IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog has been provided by Nick Apollo of The Allies Family Office (www.JoinAllies.com):
**IMPORTANT UPDATE FOR 2022+: While the most recent legislation technically “ended” the ERC in Q3 or Q4 of 2021 (depending on when your company began operating), this refund can still be retroactively amended (details below). That said, the IRS backlog is continuing to grow as more businesses are realizing they qualify now and are sending in their refund applications.
How Your Business Can Benefit From The Employee Retention Tax Credit (ERC / ERTC)
To help the companies who were able to retain their employees through the pandemic, the federal government and IRS created several new economic incentive programs such as the Employee Retention Tax Credit (commonly abbreviated as ERC or ERTC).
This article will explore everything you need to know about the new tax credit and how your business could benefit from applying for it.
What Is the Employee Retention Tax Credit?
The Employee Retention Credit initiative was established within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It was designed to aid and encourage business owners who retained and kept their employees on payroll throughout various stages of the pandemic (in addition to the PPP).
While the program is technically called a “tax credit,” it differs from traditional income tax credits (the ERC is for payroll taxes), and as such, it is most frequently received as a refund check with no spending requirements).
It is essential to be aware of this development to both determine your eligibility, calculate the correct refund amount, and then claim these credits for your business before the deadline to amend your 941 tax form passes.
However, some changes have been made to the ERC under the Taxpayer Certainty and Disaster Tax Relief Act of 2020. And then once again with the passage of the American Rescue Plan in 2021.
A Timeline of Changes to the ERC
The rules, regulations, and eligibility for the ERC have changed considerably over the past 12 months – which has understandably created a lot of confusion about the program – even among tax professionals.
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 (FAQs) that we will address later on.
However, there have been more 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.
Likewise, 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 (for companies who were operating prior to 2/15/2020 – startups after that date are still eligible for Q4).
How Is the ERC Related to the Paycheck Protection Program (PPP) Loan?
Initially, the CARES Act signed in March last year did not permit employers to be recipients of both the PPP loan and ERC. However, The Consolidated Appropriations Act of 2021 now encourages and allows eligible employers to apply for the ERC even if they received PPP forgiveness.
How to Calculate Your ERC?
Previously, the ERC was up to 50% of $10,000 in qualified wages paid to workers between March and December 2020. However, in 2021, the qualified salaries increased from 50% for the entire year in 2020 to 70% of $10,000 per quarter per employee in 2021.
However, with the new bill signed into law, the credit for Q4 was removed for companies operating prior to 2/15/2020, which reduced the total available credit for 2021 to $21,000 ($7000 per employee per quarter – Q1 through Q3).
That said, startup businesses who began operations after February 15th 2020 can still claim the credit for the entirety of 2021. (Up to $28,000 of qualified wages per worker paid).
What Makes Your Business Eligible for the ERC?
First of all, your business needs to have fewer than 500 (full-time) W2 employees on payroll to be eligible for 2021, and/or have less than 100 (full-time) W2 employees on payroll to be eligible for 2020. (i.e. If you had an average of 27 employees between 2020 and 2021 – you could be eligible for both years. Alternatively, if you had an average of 143 employees during the same time period, you wouldn’t be eligible for the 2020 credit, but you could be eligible for it in 2021).
The caveat to this is that there’s currently no limit for part-time W2 employees, so holding companies, investment groups, and staffing firms in industries that traditionally employ a much higher number (500+) of part-time staff may qualify for this credit/refund as well.
How Do I Know If I Qualify For ERC?
There’s a pretty good chance that you’re eligible if your business was in operation between January 1st 2020 and June 30th, 2021, and you experienced at least one of the following scenarios:
- A partial or complete suspension of business operations during the period mentioned above due to governmental lockdown mandates or “stay-at-home” orders. (This is highly dependent on the local laws in the areas your company operates in, as well as any unique operational changes that your company experienced in 2020 and 2021, so it’s worth requesting a personalized review and advice from an ERC specialist).
- For 2020, any calendar quarter during which gross receipts are 50% less than the amount received during the same quarter of 2019. And for 2021, any calendar quarter during which gross receipts are 20% less than the same quarter of 2019. Your company essentially experienced a significant reduction in revenue year over year.
How Can You Claim the ERC?
While the most recent legislation technically “ended” the ERC in either Q3 or Q4 of 2021, it’s critical to know that these credits can be applied retroactively (up to 3 years later). That said, the current backlog with the IRS (at the time of writing) is around 4-6+ months, but that timeline is likely to continue growing as more and more business owners realize that they qualify for this refund now and send in their applications.
If you are an eligible employer, you can input the tax credit on Form 941. You would want to write down the ERC amount—50% for 2020 and 70% for 2021—for each pay period after making all of the required calculations to determine Controlled Group criteria, documenting your qualification methodology, coordinating with prior PPP loans, and allocating healthcare expenses to the appropriate time periods, etc.
While waiting for the confirmation of the ERC, you can also reduce your employment tax deposits with the IRS. Likewise, you can also request an advance of the tax credit on Form 7200 Advance Payment of Employer Credits Due to COVID-19.
Alternatively, if you’d like to determine your eligibility for the tax credit (at no cost), and find answers for the most frequently asked questions and/or common misconceptions about ERC, you’re welcome to learn more here:
Nick and Haley Apollo built and sold two companies prior to assembling the Allies Family Office. Now they focus on networking with fellow business owners, investors and fund managers on their podcast as well as building an international animal sanctuary and rescue network. If you have questions about this content or any area of their expertise, they would welcome the opportunity to connect with my phone at (844) 219-2559 or email at hello@joinallies.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.