The IRS wants employers to take advantage of the Employee Retention Credit, but many businesses are wrongly assuming they are not eligible for the refundable tax credit. Here we look at the 7 biggest myths when it comes to employee retention credit, (and claiming for the maximum credit allowance).
- Myth: Our revenue was up therefore we do not qualify for ERC.
- Myth: We were deemed an essential business therefore we are not eligible for ERC.
- Myth: We took a Paycheck Protection Program (PPP) loan so we do not qualify for ERC.
- Myth: We never shut down our business therefore we do not qualify for ERC.
- Myth: Tax credits, like ERC, do not help us because we are non-profit and do not pay taxes.
- Myth: I do not feel we should receive this money because our revenues increased during the pandemic and do not want to take from a business that needs the funds more.
- Myth: My CPA tells me my business is not eligible.
1. Myth: Our revenue was up therefore we do not qualify for ERC.
FACT: Operations impacted by government orders OR a significant decline in gross receipts (quarterly) would qualify the eligible employer. We have helped many businesses receive Employee Retention Credit whose revenues increased but were still impacted by government orders.
2. Myth: We were deemed an essential business therefore we are not eligible for ERC.
FACT: Nothing in the law (CARES Act) that created Employee Retention Credit designates essential vs non-essential businesses when determining eligibility. Essential businesses can receive ERC if their operations were impacted by government orders OR if they experienced a significant decline in gross revenues.
3. Myth: We took a Paycheck Protection Program (PPP) loan so we do not qualify for ERC.
FACT: This used to be true until the legislation, that became law 12/27/20, changed the CARES Act to allow employers with a PPP loan to also participate in Employee Retention Credit. PPP loan funds used on wages will factor into your unique ERC calculation.
4. Myth: We never shut down our business therefore we do not qualify for ERC.
FACT: Even employers that never shut down can receive ERC if they were impacted by government orders OR had a significant decline in revenue.
5. Myth: Tax credits, like ERC, do not help us because we are a non-profit and do not pay taxes.
FACT: Non-profits, although generally exempt from income taxes, still pay employment taxes on wages paid to their employees. We have helped many non-profits receive ERC that were forced to partially or fully suspend their operations. ERC is a refundable credit so if the employer does not owe back taxes, they will receive a check for the full ERC amount from the IRS.
6. Myth: As an eligible employer, I do not feel we should receive ERC funds because our revenues increased during the pandemic, and do not want to take from a business that needs the ERC funds more.
FACT: ERC is not a grant and not limited to a certain number of employers or capped at a certain dollar amount for qualified wages. If you are an eligible employer and choose not to take ERC, you are willfully paying more in payroll tax than is required by law. This can be seen as the equivalent of writing a check to the treasury as a gift. Also, because this is a tax credit, ERC will not be publicly disclosed like PPP loan funds were.
7. Myth: My CPA tells me my business is not eligible for the tax credit.
FACT: Many CPAs are not focused on payroll tax credits and have not helped companies claim the ERC. Chances are that your CPA may have fallen victim to one of the other myths on the list. The CARES Act clearly describes eligibility as either:
1) experiencing a full or partial suspension of operations due to government orders that limited commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to Covid-19.
2) A significant decline in quarterly gross receipts compared to the same calendar quarter in 2019 (20% decline in 2021, 50% decline in 2020) Do you recall how easy it was to be eligible for PPP? ERC is similarly broad in scope and relies on the employer to decide eligibility if they meet one of the two factors listed above.
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Source of 1st sentence:
IR-2021-21, January 26, 2021, WASHINGTON
— The Internal Revenue Service urges employers to take advantage of the newly extended employee retention credit, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.