Introduction
The Employee Retention Credit program, or the ERC program, was established during the lockdown and was put into effect to halt the dwindling employee retention rate and the number of businesses scaling back due to financial losses.
This program was introduced in March 2020, falling under the CARES act, involves refundable payroll tax credit, and is designed to incentivize small-scale businesses to retain their current workforce during the pandemic.
Ever since this program began during the lockdown in 2020, it has gone through a wide variety of updates and amendments throughout two years, some of them applicable only for the recent years while some of them could be applied to the previous year of 2020 as well.
Although a significant number of changes made to the regulations and qualifications for claiming ERC were in favor of business owners and employees, the government did not do a great job explaining these updates, leading to great confusion when it came to an understanding certain concepts such as ERC deadline.
Let’s discuss this in a bit more detail, understanding some of the myths that arose due to these confusions and clearing them by highlighting some of the updates made in chronological order. Furthermore, we will also explore the concept of the ERC deadline in greater detail.
Business Owners Confused over ETC Deadline: the Myths
- Businesses Established in 2019 Do Not Qualify
Since this program was introduced in 2020, and there is no explicit instruction as to what is the year from which this program may claim ERC, a common confusion that business owners tend to have is that ERC does not apply to them because they established their business before the program was launched under the CARES act.
However, that is not true. The way to approach such a business is to understand that for all businesses launched during 2019, the quarter during which that business was operational would be considered when determining the financial losses.
Furthermore, the losses ranging from the quarter during which the business began until it reached a year of operation are considered.
An example of this is that if a business were to launch during the second tax quarter of 2019, the revenue decline it has suffered during that quarter would be used as a foundation to determine the decline for the quarters which are a part of the year 2020.
- It Is Too Late for My Business To Claim ECR
In addition to beginning their operations too early, on the other side of this situation, many business owners get confused concerning the eligibility criteria.
This has resulted in a common myth stating that if they have already recovered the capital reported in the gross receipts decline before claiming ERC, they would not be eligible to collect the refundable payroll tax amount.
However, that is not the case. You can still claim the ERC credits you have accumulated throughout the tax year despite the documented expiry date of October 1, 2021, which has been mentioned in the legislation for ERC.
This is because the rules and regulations clearly state those businesses have three more years even after the program ends to review their payroll taxes and redeem the wages after determining their eligibility.
Understanding the Eligibility Criteria for Claiming ERC
As discussed earlier, ever since the government introduced this program under the CARES act, it has gone through a vast library of different changes and updates throughout the years, due to which much confusion has arisen, which are related to exactly what types of businesses can qualify for this program.
When determining whether your business is qualified to claim ERC, there is more than one way to go about this.
- The Gross Receipts Test
One of these ways is the gross receipts test, which involves the evaluation of the revenue receipts accumulated by the business, inspecting the revenue decline be business has gone through throughout the quarter, to be more specific.
How it works is that when inspecting the decline, the employers usually take their receipts for their earnings in 2020, and compare it with the overall revenue made in the same quarter of 2021.
For example, when determining whether their business falls under the eligibility criteria to claim ERC for the second quarter of 2021, the employee would have to compare it with the gross receipts accumulated during the second quarter of 2019.
However, there may be unique instances where the employer can use a different quarter to compare their gross receipts
If they were permitted to utilize this exception, the business owner would then be able to determine whether the gross receipts have declined by comparing their revenue for the current quarter of 2021 with the receipts accumulated in the next immediate financial quarter.
- Government Order
Many business owners get confused about whether they are qualified to claim ERC and think passing the gross receipts test is the only way to qualify for ERC, but that is not the case.
In addition to revenue decline, a business may qualify for ERC when a government for its suspension during the lockdown has been issued.
The regulations surrounding the government order requirements for a business to receive ERC state that if an establishment had to partially or fully halt their operations during the applicable financial quarter due to a government order, they would be able to claim ERC.
The issued government order can consist of more than a few restrictions, including limiting the revenue generated by the business establishment or restricting travel and meeting in groups during the lockdown.
When is ERC Deadline?
Due to the lack of clarity mentioned in the ERC legislation, most of the information concerning the deadline for claiming ERC is not only mind-boggling for financial advisors but also has business owners confused over the ETC deadline as well.
Due to these confusions, many accountants and advisors are spreading possible misinformation about the rules and regulations regarding the ERC deadline.
These experts are exclaiming that the rules state that any possible changes and amendments made when claiming ERC are allowed for up to three years, depending on each tax quarter.
Furthermore, they are also stating that this can be used to the advantage of small businesses because doing this would result in a separate deadline, giving your more time to claim ERC.
However, that is not the case, and it is essential to understand that there are only two deadlines to claim ERC, according to the quarter during which your business was operational.
According to these deadlines, for all quarters spanning the year 2020, the ERC deadline for them to apply is before April 15, 2024. Furthermore, for all quarters in 2021, the deadline has been set to be on April 15, 2025.
How Can I File for Retroactive Employee Retention Credit?
Due to the amendments to the regulations surrounding the employee retention credit program, the scaled-back business owners can claim a 70% refund compared to the prior 50% starting in 2021.
Keeping this considerable bump in the tax amount in mind, let us guide you through the entire ERC application submission guide step by step.
Step 1: Compile your Business Information
The first thing you have to do when claiming ERC as a business owner is to research whether you own a business that offers this service or not, and a great way to do so is by consulting with an accountant to see if your business qualifies.
Step 2: Gather Payroll Information
After you have obtained all of the relevant business information, you need to compile the payroll information for your workforce, which consists of the salary information of all employees eligible to receive ERC.
Step 3: Collect all PPP loan documents
If you have applied for any PPP loans for your businesses, you would also need PPP loan papers. This includes the date when your loans were granted and the amount you were provided as a PPP loan.
Step 4: Compile All Employee Information Starting From 2019
After you have collected all the aforementioned documents, you will be required to present all information about your full-time employees who have worked in your company since 2019.
Sales 5: Assemble Revenue Paperwork for 2019 and 2020
This is the last bit of paperwork that would be needed and the most essential piece of information because it will act as evidence for you to claim ERC.
Conclusion
Since a vast majority of the information associated with the ERC deadline and the rules and regulations surrounding it has gone through many amendments and updates, much of the information has become shrouded in a layer of ambiguity.
However, following this article will help you understand the intricacies behind the concept of ERC and its eligibility criteria.
