January 16th 2025.
Did your small business suffer during the pandemic? And did you miss out on getting a refund for the Employee Retention Credit (ERC)? There are two important things you need to know. Firstly, you can still apply for ERC refunds. And secondly, the deadline for applying is fast approaching. The actual deadline is April 15, 2025.
Let's dig into the details so you can find out if your business qualified for the ERC and what you need to do to claim any missed refunds. It's worth noting that these refunds can be quite substantial, potentially reaching tens or even hundreds of thousands of dollars for eligible businesses.
To provide some background, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed in March 2020 to provide aid to both employers and employees. The main goal was to support struggling businesses and prevent employee layoffs. Initially, businesses had to choose between two programs: the Paycheck Protection Program (PPP) or the Employee Retention Credit. It was not possible to participate in both.
Due to the larger amount of financial assistance offered by the PPP, it quickly became the more popular option. 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 in early 2021, and it was discovered that there were significant funds available for eligible businesses.
One important thing to keep in mind is that the ERC applies to wages paid in both 2020 and 2021. However, the deadline for refunds based on 2020 wages has already passed. The focus now is on refunds for 2021 wages, which can be quite substantial.
So, how do you qualify for the ERC? Generally, businesses must meet one of three criteria: a significant decline in gross receipts, a full or partial suspension of operations due to a government closure order, or starting a new trade or business between February 15, 2020 and December 31, 2021. The most common way to qualify is through a significant decline in gross receipts, which can be easily proven to the IRS. In 2021, businesses needed to show a decline of more than 20% in gross receipts compared to the same quarter in 2019.
The second way to qualify, through government closure orders, can be more complicated and may require further research. It's worth noting that many cases of ERC fraud have been linked to businesses allegedly qualifying based on government orders.
The third way to qualify is by starting a new trade or business. To be eligible for this credit, your small business must have average gross receipts over the previous three years of $1,000,000 or less. This limit looks at the total revenue from all your businesses, and the credit is based on wages paid in any of these businesses.
Not all wages are eligible for the ERC. Qualified wages include those subject to FICA taxes, certain health plan expenses, and wages paid by employers with 500 or fewer employees. Non-qualified wages include those used for the PPP, wages of owners with more than a 50% ownership stake, and wages of family members of owners with more than a 50% stake.
The calculation for the ERC can vary depending on the credit. If you qualify based on a significant decline in gross receipts or a government order, the ERC will be 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 ERC for each quarter would be $10,000 x 70% x 3 employees, totaling $21,000 per quarter or $63,000 in total.
The startup business employee retention credit is only applicable for the third and fourth quarters of 2021, with a maximum credit of $50,000 per quarter. For instance, if a small construction company with an average annual gross receipt of $800,000 invested in a rental property in late 2020, they would be eligible for the startup business credit. If they employed ten workers earning $12,000 each in quarters three and four of 2021, the credit would be the greater of $10,000 x 70% x 10 employees or $70,000 per quarter, totaling $140,000 for the two quarters.
The deadline for claiming ERC refunds depends on the year. For 2020 claims, the deadline was April 15, 2024. Therefore, it is no longer possible to make claims based on 2020 wages. However, for 2021 claims, the deadline is April 15, 2025. This means that there is still time to claim refunds for 2021 wages.
If you operated a small business in 2021 and didn't take advantage of the ERC program, it would be wise to reach out to your CPA or tax preparer now. You may have significant refund claims that will expire soon. Additionally, if you started a new trade or business in 2020 or 2021, it's worth checking with your tax advisor as you may also be eligible for the credit through this lesser-known method.
A final word of caution: be careful in choosing someone to assist you with ERC claims. Unfortunately, there have been instances of fraudulent claims made by unqualified ERC "mills," which have resulted in serious consequences for businesses. If you suspect you may have been a victim of ERC fraud, it's essential to address the issue promptly. On the other hand, if you legitimately qualify for the ERC, don't hesitate to make a claim. This program has provided much-needed financial relief for many businesses, and the window to claim these credits is still open. Don't miss out on this opportunity before the April 15, 2025 deadline.
For more information on qualifying for the ERC, you can visit our blog post "16 Ways of Qualifying for Employee Retention Credits." If you started a new business in 2020 or 2021, our blog posts "Startup Business Employee Retention Credit" and "The $100,000 Real Estate Employee Retention Credit Windfall" may be helpful resources. Additionally, many places of worship have also qualified for the ERC, so if you are a member of a faith community that has been affected by government closure orders, it's worth researching this specialized situation further. Our blog post "Washington State Houses of Worship All Qualify for Employee Retention Credits" provides more details that may apply to other states as well.
If you need assistance with ERC claims, we are happy to help. Our firm has experience and expertise in this area, and we can guide you through the process. The ERC refund program has restarted, and there is still time to apply before the deadline. Please don't hesitate to contact us through our Nelson CPA inquiry form.
In conclusion, the Employee Retention Credit has been a lifeline for many struggling businesses during the pandemic. If you qualify for this credit, it's essential to act quickly and make a claim before the April 15, 2025 deadline. We hope this information has been helpful, and we are here to support you in any way we can. Thank you for reading.
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