Economic change is a construct that remains inevitable. The world consistently faces massive change, particularly when the global pandemic hit. As governments sought a lasting solution, temporary lockdown measures started, which overhauled the economic landscape for business owners. The government sought out numerous options to help businesses at the time and in the future. Certain programs allow businesses to claim credits regarding taxes already paid.
20 months later, one can almost deduce that corporate America is gradually swinging back into operations. But not quite.
A lot of businesses are still struggling to bounce back fully to what it was pre-pandemic. On the other hand, the US government has introduced some tax credits such as the employee retention credit (ERC) to aid struggling business owners. However, there have been noticeable amendments to the qualifications for the tax credit.
This article will explore everything about the ERC, the changes, and how you can claim your credits if eligible.
What is the ERC?
The Employee Retention Credit was formulated by the Coronavirus Aid, Relief and Economic Security (CARES) Act. It was created to encourage business owners who kept their workers on payroll during the pandemic.
In one of our previous articles, we explicitly explored how business owners who were denied the Paycheck Protection Program (PPP) loans could apply for the ERC, a totally non-refundable tax credit.
A Timeline of Changes to the ERC
The rules, regulations, and eligibility for the ERC have changed considerably over 12 months. For instance, the IRS released official guidance on claiming the tax credit (Notice 2021-20 for 2020 and Notice 2021-23 for 2021), which also dealt with some of the frequently asked questions we will address later on.
However, there have been changes since then. The 2020 Taxpayer Certainty and Disaster Tax Relief Act – part of the Consolidated Appropriations Act – extended the ERC’s scope for the Q1, Q2 and Q3 of 2021.
Now, with the passage of the infrastructure bill, the ERC effectively ended October 1, 2021. The $1 trillion bipartisan infrastructure bill, signed into law by President Biden, has shifted the initially proposed deadline for claiming the ERC from December 31st 2021 to September 30th, removing credits for Q4 of 2021.
The infrastructure bill is a significant piece of the Biden’s administrations agenda. With the bills passage they plan to build and upgrade roads, transit systems, bridges, expand broadband, etc. across the US.
This new change is designed to raise more revenue while offsetting spending increments. Particularly, the latest development to the ERC deadline aims to save up more than $8 billion, which will be included in the funding of the legislation.
It is essential that you know about this development to claim credits for your business before it completely phases out.
How Much is the ERC?
Previously, the ERC was calculated up to 50% of $10,000 in qualified wages paid to workers between March and December 2020. However, in 2021, the qualified salaries increases from 50% for the entire year to 70% of $10,000 per quarter per employee.
With the new bill signed into law, the maximum credit for Q4 was removed available has been reduced to $21,000, with Q4 removed.
What Makes Your Business Eligible for the ERC?
With everything we have discussed so far, what qualifies your business for the tax credit?
First of all your business needs to have fewer than 500 employees on payroll. Very importantly, if you were forced to temporarily or permanently shut down operations during the pandemic. If your business fits this criteria, you are eligible for the tax credit. If your gross receipts faced a decline of more than 20% compared to the previous year, you are also eligible.
You may be eligible for up to $5,000 per employee for 2020 and $21,000 per employee for 2021. However, there is a slight exception to that.
Startup businesses that began operations after February 15th 2020, with a gross receipt of less than $1 million, can claim the credit for the rest of 2021. This means that they can claim up to $28,000 of qualified wages per worker paid in 2021.
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Published by Marc Freedman
Marc currently serves as our Chief Cost Evaluator, expertly advising our client management team on how to help you successfully achieve your business and financial growth goals. A respected mentor to all he consults with, he is an avid collaborator and contributor to the spend consultant community, guiding thought leaders to formulate, design, and install the best operational solutions available to their clients.