The Employee Retention Credit (ERC) is a government program designed to assist businesses in retaining their employees during the challenging times of the COVID-19 pandemic. Originally established as part of the American Rescue Act legislation in March 2020, the ERC has been expanded, extended, and enlarged to provide additional support to eligible employers. This article aims to provide a comprehensive guide to the ERC, explaining its eligibility criteria, benefits, and the process of claiming the credit.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit that eligible businesses can claim for wages and healthcare costs paid to their employees during 2020 and 2021. Unlike a loan, the ERC does not need to be repaid and can significantly benefit small and mid-sized businesses across various industries.
Eligibility for the ERC
To qualify for the Employee Retention Credit, businesses must meet certain criteria. These include experiencing a significant decline in revenue or being subject to governmental orders that either fully or partially suspend their operations. Eligibility is not limited to businesses that received Paycheck Protection Program (PPP) funds, and even those that previously received PPP funds can now benefit from the ERC.
Examples of Eligibility Criteria
Some examples of situations that could make a business eligible for the ERC include changes in business hours, partial or full suspension of operations, shutdowns of supply chains or vendors, reduction in services offered, and reduction in workforce or employee workloads. Other factors such as disruptions in business operations, inability to visit client sites, and additional spacing requirements for employees and customers due to social distancing can also contribute to eligibility.
Benefits of the ERC
The Employee Retention Credit has proven to be highly lucrative for many businesses across the country. By participating in the program, businesses have been able to secure substantial refunds and financial support. Here are some of the key benefits of the ERC:
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Substantial Refunds: Businesses have received significant refunds through the ERC, with some examples including refunds of $1,100,000 for personal clients and funds ranging from $100,000 to $40 million for Bottom Line Concepts.
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Per Employee Benefits: The ERC provides benefits of up to $26,000 per W2 employee in 2020 and 2021. In 2021, businesses can receive up to $7,000 per employee per quarter from January 1st to September 30th.
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Retroactive Eligibility: The ERC allows businesses to retroactively claim benefits for 2020, with a rate of $5,000 per employee.
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Extended Deadline for Recovery Startups: Recovery Startup Businesses can continue to participate in the ERC program until December 31st, 2021.
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Refunds for Past Quarters: The IRS will issue refunds for past quarters, including the beginning of 2021, back to 2020 Q2.
How to Qualify for the ERC
Qualifying for the Employee Retention Credit involves meeting specific eligibility requirements and navigating the complexities that may pertain to your company's unique situation. Here are some key considerations:
Program Benefits for Small and Large Employers
The ERC is not limited to small businesses and can benefit both small and large employers. Understanding the eligibility requirements based on revenues or governmental orders for past and future quarters is crucial.
Aggregation of Affiliation Rules
Businesses with multiple entities or affiliations need to consider the aggregation of affiliation rules when determining their eligibility for the ERC.
International Nuances
International businesses should be aware of the nuances and potential eligibility criteria specific to their operations.
Treatment of Furloughed Employees and Employees on Paid Leave
Understanding how furloughed employees and employees on paid leave are treated under the ERC program is essential to maximize benefits.
Eligible Costs Besides Wages
In addition to wages, businesses should consider other eligible costs such as employer-paid healthcare and pension contributions when calculating their ERC benefits.
Duration and Partial Eligibility of Program Benefits
Businesses should determine whether they are fully or partially eligible for program benefits and for how long they are eligible, considering the program's 21-month duration.
Recovery Startup Businesses
Understanding the criteria for a Recovery Startup Business and the associated benefits under the ERC program is crucial for eligible businesses.
Part-Time Employees
Navigating the rules governing part-time employees and their eligibility for the ERC is essential for accurate benefit calculations.
Union and Non-Union Situations
Businesses operating in union and non-union environments should be aware of the nuances and specific considerations related to these situations.
Maximizing PPP Forgiveness and ERC Eligibility
Analyzing the mathematical sweet spot to maximize both Paycheck Protection Program (PPP) forgiveness and Employee Retention Credit (ERC) eligibility can result in optimal financial benefits for businesses.
Demystifying FAQs from the IRS
Addressing frequently asked questions and clarifying any doubts from the IRS can help businesses ensure accurate eligibility determinations and maximize their ERC benefits.
Industries that Qualify for the ERC
While the Employee Retention Credit is not limited to specific industries, it has proven to be particularly relevant and beneficial for various sectors. Some of the most relevant industries that qualify for the ERC include:
- Auto Repair Shops
- Bars
- Car Washes
- Churches/Temples
- Commercial Buildings
- Contractors & Construction
- Country Clubs
- Doctor/Veterinarian Offices
- Dry Cleaners
- Franchisees
- Gyms
- Hotels
- Manufacturers
- Moving Companies
- Parking Garages
- Private Schools
- Property Managers
- Restaurants
- Retailers
- Senior Living & Retirement Communities
- Trade Show & Conference Organizers
- Sports Facilities
- Wholesalers
The Process of Claiming the ERC
To claim the Employee Retention Credit, businesses need to follow a step-by-step process. Here is an overview of the client process involved:
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Schedule a Meeting with ERC Advisors: Begin by scheduling a meeting with ERC advisors who can guide you through the process and assess your eligibility.
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Review Eligibility: During the meeting, your eligibility for the ERC will be reviewed based on your specific circumstances and the criteria outlined by the IRS.
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Sign Engagement Letter: If you are eligible and decide to proceed, you will sign an engagement letter with the ERC advisors to initiate the process.
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Complete Questionnaire: A questionnaire will be provided to gather relevant information about your business, operations, and financials.
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Gather Required Documents: Gather all the necessary documents, such as payroll records, financial statements, and any other supporting documentation required to substantiate your ERC claim.
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Determine Eligible Amount: The ERC advisors will calculate the amount you qualify for based on the information provided and the ERC guidelines.
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Bottom Line Completes IRS Filing: The ERC advisors will handle the IRS filing process on your behalf, ensuring accuracy and compliance with all necessary regulations.
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Receive Refunds: Once the IRS processes your ERC claim, you can expect to receive your refunds within 3-5 months.
Conclusion
The Employee Retention Credit (ERC) is a valuable program that provides financial support to businesses that have retained their employees during the COVID-19 pandemic. By understanding the eligibility criteria, navigating the complexities, and following the proper procedures, businesses can maximize their ERC benefits and receive substantial refunds. If your business operated during the pandemic and kept its employees employed, it is worth exploring the potential benefits of the ERC and seeking guidance from experienced advisors to ensure accurate eligibility determinations and successful claims.
