Huge tax credits available for employers.
Recently passed legislation provides large credits for employers who have been financially impacted by the pandemic.
The Cares Act in 2020 created the employee retention credit (ERC) to encourage businesses to keep workers employed instead of laying them off during the COVID-19 pandemic.
The American Rescue Plan Act of 2021 (ARPA) substantially expanded the amount of the credits created by the Cares Act. Additionally, there are several ARPA rule changes that will provide more benefits than the Cares Act.
The Cares Act allowed businesses to choose between taking the PPP loan or taking the ERC credit. However, thanks to the new legislation businesses can now take the ERC credit even if they received a PPP loan. Businesses can file amended 941 payroll tax returns if they had previously taken a PPP loan. Many businesses will receive tens of thousands of dollars from amending their 2020 payroll tax returns. Form 941-X should be used to amend the previous 941 payroll tax returns for 2020.
The amount of the tax credit has also been increased. The original law provided a tax credit of up to 50% of each employee’s qualified wages with a maximum credit of $5,000 per employee.
The new tax credit has increased to up to 70% of an employee’s qualified wages. Previously the credit was limited to $5,000 a year but has increased to $7,000 per quarter. If you qualify, you could receive up to $28,000 per employee during 2021.
Employers are eligible for the ERC for each quarter where the gross receipts of that calendar are less than 80% of the gross receipts in the same calendar quarter in 2019.
For 2020, employers calculate the amount of ERC over quarters 2, 3, and 4 by taking up to 50% of the first $10,000 of Qualified Wages paid per employee in the aggregate over all three quarters for a total of $5,000 per employee.
The ERC is both refundable and advanceable, so employers can apply to the IRS for an advance payment against payroll costs in the first two quarters of 2021. However, this only applies to small employers. You can file Form 7200 Advance of Employer Credits Due to Covid-19.
If your business has employees and your income has declined as a result of the pandemic, the ERC may be able to provide your business with a substantial source of cash.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org