERC refund.  Many business owners, as well as their accounting departments and outside accountants, were unaware that in early 2021, Congress changed the legislation thereby allowing the ERC even when a PPP loan was received.  Additionally, Congress retroactively changed the law to apply toward 2020 as well as for the first 3 quarters of 2021.  The only restriction was you could not use the same payroll for ERC calculation as you used for PPP loan forgiveness.

WATCH OUT WHAT PEOPLE TELL YOU ABOUT THIS CREDIT

Since the change in legislation, many “fly-by-night” companies, holding themselves out to be professional ERC companies, have promised clients the maximum refunds.  Be aware most of these companies will be calculating your ERC incorrectly and should you be audited by the IRS (they have 5 years from submission to audit you), be warned that you won’t be able to locate these same companies who calculated the ERC figures when that time comes.  As such, use only a reputable firm who are bound by ethics to correctly compute your eligibility and your refund.

HOW DO I QUALIFY?

Eligibility is based on quarterly revenues.  Compare 1st quarter 2020 revenues to 1st quarter 2019 (pre-pandemic) revenues.  If 2020 Q1 revenues are down more than 50% of 2019 Q1, you qualify.  Do the same for each of the 4 quarters in 2020; comparing them with the same quarter of 2019.  For 2021, the rules are even more relaxed as you only need quarterly revenues to be down more than 20% vs. the same quarter of 2019.  As the ERC program ended on 9/30/21, there are only 3 quarters to review for 2021. 

I QUALIFY, NOW WHAT?

Once it’s determined what quarters qualify for ERC, you then can get a payroll credit for those quarters; however, there are a lot of “exclusions” as to what you can take. Here are the main ones:

  • Over 50% owners are excluded from the refund as well as their spouses and relatives on payroll.
  • Any payroll used for PPP loan forgiveness must be excluded from ERC refund calculations.
  • If business owners own other businesses, they may have to add those revenues to their company revenues when calculating eligibility
  • Maximum credit is $5,000 per employee PER YEAR for 2020. And $7,000 per employee PER QUARTER for 2021.  Credit is based on 50% of actual payroll not to exceed $10,000 for the year for 2020; 70% of actual payroll not to exceed $10,000 per quarter for 2021. The cost of health insurance per employee (net of what the employee contributes) can be included to maximize these credits.

HOW DO I CLAIM MY REFUND?

Completion of amended quarterly payroll tax returns (941-X’s) are used for submission to IRS.  Backlog in receiving these ERC’s are now 2-9 months long.  The IRS will mail your company a check for the ERC being claimed.  Deadline for claiming the ERC on 2020 payroll will end at the end of 2023.

DO I NEED TO AMEND ANYTHING ELSE?

YES, you will need to amend your corporate tax return for the year the credit was claimed for.   So, if your refund applies to 2020 but you didn’t get that refund until 2022, it’s the 2020 corporate return that needs to be amended by deducting the credit against wages claimed on your original corporate return.  If your company is an S-Corp where the profits flow to the individual shareholders, then you’ll need to amend the shareholder’s individual tax returns as well. The costs to do this should be estimated to determine beforehand if it’s worth applying for the ERC refund.

IF I HAVE TO DEDUCT THE ERC REFUND, THEN WHY EVEN PURSUE THIS?

Remember, a credit is better than a deduction.  So, for example, if you received a $100,000 ERC refund against $900,000 in wages for 2021, you’re amended 2021 corporate return’s wages will be reduced by $100,000 to $800,000.  If corporate tax rate is 15%, you’ll pay $15,000 more in taxes ($100,000 X 15%) but you will have received $100,000 from the IRS, thus you are ahead of the game by the difference-$85,000.

FINAL NOTES:

The above is a basic summary of the law surrounding this credit. There are numerous alternative methods toward eligibility and credit calculations—too many to list in this blog.  ProCFOConsulting will provide a free eligibility analysis for your company to see if you even qualify for this refund so let a trusted advisor with ethical responsibilities be your go-to ERC professional.  Call today for a free consultation.