In the dynamic realm of tax credits and financial incentives, misinformation often lurks, creating confusion and missed opportunities for businesses. One such opportunity that has been subject to misconceptions is the Employee Retention Credit (ERC). As businesses across the United States strive to navigate the complexities of economic recovery, it’s crucial to separate fact from fiction and fully understand the potential benefits of the ERC. Let’s debunk 5 common myths surrounding the ERC:
Myth 1: It’s Too Late to Apply for the ERC
Despite the ERC’s initial expiration date on October 1st, 2021, claiming the credit in 2023 is still possible. How? By amending your previously filed payroll returns. As of August 2023, businesses can still file Employee Retention Credit claims for 2020 and 2021. Generally, the deadline for ERC claims for 2020 tax periods is April 15, 2024. For the 2021 tax periods, the Employee Retention Credit deadline is April 15, 2025.
Myth 2: PPP Recipients Can Receive $26,000 Per Employee
While the Consolidated Appropriations Act of 2021 permits PPP recipients to claim the ERC, a word of caution is necessary when calculating the credit per employee. According to IRS guidance, wages used for PPP loan forgiveness or other specific tax credits cannot be claimed for the Employee Retention Credit in the same tax period. In essence, you can’t double-dip by using the same wages for both programs. It’s essential to note that obtaining the full $26,000 per employee through a combination of these incentives is highly unlikely.
Myth 3: Any Period of Closure Due to Governmental Order Qualifies
Not quite. To qualify for an entire quarter of the Employee Retention Credit due to a government order, your business must meet either the decline in gross receipts test or experience a qualifying governmental order that lasted the entire quarter. If your ERC claim is based on a government order, only wages paid during the actual days of partial or full shutdown can be used for the credit.
Myth 4: If Your Gross Receipts Improved in 2021, You Can’t Qualify
Contrary to popular belief, improved gross receipts in 2021 do not necessarily disqualify your business from the ERC. If your business experienced a loss of 20% or more in a specific quarter compared to the same quarter in 2019, you may still qualify for the ERC in 2021. This aspect allows businesses with rebounding sales to also benefit from the credit.
Myth 5: Any Government Guideline Equals Qualification for ERC
It’s important to distinguish between government guidelines and government orders. To qualify for the ERC without relying on the gross receipt test, your business must have encountered a partial or full shutdown of operations due to a COVID-19 governmental order, which limited commerce, travel, or group meetings. Mere government recommendations or mask mandates do not meet the criteria for ERC qualification.
In the intricate landscape of ERC claims, these misconceptions can hinder businesses from taking advantage of the ERC. By staying informed and seeking guidance from a tax expert, such as a Certified Public Accountant (CPA), you can confidently cut through the noise and claim Employee Retention Credit without the risk of an audit. Remember, knowledge is power, and debunking these myths is the first step toward securing your ERC benefits.