- The Employee Retention Credit applied to the 2020 and 2021 tax years, but you may still be able to file an amended return and claim the credit if you qualify.
- The ERC is a refundable credit to help businesses that kept paying employees despite the disruptions to income caused by COVID-19 pandemic restrictions.
- You should file for the ERC only if you have documentation to show you qualify.
- This article is for business owners who want to know if they should file amended returns to claim the ERC.
If the pandemic impacted your business, you might wonder about the Employee Retention Credit (ERC) and how this relief measure can help you. Radio and TV ads tout various companies’ promises to help businesses reap big money as a reward for keeping workers employed. But is it real or just hype – or worse?
The good news is that the ERC is real. However, whether or not you should claim this tax credit depends on your situation. We’ll help you determine if you qualify, explain how to apply and outline what happens if a business falsely files for the ERC.
What is the Employee Retention Credit?
COVID-19 pandemic challenges and restrictions adversely affected many businesses. The ERC is a refundable tax credit created to help businesses that continued paying employees despite shutdowns or noteworthy gross receipt declines between March 13, 2020, and December 31, 2021.
You’ve likely filed your original tax returns for the applicable periods. However, you can file an amended return to claim the ERC within three years after the original filing date or two years after paying the tax due on the return, whichever is later.
The ERC is refundable, so you may qualify to receive more money back as a refund than you paid in small business taxes.
Who qualifies for the ERC?
The advertisements by third-party companies claiming they can secure additional COVID-19 pandemic relief funds for your business can be tempting – especially when they claim to know the ins and outs and promise to do the work for you. However, you still must provide all necessary records and documentation, and it’s up to you to decide if you’re eligible.
Employers eligible for the ERC must meet one of the following requirements:
- Your business suspended operations. Your business sustained full or partial suspension of operations due to orders from a governmental authority during 2020 or the first three quarters of 2021. The orders may have limited commerce, travel or group meetings due to COVID-19.
- Your business saw a decline in gross receipts. Your business can show a significant decline in gross receipts during 2020, or your gross receipts went down during the first three quarters of 2021. A period of significant decline in gross receipts begins when a business’s gross receipts are less than 50 percent of gross receipts for the same calendar quarter in the prior year. The period of decline ends after the first calendar quarter after a calendar quarter with gross receipts greater than 80 percent of gross receipts for the same calendar quarter in the prior year.
- You had a qualified recovery startup. You had a qualified recovery startup business during the third or fourth quarter of 2021. A recovery startup business is an employer that started a business or trade after February 15, 2020, and has average annual gross receipts not exceeding $1 million.
Check with your certified public accountant (CPA) or tax consultant to help you evaluate if you’re eligible for the ERC.
How much money could I get from the ERC?
The ERC was created to help small businesses survive the COVID-19 pandemic and all its ramifications. Companies may receive up to $5,000 per employee for the year 2020.
The credit is more generous for 2021. If you meet the requirements, you could claim up to $7,000 per employee per quarter. Most businesses can claim the credit for the first three quarters of 2021 only, but qualified startup recovery businesses may also be able to claim the credit for the last quarter of 2021.
Larger companies may face limits on the amount they can claim.
The same wages can’t be counted for tax benefits twice. Any wages you reported as payroll costs for Paycheck Protection Program (PPP) loan forgiveness or specific other tax credits do not qualify for the ERC.
What are the consequences of falsely filing for the ERC?
Filing for the ERC if you’re unsure you qualify or don’t have documentation to show you qualify is a terrible idea. You could be accused of tax fraud, which may result in penalties and long-term adverse effects.
Ahmad Ibrahim, CEO of Neo.Tax, takes a critical look at filing for the ERC at this stage of the game, especially via third-party companies. “Unfortunately, it’s going to come back and bite,” Ibrahim warned.
The IRS is not just conducting tax audits on amended returns for the ERC. According to Ibrahim, it’s working with criminal investigation units (police department units that investigate crimes) and the Justice Department. “It’s not just an audit; it’s not just the money being paid back,” he explained. “They are perceiving this as fraud, versus just ‘Oh, I got some numbers wrong.’” The fact that criminal investigation units and the Justice Department are involved suggests that the IRS sees unsupported filings as malicious actions, not innocent mistakes.
Ibrahim believes third-party ERC filing companies may be more in the crosshairs than their customers. However, that’s little help if the IRS audits your return. If you use a third-party company to file and the IRS determines you filed falsely, you cannot shift the blame to the third party. According to the IRS, taxpayers are always responsible for information reported on their tax returns.
If you must handle a tax audit, consider hiring an accountant or tax attorney to help you thoroughly understand the audit letter and identify the issues the IRS has flagged.
What are tips for filing for the ERC?
Consider the following tips to file for the ERC properly and reduce your chances of being audited by the IRS:
- Organize your records. You must prove the COVID-19 pandemic materially impacted your business and that you continued to pay your employees. Organize payroll reports and financial records to demonstrate your eligibility.
- Get expert advice. Choose professional help you trust, such as your small business accountant, CPA or another tax professional. If they recommend you don’t file, trust them.
- Understand your return before you file. No one knows your business like you do. Read your amended return claiming the ERC, and ask questions before sending a return to the IRS.
The best accounting software can help you maintain impeccable records so you always understand your business’s financial health.
Claim the ERC if your business qualifies
The IRS has no problem with companies taking full advantage of the ERC if they report accurately and completely. “It’s not about shortchanging any benefits you are entitled to. It’s about making sure you get the right amount and that you report accurately, transparently and comprehensively,” Ibrahim explained.
Fear of being audited should never deter you from taking legitimate tax credits. The ERC was created to help small businesses like yours; if you qualify, be sure to take advantage of it.
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