January 16th 2025.
Did your small business suffer during the pandemic? If you didn't receive a refund for the Employee Retention Credit (ERC), there are a few things you should know. First, you can still apply for the ERC refund. And second, the deadline to do so is approaching quickly - April 15, 2025 to be exact.
Let's dive into the details so you can determine if your business is eligible for the ERC. It's also important to know what steps you need to take to claim any missed refunds. And here's a heads up - these refunds can add up to tens or even hundreds of thousands of dollars.
To provide some background, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020 to provide assistance to employers and employees during the pandemic. The goal was to keep businesses afloat and prevent employee layoffs. Initially, employers had to choose between two programs - the Paycheck Protection Program (PPP) or the Employee Retention Credit. Only one could be utilized.
The PPP was the more popular choice as it generally provided more financial support to business owners. However, in December 2020, the Consolidated Appropriations Act (CAA) was passed, allowing businesses to participate in both the PPP and the ERC. This led to a scramble for information about the ERC program in early 2021. And as it turns out, there was a significant amount of aid available for eligible employers.
One important detail to note is that employers could potentially receive ERC refunds for wages paid in both 2020 and 2021. However, the deadline for 2020 wages has already passed. This means that we are now focusing on refunds for 2021 wages, which is where the big money lies.
So, how do you qualify for the ERC? There are three main criteria that a business must meet. First, there must be a significant decline in gross receipts. Second, there must be a full or partial suspension of operations due to a government closure order. And third, the business must have started a new trade or business between February 15, 2020 and December 31, 2021.
From a tax practitioner's perspective, the most straightforward way to qualify is by showing a significant decline in gross receipts. For 2021, this means a decrease of more than 20% compared to the same quarter in 2019. The second criteria, government shutdown orders, can add some complexity to the qualification process. If you're interested, you can read more about this here, but it's worth noting that there have been instances of fraud involving businesses allegedly qualifying based on government orders.
The third way to qualify is by starting a new trade or business. To be eligible, the business must have an average gross receipts of $1,000,000 or less over the past three years. This looks at the total revenue from all businesses and the ERC refund is based on wages paid in any of those businesses.
Not all wages are eligible for the ERC. Qualified wages include those that are subject to FICA taxes, certain health plan expenses, and businesses with 500 or fewer employees. Non-qualified wages include those that were used for the PPP, wages for owners who own more than 50%, and wages for family members of owners who own more than 50%.
The calculation for the ERC is different depending on the credit. If you qualify based on a decline in gross receipts or a government order, the ERC will equal 70% of qualified wages, up to $10,000 per employee per quarter for the first, second, and third quarters of 2021. For example, if you have three employees earning $12,000 each quarter, the qualified wages would be $10,000 per employee per quarter, resulting in an ERC of $21,000 per quarter or $63,000 in total.
The startup business employee retention credit only applies to the third and fourth quarters of 2021, with a maximum of $50,000 per quarter. For instance, if a small construction company has an average annual gross receipts of $800,000 and started a new business in late 2020, they would qualify for the ERC based on their new venture. If they employed ten people earning $12,000 each in the third and fourth quarters of 2021, the ERC would equal the greater of $10,000 x 70% x 10 employees or $70,000 for each quarter, reaching the maximum of $50,000 per quarter. In this scenario, the total ERC would be $100,000.
The deadline to claim the ERC refund depends on the year. For 2020 claims, the deadline was April 15, 2024. This means that it is no longer possible to claim refunds for wages paid in 2020. However, for 2021 claims, the deadline is April 15, 2025, giving employers time to submit claims for wages paid this year.
If you operated a small business in 2021 and had employees but did not take advantage of the ERC program, it's important to reach out to your CPA or tax preparer now. You could potentially have significant refund claims that will soon expire. Additionally, if you started a new trade or business in 2020 or 2021, it's worth checking in with your CPA or tax advisor as you may also qualify for the ERC based on this lesser-known method.
One word of caution - be sure to thoroughly vet anyone you engage for ERC work. Unfortunately, there have been cases of fraud involving unqualified ERC "mills" that have prepared fraudulent claims, resulting in consequences for businesses. If you suspect you may have been a victim of ERC fraud, it's important to address the issue promptly.
Lastly, don't miss out on the opportunity to claim the ERC if you legitimately qualify. This program has provided much-needed financial relief for many businesses and the deadline to claim is still open. Don't wait until it's too late to file before the April 15, 2025 deadline.
For more information and resources, check out these links: 16 Ways of Qualifying for Employee Retention Credits, Startup Business Employee Retention Credit, The $100,000 Real Estate Employee Retention Credit Windfall, and Washington State Houses of Worship All Qualify for Employee Retention Credits.
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