If you are a business owner do not miss this opportunity to claim significant tax credits which continue to be enhanced. The Employee Retention Credit (ERC) was created by the CARES Act and has been improved by each of the last three stimulus bills. If you previously thought you were ineligible you may want to look again.
The ERC is available for wages paid in 2020 and 2021 but the rules for each of these years are very different. In 2020 you can get a credit of up to $5,000 for each employee for the entire year. In 2021 you can now receive a credit of up to $7,000 for each employee for any qualifying quarterthrough September 30, 2021. This means if you qualify for each quarter in 2021 you could potentially get a credit of up to $21,000 for each employee.
The credit is equal to 50% of wages in 2020 and 70% of wages in 2021. Therefore, the credit maxes out based on $10,000 of wages during any qualified quarter. The wages of the business owner, spouse, kids, and other relatives’ wages are generally excluded from the credit.
There are three ways to qualify:
- First, if your business was affected by a mandated full or partial suspension of business then you automatically qualify for the This includes any actual closures but also restrictions on hours or capacity. Here are several examples of partial suspension of business:
- A requirement for restaurants to keep tables 6 feet apart
- A restriction on the number of customers who may be in a retail store or event venue at any time
- A requirement for a store to close earlier or intermittently for cleaning
- Law firms who are impacted by courts remaining closed
- Surgeons being restricted from performing elective surgery
- Businesses who could not operate due to stay-at-home orders
It's important to note that if you rely on this test only wages during the exact mandate period qualify rather than all wages for the quarter.
- The second way to qualify is based on a significant reduction in gross receipts. In 2020 your business gross receipts must be down 50% compared to the same quarter of 2019 in order to qualify. In 2021 this requirement is easier to meet because you only need a 20% reduction in gross receipts to meet the test.
Most people are surprised to hear that the 2021 qualification test still compares gross receipts to 2019 rather than the prior year. Upon further reflection, this makes sense because 2019 was pre-pandemic.
An additional improvement that makes it easier to qualify in 2021 is that you can elect to rely on the prior quarter’s gross receipts test to determine if you qualify for the ERC.
- The third way to qualify is if you started a new business after February 15, 2020. If this is the case and your gross receipts for 2020 and 2021 were under $1,000,000/year you are considered a “Recovery Startup Business”. Recovery Startup Businesses automatically qualify for ERC in Q3 and Q4 of 2021 (up to $50,000/quarter).
You can use the below link to schedule a free consultation to help determine if you qualify and how to move forward:
Tim Stolz, CPA, CFP®