Many employers are unaware they are eligible for special tax relief created for the covid-19 pandemic. The Covid-19 Employee Retention Credit (ERC) is worth up to $26,000 per employee when a business qualifies. That means, for example, that a small business with 10 employees could qualify for up to $260,000. It sounds like a lot (and it is), but it's also realistic.
ERC is a fully refundable tax credit. That means if you qualify, you receive a tax refund check from the U.S. Treasury.
Am I too late?
There's still hope if you didn't claim your ERC tax credit during the pandemic (between March 2020 and December 2021). For a limited time, you can claim it retroactively as a tax refund by amending your 2020 and 2021 payroll tax returns.
How does it work?
The rules are complicated, and Congress has changed them multiple times since creating the tax credit in March 2020. The IRS has published hundreds of pages of guidance for this tax benefit and openly admits that its official website is out of date.
But don't let this discourage you. It's too valuable to walk away.
Let's explore it a little more.
The Gross-Receipts Test
Employers qualify in multiple ways. One way is called the gross-receipts test. This test weighs your quarterly gross revenue for 2020 and 2021 against 2019, and if the differences are significant enough, you qualify. But be careful. The comparison rules are different for 2020 and 2021. And many technical variations come into play depending on your business' unique facts and circumstances. Getting a professional evaluation is a smart move.
The Full- or Partial-Suspension Test
Another way employers qualify stems from how the government's Covid-19 mandates affected your business operations. You can qualify even if your revenue increased. In some cases, directives from federal, state, and local governments required employers to stop their operations completely. In other situations, the rules allowed a business to keep its doors open but forced parts of it to close down.
Here's a simple example. A Best Western hotel stayed open during the pandemic, and weary travelers continued to occupy rooms. However, the county's covid-19 directive required the hotel to close its bar and restaurant. The IRS considers this situation a “partial suspension,” and if its impact on the business was "more than nominal," it qualifies for the tax benefit.
A full closure under the rules usually qualifies for the ERC tax benefit. However, a partial suspension is more complicated and must be evaluated case by case based on unique facts and circumstances.
An Important Question
Have you done all you can to claim the tax benefits your company has earned? Seeking specialized help makes a lot of sense. While your payroll company can help file the forms, it's unlikely they have the expertise to evaluate your business for maximum eligibility. The same is true for most tax preparers and accountants, who frequently reach out to specialists to help with the evaluation.
Is your covid-19 tax refund still waiting? Not every employer qualifies. On the other hand, many do qualify but don’t know it. How about you?
