ERTC FAQDec 13, 2021
Looking back at December 2020, who would have guessed then how important the Employee Retention Tax Credit would become for many businesses.
With the passing of the Appropriations Act on 12/28/2020, the Employee Retention Tax Credit, or ERC, was expanded to allow businesses who had previously received PPP funds to also be eligible for the ERC Credit. With this change, thousands of businesses have applied for ERC credits in 2020 and 2021 based on the eligibility criteria of sales decline, business restrictions, and/or supply chain disruptions.
This has meant meaningful refund checks issued to businesses all over the country received for the 2020 and 2021 tax year, with many more still being processed.
This credit has truly been a life saver for many businesses still reeling from the impact of COVID-19. And as we wind down the clock on 2021, we wanted to send out a recap for those that may still have questions regarding ERC. Afterall, while we are finally starting to see the returns filed being processed and checks received, there are still more questions than answers on the ERC credit.
1. Will the ERC be taxable?
The ERC is a payroll tax credit (not an income tax credit), which means that it is not included in gross income. However, the IRS has stated that it believes it is subject to expense disallowance rules, which in effect would make it taxable. We are still waiting for further guidance and/or confirmation from congress on if the credit was intended to be taxable. Should nothing else be issued by congress on this matter, the credit would be taxable. This is the same situation that business owners faced in 2020 regarding PPP, which ultimately became non-taxable as part of the appropriations bill passed on 12/28/2020.
2. How should the ERC be recorded in my books?
The IRS has issued guidance on the recording of the ERC for tax purposes, which states that the credits received in 2021 for 2020 should be shown on the 2020 return in an amended filing. We are still waiting on final guidance from the IRS to see if there may be a simplified option.
We believe for operations, all credits/grants/PPP should be booked as other income, so that your operations are not impacted by the credit. However, for tax purposes it may be the case that wages are reduced by the credits received.
3. What is the deadline to claim the ERC credit?
The ERC credit is claimed by filing an amended form 941, Employer’s Quarterly Federal Tax Return. Per IRS rules, you may file an amended 941 within 3 years of the date of the 941 or 2 years from the date you paid the tax on form 941, whichever is later. This would mean for most businesses, you have until 3/15/2023 to file form 941 to claim your credits.
4. How much will I receive by filing for the ERC?
Qualifying businesses are eligible for a refundable credit of up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. This credit can exceed the total payroll taxes paid in by the business in the qualifying quarter and is paid in the form of a refund check and/or credit to be used on future filings.
5. What should I do if I have already filed for the ERC credit?
SAVE your documents. Just as you would for any tax year, you will want to keep good records on your eligibility for the credit, as the IRS will have the right to review filings at a later date. Good records to keep:
*Sales reports from your POS showing decline in sales (50% for 2020 and 20% in 2021)
*Specific rules/letters/instructions from your state and local governments explaining restrictions put in place and impact this had on your operations.
*State/local guidance on full and partial shutdowns
*Internal documentation showing interrupted operations/inability to access equipment
*Letters from suppliers detailing supply chain issues experienced due to Covid-19 pandemic. This letter should include in detail inability to work with specific vendors, reduction of product and service.
*Narrative explaining impact on operations, including shifting hours to increase sanitation of facility, decrease in hours of operation, etc.
6. What should I do if I received the credit, and it is now taxable?
Our recommendation is to wait and see if more guidance is issued before 12/31/2021 regarding the tax treatment of the ERC. But please know we are watching and paying very close attention to this issue as we head into year-end.
Just as we did last year with PPP, the best thing we can do is plan for both scenarios. This year has had so many moving parts, that we will want to see your taxable income with and without ERC, so that above all there are no surprises. For the purpose of planning, we recommend using 25% effective rate for the business income and ERC credit. Which would mean that if you received $100,000 in ERC credits, your tax liability may be $25,000. While this isn’t ideal, this is still a great way to supplement your business cash flow as we move into 2022
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