Alphonso Anderson, JD, LL.M Tax
The TaxRx Group is a specialty tax consulting firm. We work with local accounting teams to identify advanced options that reduce our clients’ taxes. We produce a yearly tax prescription (Tax Rx) to maximize available benefits and savings.
This week’s Tax Tip is an introduction to the Employee Retention Credit (ERC). When done correctly, the ERC can have an immediate impact on your business and quarterly payroll taxes for 2020 and 2021.
The ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. Eligible taxpayers can claim the ERC on an original 941 or amended employment tax return for a period within those dates.
The period to apply for this credit follows the same rules as those that govern amending tax returns. The SOL period for filing Form 941-X refund claims is three years from the date the employer filed its first return or two years from the date the tax was paid. (See IRC Section 6511). Therefore, this can be considered the deadline for filing Form 941-X or the Corrections on Form 941.
Who is Eligible for this Credit?
While many companies have come into existence over the last two years espousing improper ways to qualify for the credit, qualification remains the same. To be eligible for the ERC employers must have experienced one of the following scenarios:
The employer sustained a full or partial suspension or a more than nominal modification of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021.
The employer experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021. Finally, an employer may qualify as a recovery startup business for the third or fourth quarters of 2021.
What is an Employee Retention Credit Study & How Does it Work?
An Employee Retention Credit study analyzes the differing qualification scenarios for each employer to make a determination on whether the facts and circumstances surrounding the impact of Covid-19 on their business qualifies them under the relevant guidance to benefit from the Credit. The primary goal of the study is to identify whether or not the employer qualifies for the credit in any of the eligible quarters based on an evaluation of the employer’s gross receipts or the relevant government orders impacting the employer’s business, identifying the documentation that substantiates the determination that the employer is, in fact, an eligible employer and then quantification of what the credit would be after evaluating whether the employer claimed certain other tax credits. For example, an eligible employer who qualifies for this credit cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness.