Many Small Businesses and Nonprofits are Missing Out on this Valuable Covid-related Tax Credit
Due to several misconceptions, more than 50 percent of eligible organizations have not applied for this Federal program that potentially provides a combined credit of up to $26,000 per qualified employee.
The Employee Retention Tax Credit (ERC) is a valuable but often overlooked federal assistance program offered to businesses that have been adversely impacted by the Covid-19 pandemic.
Unlike the Paycheck Protection Plan (PPP) which was widely used and known, the ERC, which provides an incentive to employers for retaining their workforce during the pandemic, has been severely underutilized. The IRS estimates that of the 80 percent of small businesses and not-for-profit organizations that were eligible for the credit, less than half have claimed it. The main reason seems to be a number of misconceptions by business owners and their accountants.
Misconception 1: Organizations that have received funds under the PPP are not eligible for ERC.
This was true when the ERC was first drafted and implemented in 2020. But it was later expanded, in late 2020, to allow businesses and organizations to receive both ERC and PPP. Bottom line is that PPP recipients may also qualify for ERC.
Misconception 2: If a business did not qualify for PPP or did not apply for PPP, they are not qualified for ERC.
PPP and ERC are two different assistance programs with separate eligibility requirements. Not applying or not qualifying for one does not disqualify you from the other program.
Misconception 3: ERC is a loan program and must be paid back with interest.
There is no repayment required. ERC is a grant which is recognized as taxable income. Any organization that gets the benefit of ERC now will need to file an amended tax return for the affected years.
Misconception 4: ERC is only for for-profit organizations and not for nonprofit organizations with 501(3) status.
False. Qualified nonprofit organizations are eligible for the ERC. This program is well-suited for temples, churches, and other charitable organizations that saw a drop in donations or revenues during the pandemic.
Misconception 5: The ERC is too complicated and cumbersome to qualify.
False. If any organization has verifiable quarterly revenue figures for 2019, 2020, and 2021, as well as quarterly 941 forms and payroll reports reflecting W2 employees, all other requirements are manageable.
Misconception 6: ERC is a tax credit, not a refund.
Not true. It is a refundable credit. It is only credited if your organization owes money to the IRS. Otherwise, you get a refund plus applicable interest.
Misconception 7: Covid is over, and now it is too late to apply for and get ERC.
It is not too late. Due to the three-year filing deadline on a quarter-by-quarter basis, organizations may still be able to apply. Although it is not too late right now, most deadlines are coming up.
Who should apply?
The most likely businesses to benefit from ERC are restaurants, hotels, and retail operations. Additionally, even businesses that increased revenue during the pandemic and startup businesses should look at the eligibility criteria and consider filing.
The basic eligibility requirements:
- Your organization must have engaged in business activities in 2019 (pre-Covid) and also 2020 and 2021 (post-Covid).
- Your organization must have been adversely impacted either by a government-ordered shutdown (complete or partial) or experienced at least a 50 percent revenue decline in the quarters of 2020.
- In 2021, your business revenues should have declined by 20 percent.
- Only employers with 100 or fewer W2 employees for 2020, and 500 or fewer employees for 2021, are eligible for ERC.
How to claim ERC
- If you have a third-party payroll processing provider, call them and inform them that you are eligible for ERC credit, and would like them to file an amended 941 (called 941X). They may not have proof of revenue declining, so you may need to provide these.
- If you have an accounting firm doing your payroll and filing quarterly payroll tax returns, they should be able to pinpoint qualifying quarters and file the 941X for you.
- If you process your own paychecks and file quarterly payroll reports, we suggest you seek professional help. The ERC benefit may far outweigh the consultation cost.
What documents will you need?
You will need to maintain the following documents to prepare for audits or inquiries:
The employers should keep proper records and notes of government-mandated shutdowns and a proper record of all three years’ quarterly revenue figures, all applicable quarterly payroll reports (2019/2020/2021) including Form 941, Department of Labor (DOL) reports, and employees’ W2 records.
The clock is ticking on the deadline.
The ERC was a potential lifeline for many businesses during Covid and if your organization failed to apply for it, there is still time to apply, but the clock is ticking. Assuming the original 941 for Q1 2020 was submitted on April 30, 2020, the last date to file an amended 941 (941x) for Q1 2020, is April 30, 2023, after which Q1 2020 ERC opportunity window will shut down. In essence, every three months delay may cost organizations a quarter’s worth of ERC. Based on our experience, for an average mid-size business entity adversely
impacted by COVID, each quarter loss may amount to over $10,000.
Guest columnist Raj Shah is the founder and president of UVS VAT and Property Tax America LLC., companies that help businesses with VAT recovery, property tax appeals, ERC claims, and more. Business Insights is hosted by the Law Firm of KPPB Law (www.kppblaw.com).
Sonjui L. Kumar is a founding partner of KPPB Law, practicing in the area of corporate law and governance. Disclaimer: This article is for general information purposes only and does not constitute legal, tax, or other professional advice.
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