Through new laws passed by Congress and the quick action on the part of Gerald McAdoo, a local business owner, thousands of businesses in Texas are about to get the lifeline they need to come out the other side of the pandemic intact.
In the past weeks, President Biden has been encouraging businesses to take advantage of one of the largest tax credits created by passing new law; the Employee Retention Tax Credit.
This credit technically already existed for declared disaster areas throughout the U.S. In March 2020, the CARES Act assimilated the ERC into its relief package specifically for COVID. The American Rescue Plan Act (ARPA), signed in March of this year, expanded the credit further.
To date, over 30,000 businesses have claimed more than $1 billion in ERC. Still, the Biden administration wants to increase awareness of the program and said the Treasury Department would release further guidance about the ERC this week.
The 2020 ERC provides a refundable tax credit of 50% up to $10,000 in qualified wages paid per employee for the year. That means eligible businesses can claim up to $5,000 per employee for last year. If you took a Paycheck Protection Plan (PPP) loan previous to ARPA, you could not receive ERC. That is no longer the case. You can now take both. You have to be careful how you determine what wages you will allocate to each.
ARPA expanded the ERC, making almost every employer eligible. It also extended ERC through the end of 2021 and increased the credit dramatically. The 2021 ERC provides a refundable tax credit up to 70% up to $100,000 in qualified wages paid per employee per quarter. This brings the total annual amount of the credit to $28,000 per employee for 2021. That is more than five times the credit!
The tax credit is initially applied against employment taxes for the business, offsetting most liability in employment tax. What happens if your credit is more than you owe in employment taxes? The IRS sends you a check back for the difference! You can even apply for an advance on the ERC.
Eligibility for 2020 and 2021 is different. For 2020, businesses must have experienced a full or partial shutdown of operations during the year because of COVID OR had a 50% or more decline in gross receipts in any quarter. You do not have to have experienced both of these qualifications but rather one or the other to qualify.
For 2021, businesses must have either experienced a full or partial shutdown or a more than 20% decline in gross receipts in any quarter.
The devil is in the details… What does a full or partial shutdown mean? How many quarters do I need to have seen a decline? What if I was only shut down for a few days or hours were cut? Does that qualify? What if I took PPP in 2020 or 2021? What if I have over 500 employees?
“It’s very complicated, even though it’s very favorable,” said Mark Steber, chief tax officer at Jackson Hewitt Tax Services. “Do not wade into this program without some competent help.”
Gerald McAdoo is the local ERC Expediter for Texas. He has worked with Growth Management Group, which for over 19 years, has helped clients claim tax credits. Experts in Employee Retention Tax Credit, GMG helps you determine the best way to compile your credit along with PPP loans or other incentives your company may be eligible for or have received.