1 tax credit may be more helpful for small businesses than a PPP loan — and you could be eligible for both

  • Congress expanded a key tax credit in December’s pandemic relief bill.
  • The Employee Retention Credit provides up to $14,000 per employee for eligible businesses in 2021.
  • On top of that, PPP borrowers are no longer excluded from claiming the credit for 2020 and 2021.
  • Visit the Business section of Insider for more stories.

When Congress passed legislation back in December reauthorizing and extending parts of the CARES Act, changes to a major tax incentive escaped significant attention.

“Nobody understood it when it passed,” said accountant Adam Markowitz, referring to the 40-odd pages of technical changes the bill made to the IRS’s Employee Retention Credit (ERC).

Although the IRS has not yet issued its official guidance, Markowitz told Insider there’s an emerging consensus about what employers might reasonably expect to see, and that the ERC “could be a significantly bigger boon for those who qualify than PPP.”

Most importantly, you no longer have to choose between taking a PPP loan and the credit.

Who’s eligible for the Employee Retention Credit

The biggest update from the original rules is that PPP loan recipients are no longer excluded from claiming the ERC on their 2020 and 2021 taxes.

Even so, the timing of when you use each benefit matters: the wage period for which you’re claiming the ERC is not allowed to overlap with the “covered period” of your PPP loan. For example, if you used a PPP loan to cover employee wages for an eight-week period in August and September of 2020, you cannot claim ERC wages for Q3.

Current eligibility requirements for the 2020 credit are otherwise the same as before, but the rules are more flexible for 2021 filings.

The credit applies to actual wages paid to employees in a given calendar quarter under one of the following conditions:

  • As before, businesses who experience full or partial shutdowns due to government orders.
  • Businesses that can show a 20% drop in quarterly revenue compared with the same quarter in 2019. (The 2020 rule required a 50% drop.)

The ERC offers a max credit of $14,000 per employee

The ERC legislation allows businesses to claim a maximum credit of $14,000 per employee in 2021, up significantly from $5,000 in 2020.

Here’s the math:

In 2020, employers could claim a credit worth half of the first $10,000 of an employee’s annual wages.

For 2021, employers can claim 70% of the first $10,000 of a worker’s quarterly wages in the first and second quarters of the year.

“There are companies out there that will hit the proverbial home-run,” Markowitz said. “The retention credit for 2020, the retention credit for 2021, the PPP of 2020, and the PPP of 2021.”

How to claim the ERC

The ERC counts against federal employment taxes, and businesses can claim it by completing the relevant section on their quarterly tax filings, or Form 941.

As a refundable credit, if your ERC is larger than your tax obligation, the IRS will pay you the difference.

In addition, businesses with fewer than 500 workers can request a cash advance of the credit for current and future quarters by completing Form 7200.

If you missed out on the credit in 2020, or you’re unsure about claiming it this year, you can still file a correction up to three years later. It may take a while for the IRS to process your request, though.

Markowitz cautioned however that many tax experts are not necessarily versed in payroll matters, and the same goes for the software used for each purpose.

“People are gonna miss this left and right,” he said, “but it’s gonna be the most appreciated credit for those who take it.”

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