The Employee Retention Tax Credit can provide cash relief for businesses, but changes in legislation and a complicated filing process have left many business owners with more questions than answers. In this guide, we will answer some of the most frequently asked questions about ERC.
1. Can I Get the ERC and a PPP Loan?
Yes. Businesses can claim the ERC even if they received a PPP loan. Even if a business received loan forgiveness, they can still take the ERC. However, wages paid using PPP funds cannot be used to calculate the ERC.
Initially, businesses could not take advantage of both PPP loans and the ERC, but new legislation has changed this rule. The change is retroactive to March 13, 2020.
2. What are Gross Receipts for ERC?
According to the IRS, gross receipts for taxable entities includes:
- Total sales (minus returns and allowances) and all amounts from services
- Income from investments, such as interest, dividends, royalties, annuities, rents, etc.
For tax-exempt entities, gross receipts include:
- Gross receipts from all operations (e.g. all amounts received for services and amounts received from total sales).
- Investment income, including from rents, dividends, royalties
- Gross amount received as grants, contributions, gifts and other similar amounts
- Gross amount received as assessments or dues from affiliated organizations or members
3. Gross Receipts Test or Suspension of Operations Test: Which Should I Use to Reach Eligibility for ERC?
The answer really depends on which year you are claiming the ERC and what happened in your business.
As a note:
- For 2020, most companies are using the Suspension of Operations test to qualify.
- For 2021, most companies are using the Gross Receipts test to qualify.
4. If a Business Qualifies Under the Suspensions of Operations Test, Does it Automatically Qualify as an Eligible Employer for the Quarter?
Yes, but only wages paid while the mandate is in effect will qualify, and they must have a significant impact on the business.
On the other hand, if a business qualifies via the Gross Receipts test, it will automatically qualify for the following quarter and each following quarter until gross receipts are 80% compared to the same period in 2019.
5. Does the ERC Have to be Paid Back?
No. The ERC is a refundable tax credit claimed against employment taxes. It is not considered a loan, and it does not have to be repaid.
6. Is the ERC Considered Taxable Income?
No. The ERC is not considered taxable income. However, under IRC Section 280C, claiming employer tax credits requires you to reduce wages in the amount of the credit. The reduction must occur in the year the wages were paid. So, if you were to claim the ERC for 2021, the credit must be reflected on your 2021 tax return, even if you have yet to receive the refund.
7. How Does a Business Apply for the ERC?
Businesses that still want to claim the ERC will need to file an amended payroll tax return. You have up to three years from the original return filing date to file an amended payroll tax return.
Initially, businesses could use Form 7200 to request an advance from the IRS before the end of the quarter. However, this option is no longer available.
8. How Long Does it Take to Receive a Refund After Filing an Amended Form 941-X?
Once you’ve filed an amended payroll tax return (Form 941-X), you will have to wait for your refund check. For many businesses, the wait period can be significant. Staff shortages, the effects of the pandemic and logistics/supply chain issues have further delayed ERC refunds.
No one can say for sure how long it will take to receive your refund after filing your amended return now, but you can expect it to likely take months.
10. Is PPP Forgiveness Considered Gross Receipts for ERC?
No. PPP forgiveness is not considered gross receipts for the purpose of ERC. Furthermore, Restaurant Revitalization Funding and Shuttered Venue Grant proceeds are also not considered gross receipts for this purpose.
11. Are the ERC Benefits the Same for Large and Small Businesses?
No. The ERC is more advantageous for small businesses because they can include all of their wages paid to employees during periods they are considered an eligible employer. Large businesses, on the other hand, can only include wages that were paid to employees for not providing services.
12. Can Businesses Still Apply for the ERC?
Yes. Businesses can still apply for the ERC by filing an amended payroll tax return. Businesses have up to three years from the filing date to file an amended return. Filing an amended return can be complicated and may best be handled by a professional.
13. How Does a Business Qualify for the ERC?
Businesses may qualify for the ERC if they experienced any of the following:
- They were impacted by full or partial shutdowns related to the COVID-19 pandemic
- Business operations were interrupted due to reduced services, supply chain issues, reduced hours of operations, or limited capacity related to the pandemic.
- After March 13, 2020, the business saw a significant decline in gross receipts compared to the same quarter in 2019. A significant decline is defined as a 50%+ decline for 2020 and a 20%+ decline for 2021.
These are some of the most frequently asked questions about the ERC. Businesses still have time to claim this credit and receive cash relief. Our consulting company can help if you’re unsure whether you qualify.
Ready to find out if you qualify? Let’s find out and get you access to the credits you deserve. To get started today, email Keith Hanson: firstname.lastname@example.org.