During the COVID-19 pandemic there was a slew of various relief packages and initiatives passed to help businesses that were suffering, including PPP loans, Economic Injury Disaster Loans and perhaps most importantly – the Employee Retention Tax Credit (ERTC).
The one that probably got the most attention were PPP Loans, which provided businesses with loans (based on the size of their payroll) that were fully forgivable if used for permissible purposes such as payroll, rent, utilities etc.
Another popular option that received a great deal of attention were Economic Injury Disaster Loans (EIDL). These were available before COVID as well, but since the entire country was essentially in a state of economic disaster, all of a sudden many business owners qualified for these loans, which offered up to $2,000,000 of funding at very favorable terms and rates. Of course the only downside with the EIDL is that they are traditional loans that need to be paid back, and they can come with quite a lot of administrative and compliance headaches.
However, the program that might prove to be the most financially beneficial – and yet is still clearly the program that is least understood – is the Employee Retention Tax Credit (ERTC). This is an extremely complicated program, so this blog post will stick to the basics. Be sure to consult an expert if you’re interested in learning more.
The ERTC is a tax credit that is claimed via the payroll tax returns typically filed on a quarterly basis by business owners. There is no ‘application’ persay to qualify. Rather, as long as a business meets the requirements, it can amend its payroll tax returns from 2020 and 2021 to claim the credit on a quarterly basis. The IRS receives the amended payroll tax returns, processes them and sends out a check to the business owner (granted this has seemed to take 6-8 months on average). There are no restrictions on how the funds may be used.
So, how does one qualify for ERTC?
There are essentially two paths, one relatively simple and the other very complex:
- The Simple Path – Drop in Gross Receipts
- The Complex Path – Full or Partial Suspension
The Simple Path
A business – including tax-exempt organizations – that can demonstrate a significant drop in gross receipts in a certain quarter compared to a prior quarter, will qualify for the credit. There are different rules for 2020 and 2021.
For 2020, if a quarter has a 50% drop in revenue compared to the same quarter in 2019, then that 2020 quarter will qualify. Subsequent quarters will continue to qualify until the quarter after which gross revenue has recovered to at least 80% of the same quarter in 2019.
For 2021, a quarter only needs to show a 20% drop in revenue compared to the same quarter in 2019 to qualify. Furthermore, if one quarter qualifies, that will automatically qualify the next quarter as well – regardless of its revenue compared to 2019. This also works for Q1 of 2021, by looking back at Q4 2020 compared to Q4 2019 – if there’s a 20% drop, then Q1 2021 qualifies regardless of its gross revenue. In other words, it’s entirely possible for a business to qualify for Q1, Q2 and Q3 of 2021 and only have a 20% drop in gross revenue for Q2 2021 (assuming Q4 2020 vs Q4 2019 resulted in a 20% drop as well)!
The Complex Path
Full or partial shutdown is a very complicated topic. The general idea is that if a business was either fully or partially shutdown due a government order in regards to COVID-19, the business may qualify for ERTC for the period of that shutdown.
Full shutdown is fairly straightforward. If for example you own a restaurant, and your state governor ordered all restaurants to be closed for a period of time in 2020, you likely qualify during that shutdown period. However, if restaurants were allowed to be open, say for outdoor dining or delivery only, this gets into the realm of partial shutdown.
While the IRS has published some helpful guidelines regarding partial shutdown, it’s still a fairly vague area. What we do know is that if a business was subject to a partial shutdown, or could stay open but was required to modify its operations, and that shutdown or modification had more than a nominal effect on operations, then the business may qualify under the partial shutdown clause. This is definitely an area where you need to consult with a CPA experienced in the ERTC guidelines.
How Much Money Can You Get?
The amount of the credit claimed for 2020 is 50% of wages paid, with a cap of $10,000 per employee for te entire year. In other words, the most money you can receive is $5,000 per employee for 2020.
Besides being easier to qualify for in 2021, the credit is also worth more money in 2021 than compared to 2020. For 2021, the credit is equal to 70% of wages paid, with a cap of $10,000 of wages per employee per quarter. For most businesses, ERTC ended with Q3 2021. That means the most money a business could receive in 2021 is $21,000 per employee ($7,000 per employee in Q1, Q2 and Q3).
Therefore when it’s all said and done, the maximum funding a business could receive is $26,000 per employee between 2020 and 2021. You can imagine how quickly that adds up for businesses with significant numbers of employees. Many businesses are getting six and even seven-figure checks from the IRS through ERTC!
There is also a unique opportunity to claim ERTC in Q3 and Q4 of 2021. This clause, known as the Recovery Startup Business (RSB), essentially allows businesses that would not otherwise qualify due to a revenue drop or shutdown to still claim ERTC, up to a maximum of $50,000 per quarter in Q3 and Q4 of 2021. To qualify as a RSB, the business must have begun carrying on its trade or business after 2/15/20, its annual gross receipts for the prior three years must be less than $1,000,000 and it must not be able to qualify for ERTC under the revenue drop or shutdown options. The credit would be 70% of wages paid to employees, with a max of $10,000 wages per employee and a max credit of $50,000 across all employees per quarter.
There are many other important parts to claiming ERTC. Some of the most important are:
- Wages paid to owners of a business or relatives of the owner do not qualify.
- For claiming the credit in 2020, if the business had more than 100 full-time employees in 2019 there are additional restrictions. For claiming the credit in 2021, those restrictions only apply if the business had more than 500 employees in 2019.
- ERTC funds are essentially fully taxable, in the year that the wages were paid to employees (not the year in which you receive the check). That likely means going back and amending prior year tax returns if you claim the credit.
- The deadline to claim ERTC is the deadline to amend your payroll tax returns, which is typically three years from their initial deadline. For most businesses, that means that the chance to claim ERTC for Q2 2020 would expire in July of 2023.
If there’s nothing else you take away from this blog post, know that the ERTC is complicated, but it has the potential to be the most lucrative stimulus-related financing for your business. It’s free money that millions of business owners are claiming. We’ve helped many dozens of business owners successfully claim this funding, and we’d be happy to evaluate your eligibility at no initial cost. Feel free to book an appointment with us here!