September 15th 2023.
The Employee Retention Tax Credit (ERC) was a refundable payroll tax credit created under the CARES Act to help businesses that continued paying employees during the COVID-19 pandemic. Businesses that experienced a significant decline in gross receipts during the eligibility periods could claim up to $26,000 per employee if they paid wages in all eligible quarters.
Initially, the ERC was a lesser-known option compared to the Paycheck Protection Program (PPP) loans, with businesses receiving PPP loans originally ineligible to claim the ERC. The program was initially set to end on September 30, 2021 however the IRS extended the deadlines to claim the credit retroactively, allowing businesses to now claim the credit for wages paid in 2020 until April 15, 2024 and for wages paid in the first three quarters of 2021 until April 15, 2025.
The potentially high refund amounts and complexity of the program caused a new industry of ERC consultancy firms to appear, some of whom are not always acting in the best interests of businesses. This caused the IRS to become increasingly alarmed about honest small business owners being scammed, and so they imposed a moratorium on the ERC effective immediately and to last until the end of 2023.
The IRS is continuing to process claims filed before the moratorium however the processing time is significantly reduced and could take up to 180 days or longer. The agency is training auditors to focus on ERC claims posing the highest risk and working with the Department of Justice to identify fraud and investigate businesses or promoters of fraudulent claims.
The IRS recommends businesses use the moratorium period to carefully review their application to ensure eligibility and to work with a Certified Public Accountant or other tax professional who understands ERC eligibility. They have also published a new question-and-answer guide to help clarify eligibility requirements.
The qualifications for an eligible employer depend on the period during which the qualified wages were paid. Generally, to qualify for the tax credit on qualified wages paid between March 13 and December 21, 2020, businesses must have carried on trade or been a tax-exempt organization and either received a government order for a full or partial suspension of operations, or have experienced a decline in gross receipts of 50% or more for the corresponding quarter in 2019 due to COVID-19-related decline.
For wages paid between January 1, 2021, and September 30, 2021, businesses must have either received an appropriate government authority's order for a full or partial shutdown of business operations, or experienced a decline of 80% in gross receipts for the corresponding quarter in 2019 due to Covid-related decline.
Most businesses do not qualify for the ERC on wages paid during Q4 2021, with the only exception being recovery startup businesses as defined in the American Rescue Plan Act. This includes any business which opened its doors during the pandemic after February 15, 2020.
If you are concerned about your ERC application, contact us, a CPA or tax professional, or visit the IRS website's eligibility checklist for more information. Alternatively, you can still apply for an ERTC advance, which provides the funds for the ERC through a financial institution that issues the advance.
The Employee Retention Tax Credit (ERC) was a refundable payroll tax credit for businesses that continued to employ their workers during the COVID-19 pandemic. It was initially enacted under the CARES Act and had several updates in subsequent legislation. Eligible employers could receive up to $26,000 per employee if they paid wages in all eligible quarters.
At first, most business owners focused on Paycheck Protection Program (PPP) loans and ERC claims were overlooked. Businesses that received PPP loans were initially ineligible to claim the ERC. However, changes to the program opened up new opportunities for businesses to claim the credit. The IRS also extended the deadlines to claim the credit retroactively. The deadline for wages paid in 2020 is April 15, 2024, while the deadline for wages paid in the first three quarters of 2021 is April 15, 2025.
The potentially high refund amounts and complexity surrounding the ERC created a new industry of ERC advisors and consultants. While some of these companies wanted to genuinely help eligible business owners, some unscrupulous companies pressured ineligible businesses to apply. The influx of improper claims caused the IRS to issue a moratorium on the program effective immediately and lasting until the end of 2023.
The IRS is continuing to process claims that were filed before the moratorium, though the processing time will be significantly reduced. Applications are also facing additional compliance scrutiny, so any issues or filing errors could further increase the delay. If your claim is eligible, you can still apply for an ERTC advance to access the funds sooner.
If you plan to file for the ERC, the IRS recommends taking the moratorium period to carefully review your application to ensure eligibility. It also published a new question-and-answer guide to help clarify eligibility requirements. It's important to be aware of bad actors who require an upfront fee to file or who base their payment on the size of the refund.
The qualifications for an eligible employer depend on the period during which the qualified wages were paid. To qualify for the tax credit on qualified wages paid between March 13 and December 21, 2020, your business must have carried on trade or have been a tax-exempt organization that received a government order for a full or partial suspension of operations, or experienced a decline in gross receipts of 50% or more for the corresponding quarter in 2019 due to COVID-19-related decline.
Businesses applying for the ERC for wages paid between January 1, 2021, and September 30, 2021, must meet the following conditions: an appropriate government authority ordered a full or partial shutdown of business operations, or experience a decline of 80% in gross receipts for the corresponding quarter in 2019 due to Covid-related decline.
Most businesses do not qualify for the ERC on wages paid during Q4 2021. The sole exception applies to recovery startup businesses, which are defined in the American Rescue Plan Act as any business that opened its doors during the pandemic on or after February 15, 2020.
It's important to be aware of the qualifications for the ERC and potential bad actors when filing. Be sure to consult with a Certified Public Accountant or other tax professional who understands ERC eligibility, and take extra precautions to ensure your application is accurate. If you need help with alternative business funding solutions, we can help.
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