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Exploring ERC Eligibility Requirement Changes


Given that businesses have three (or five for certain periods) years before the statute of limitations expires for the filing of an amended return, you and your clients should take another look at Employee Retention Credit (ERC) eligibility requirements and the program’s benefits.

When the ERC program was originally launched in 2020, it provided a refundable payroll tax credit for up to 50 percent of the first $10,000 in qualified wages per employee. Therefore, the maximum ERC for 2020 was $5,000 per employee.

Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the ERC was extended for wages paid for the first two quarters of 2021 and was increased to a maximum tax credit of $7,000 per quarter per employee. The American Rescue Plan Act of 2021 further extended the ERC through December 31, 2021, allowing eligible employers to claim refundable credit in the third and fourth quarters of 2021. Thus, the maximum ERC for 2021 became $28,000 per employee.

Also, under the CARES Act, employers had the option to receive assistance either through ERC or Paycheck Protection Program (PPP), but not both. That changed under the Consolidated Appropriations Act of 2021, which permitted recipients of PPP loans to also participate in the ERC (with certain restrictions), allowing employers to benefit from both programs.

ERC eligibility requirements include:

1. Employers who had to stop operations fully or partially due to COVID-19 government orders. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter,

2. Employers who had a significant decline in gross receipts caused by COVID-19 in 2020 or 2021 compared to 2019 gross receipts, and

3. Recovery startup business, a category added by the American Rescue Plan for the third and fourth quarters of 2021.

To meet the last ERC eligibility requirement, businesses must:

  • Have begun carrying on trade or business after February 15, 2020
  • Have annual gross receipts that do not exceed $1 million
  • Not be eligible for the ERC under the other two categories

According to the Infrastructure Investment and Jobs Act, if employers fulfill the above qualifications to be considered a recovery startup business, they meet the ERC eligibility requirement. In other words, the credit remains available for them for the fourth quarter of 2021.

Claiming ERC Retroactively

The IRS released multiple notices in an attempt to provide clarity to the ERC.  IRS Notice 2021-20 provides guidance for employers claiming the ERC that applies to qualified wages paid between March 12, 2020, and September 30, 2021. The Notice also explains how employers who received a PPP loan can retroactively claim the ERC. To do so, they need to file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarters in which the qualified wages were paid.

On December 6, 2021, the IRS issued Notice 2021-65 with a list of conditions that employers need to meet in order to avoid a failure to deposit penalty. Consequently, employers that reduced deposits in anticipation of the ERC for wages paid in the fourth quarter will not be subject to failure-to-deposit penalties, if they:

  • Reduced deposits on or before December 20, 2021
  • Made deposits for the retained amounts on or before the relevant due date for wages paid on December 31, 2021, regardless of whether they actually pay wages on that date
  • Report the tax liability resulting from early termination of the ERC on the applicable employment tax return

If businesses do not meet the requirements for penalty relief outlined in Notice 2021-65, they can still request penalty relief from the IRS based on reasonable cause. Also, the Notice does not apply to recovery startup businesses that were permitted to claim the ERC for fourth-quarter 2021 wages.

Remaining ERC Opportunities

The ERC has been one of the most important pandemic relief programs introduced to help employers negatively impacted by government pandemic orders. Furthermore, the changes to ERC eligibility requirements have opened the program to a wide range of businesses that were previously disqualified.

The ERC program expired in September 2021, but businesses can still apply for the credit retroactively. Ending the ERC eligibility period a full quarter early, especially in the face of the Omicron and other possible variants, deprives employers of crucial support and ignores the barriers that they are still facing. While a bipartisan group of lawmakers introduced legislation that would reinstate the ERC retroactively and undo the termination of the credit, the bill’s chances of becoming law are still uncertain. In the meantime, businesses should determine their eligibility and take advantage of the remaining ERC opportunities.

Applying for any government support package, including the ERC, can be a complex and time-consuming process. However, outsourcing the entire process provides employers with assistance when reviewing qualified wages, calculating the credits, and filing the necessary forms that allow them to claim the ERC. Furthermore, a secure, fast, and streamlined process managed by a team of experts ensures that businesses are taking the right steps to maintain compliance, future-proofing them for potential audits in years to come.

Please join us on Thursday, Feb. 17 at 2pm EDT for Employee Retention Credit: Lessons Learned and IRS Audit Tips, a free CPE webinar to learn how to best support your clients with ERC-related matters.

Register Now!

 

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