Can Your Business Still Qualify for the Employee Retention Credit?

Many businesses can still qualify for the Employee Retention Credit (ERC). This IRS tax credit was passed in 2020 in response to the pandemic but was expanded several times and continued through September 30, 2021. The purpose of the credit was to help employers afford to retain their employees rather than lay them off. However, not every business that qualified took the credit. Fortunately, companies that failed to apply for it originally can still file an amended tax return and obtain a refund. To ensure you obtain the credit, it’s best to work with a tax professional when you file. ERC rules are complicated and the documentation required is extensive. If you already filed but are now being audited, you should consult a tax attorney for assistance in dealing with the IRS.

What Is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit for W2 employees that remained employed during the period from March 12, 2020 to September 30, 2021.

The credit is equal to 50% of qualified wages that eligible employers paid their employees up to a credit of $5000 per employee for all calendar quarters in 2020 and 70% of qualified wages for each of the first 3 quarters of 2021 up to a credit of $7,000 per employee per quarter.

How Does a Business Qualify for the Employee Retention Credit?

To qualify for the ERC, businesses and non-profits that carry on a trade or business must have either:

• been completely or partially shut down during any calendar quarter in 2020 due to governmental orders, or
• experienced a significant decline in gross receipts during the calendar quarter.

A significant decline in gross receipts for 2020 means the business must have experienced a decrease of 50% in revenue in any quarter compared to the same quarter of 2019. For 2021, it is a decrease of 20% in revenue compared to the same quarter in 2019. Generally, employers must demonstrate a drop in revenue compared to the same quarter in 2019. However, there is an exception allowing employers to use the quarter immediately preceding the quarter they are claiming if they so elect.

There is also another category of businesses that can qualify for the ERC. These are known as “recovery startup businesses” and they were given the credit in 2021 to acknowledge that businesses that started up during the pandemic faced additional challenges. The requirements for such businesses are as follows:

• the business began carrying on a trade or business on or after February 15, 2020,
• the business had average gross receipts below $1,000,000 for their first taxable year, and
• the business cannot be eligible for the ERTC under the criteria that apply to regular businesses.

What Is the Deadline for Filing for the Credit?

If you did not file for the credit on your original tax return, you have three years to file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to get the credit.

What Happens If You Get Audited?

Your best defense in any audit is good recordkeeping. The IRS documentation requirements to qualify for the ERC are extensive. If you are notified of an audit, gather all of your payroll, revenue, and other information to substantiate what you claimed on your tax return. You should also contact a tax attorney as soon as possible. Your lawyer can help you organize your records, explain any discrepancies if there are any, keep the scope of the audit as limited as possible, and either challenge the audit or negotiate a settlement.

Our tax law firm has more than 25 years of experience helping clients resolve their IRS tax problems. Contact us for a consultation.