The Employee Retention Tax Credits, or ERC, was first enacted by the multitrillion-dollar CARES Act in March 2020 to address the economic impact of COVID on many businesses. When first enacted, the ERC gave employers the opportunity to qualify for up to 50% of $10,000 in eligible wages, or up to $5,000 worth of credits, per employee for 2020. Since then, several pieces of legislature, including the American Rescue Plan and, more recently, the Infrastructure Bill, have expanded the ERC to include the first three quarters of 2021 as well as increase the maximum credits for 2021 to 70% of $10,000 in eligible wages per employee, for each of the first three quarters of 2021 or a total of up to $21,000 per employee for 2021. On top of these expansions, the subsequent legislature also loosened the criteria to be eligible for the ERC, allowing more businesses the opportunity to qualify for the credits.
To summarize the credits value, the ERC now allows employers to qualify for up to $5,000 per employee for 2020, $7,000 per employee for Q1 of 2021, $7,000 per employee for Q2 of 2021, and $7,000 per employee for Q3 of 2021, for a total of up to $26,000 per employee in employee retention tax credits.
Why Haven’t More Businesses Utilized The ERC?
For many business owners, these tax credits present a massive opportunity to negate the impact of COVID on their organization. Unfortunately, the vast majority of business owners are either still completely unaware of the ERC or, due to a number of misnomers, are under the false belief that their business will not qualify. These misnomers are due to most tax professionals, who are not specialized in the program, having a lack of understanding of the guidance issued — specifically, the different ways a business can qualify for the ERC — and thus are misinforming their clients on their eligibility for the funds. As a result, the government still has tens of billions of dollars in ERC funds ready to be distributed, yet hundreds of thousands of businesses that would qualify are still failing to take advantage of these credits.
Despite these misnomers, the IRS management believes that approximately 70%–80% of all small and medium-sized businesses, including tax-exempt organizations, are good candidates for the ERC. Unfortunately, only about 5% of those businesses that are good candidates have filed for the tax credits so far. To understand why the IRS believes so many more businesses are eligible for the ERC than is conventionally thought at this time, we must understand the different ways a business can qualify for the program.
How Can One’s Business Qualify?
The first way to qualify, and the only way on which most tax experts are basing their client’s eligibility, is to show the business experienced a significant decline in gross receipts. To count as significant, a business must show a 50% decrease in gross receipts in 2020 compared to the same quarter in 2019, or a 20% decrease in gross receipts in 2021 compared to the same quarter in 2019. While this is the easiest way to qualify, very few businesses meet these criteria. Thus, thousands of business owners are being incorrectly advised to not file for the credits because their tax experts believe this is the sole method for them to receive the funds.
In reality, there are two additional ways a business can qualify for the ERC. The first of these ways is to show a business was negatively affected by full or partial shutdown orders from any level of government. The second alternative way to qualify is to show a business experienced a nominal negative effect on a portion of the business. While a large portion of businesses did not experience a significant decrease in receipts, the vast majority of them did experience at least one of these two other effects from COVID — which is why the IRS projects such a high percentage of businesses can still qualify for the ERC.
The two alternative methods require an intricate knowledge of the ERC guidance and government regulations, as well as a lot of analysis of the business’s financial statements. While the first is the more likely way to qualify a business, ERC candidacy will be considered by the government only once per business — which makes it important to know of all aspects of the program in order to maximize the credits a business receives. Due to these complexities, it is highly recommended that any business seeking to obtain these credits use an ERC specialized tax expert to do so.
Specializing in the ERC, Jorns & Associates is a fully staffed accounting firm that provides complete, rapid and uncompromising results for its clients. With hundreds of veteran tax professionals and decades of industry experience, Jorns & Associates is one of the leading tax firms that is strictly focused on the ERC. Jorns & Associates’ mission is to have industry-leading expertise and provide the highest quality service to deliver maximum value for its clients. Combining all this with its proprietary ERC software, Jorns & Associates has the experience and tools to maximize its client’s tax credits.
Businesses interested in finding out more about how they could benefit from the ERC can visit here.