Introduction
When Covid 19 spread across the globe, many businesses were forced to either severely downsize or completely shut down their operations due to the lockdown imposed to combat the airborne virus.
This caused a worldwide recession that affected the livelihoods of millions of employees. Still, due to the primary operations for many businesses shutting down, many businesses permanently closed off, and many entrepreneurs suffered during this time.
The government saw this closing off of businesses as a threat to the economy and the overall rate of employment as well. They launched the Employee Retention Credit Program, also known as the ERC or ERTC, to encourage businesses not to scale back and help them retain their current employee base during the pandemic.
However, it is a known fact in the market that the legislation and regulations present in the ERC are made to be rather vague and highly complex. Due to this, there are many mistakes business owners make with employee retention credit.
Many of their accountants and employees, in general, not only them, tend to make mistakes claiming for ERC. Let us discuss this in more detail, highlighting some of the common mistakes they tend to make when planning to claim ERC.
Mistakes Business Owners Make With Employee Retention Credit
- Not Claiming ERC Because They Have Already Claimed PPP
Before exploring this noteworthy mistake many business owners tend to make that usually results in them not claiming ERC, we need to understand what PPP is.
PPP, also known as the paycheck protection program, involves loans usually issued by private lenders backed by the small business administration, otherwise known as the SBA.
The main purpose behind these loans is to help businesses stay afloat so that they do not have to lay off any workforce during the pandemic. Due to this program being so similar to the ERTC, not only business owners but this is known to be one of the mistakes employees make with employee retention credit as well.
They think that due to the fact that these programs are so similar to each other, they can only claim one of them at a time, but that is not the case.
Congress has excluded this limitation in the Consolidated Appropriations Act, or CAA for short, which states that you can only claim one or the other.
How it works is that the PPP loans only account for 2.5 times your monthly payroll and employee retention expenses and are designed to be spread over six months. Due to this, a significant amount of untapped payroll expenses can be capitalized on by claiming ERC.
- Assuming They Are Not Eligible Because They Do Not Have a Drop of 50% in Gross Receipts
In addition to PPP loans, another mistake business owners and accountants tend to make is that they forego the possibility of claiming ERC if they do not pass the gross receipts test.
They exclaim that they cannot be a part of this program because they do not have any negative dip in their net revenue, shown in their gross receipts, to be at least 50%.
However, it is essential to understand that the CAA, also known as the Consolidated Appropriations Act, has made several different updates and amendments to its regulations ever since this program launched, one of them being the readjustment of the gross receipt policy.
The way it works after the updates is that the CAA has deemed a dip of around 20% to qualify for this program. However, it is essential to understand there are other ways you can qualify for claiming ERC other than having a dip in gross receipts.
Other than the gross receipts, if your business had to resort to entirely or even partially suspending its operations due to the lockdown or a government-issued order, you would still be able to claim ERC.
- My Business Did Not Shut Down During the Pandemic
There have been instances that some businesses did not completely close down amidst the Covid lockdown.
An example of this is that several businesses have a dedicated online selling platform. After the lockdown, they shut down any in-person dealing and shifted their operations online.
Many business owners assume that, since their establishment was a part of a situation similar to this, they would not be able to claim Employee Retention Credit because the program was designed to cater to businesses that went through a complete shutdown of operations during this time.
However, that is not the case, and even if the government issued an order for a partial suspension of your business establishment, it could still qualify for claiming ERC. Other than shifting to an online mode of operation, there are many other situations where the business had to partially, rather than completely, suspend its operations and still qualify for claiming ERC.
These include many different possibilities, such as a business not being able to have access to their equipment, having them reduce the number of services they may be offering as a part of their business model, or also reducing the hours of operation to cooperate with the strict sanitary standards and regulations set by the government.
Whatever the situation may be, there are several considerations that business owners would want to take into account to determine if their business is qualified to claim ERC.
One critical factor affecting this possibility is whether the business could continue its operations at the same pace, even after partial suspension, and if the suspension impacted the revenue stream for the business.
- I Own an Essential Business Which Was Not Suspended
A common mistake many business owners tend to make is that they assume since they own a business whose operations were not affected by the lockdown, they are not able to claim ERC.
Before addressing this mistake, let us discuss what makes a business an “essential business” exactly. What makes an establishment a category of an ‘essential business’ is if they fulfill the condition of having a duty to be operational and available during emergencies during the COVID-19 pandemic and can include healthcare providers and transporters of essential goods.
If you are a business owner who falls into this category, then there is a great chance that you might not have claimed ERC, because you might have assumed that your business was not affected in any way.
Due to this, you might think it does not fall under the suspension rule associated with the legislation mentioned as a part of the ERC, but that is not the case.
The regulations mentioned in the ERC clearly state that even a business whose operation is deemed essential would still qualify for this program if they were impacted due to the lockdown.
- Instead of Facing Losses, My Business Grew During the Pandemic
The lockdown was not all doom and gloom for business owners because several businesses and industries flourished during this period.
Many businesses, such as freelancing agencies and other technologically driven businesses, profited from the pandemic and thrived in this work-at-home-dependent landscape.
Whatever the establishment, business owners who fall in this category think they might not qualify for claiming ERC because they have profits to show in their gross receipts, even after partial suspension.
However, that is not the case mainly since another condition that deems your business qualified for ERC is the possibility that it was partially suspended as per a government order, due to which your business may qualify as well, even in the case of profit.
- The Business Does Not Have Tax Liability
If a business does not have any tax liability, they do not claim ERC since it does not have to file for a tax return.
However, it is essential to understand that ERC consists of a refundable payroll tax credit, and technically any overage charges made in the form of credit can count as a refundable amount.
Conclusion
Not just business owners and employees but there are mistakes accountants make with ERC as well. Because of this, it is always encouraged to do proper research before concluding when determining whether a business or an employee may qualify for claiming ERC or not.
