Businesses can retroactively claim the employee retention tax credit (ERTC)

Tax credit programs for employee retention have ended, but businesses can retroactively claim credits

The Employee Retention Tax Credit (ERTC) program end date retroactively changed to Sept. 30, 2021, with the signing of the Infrastructure Investment and Jobs Act on Nov. 15, 2021. The recovery startup business remains eligible to claim the credit through Dec. 31, 2021.

However, the program's end does not affect a company's ability to claim retroactively. Businesses will be able to conduct a lookback three years after the sunset of the program to determine if wages they paid after March 12, 2020 will be eligible. Some CPA firms have developed an ERTC Service to assist.

Exactly what is the Employee Retention Credit?

Business owners can claim the ERTC as a refundable credit on qualified wages, including certain health insurance costs.

Which employers are eligible for the Employee Retention Credit?

Since the passage of the American Rescue Plan Act, most employers, including colleges, universities, hospitals, and 501(c) organizations, are eligible for the credit. The Consolidated Appropriations Act extended tax credit eligibility to businesses that took out Paycheck Protection Program (PPP) loans, including those who were initially ineligible for the tax credit.

In order for an employer to qualify, one of two factors must apply during the quarter in which the employer wishes to utilize the credit:

The first point. Due to government orders, the full or partial suspension or reduction of business hours of a trade or business. Credit is only available for the portion of the quarter the business is suspended, not the entire quarter.

As a general rule, some businesses would not qualify under this factor test, based on IRS guidance.

They are not considered essential unless their supply of critical materials/goods is disrupted in a way that impacts their ability to continue operating. The shuttered businesses could continue to run largely intact through teleworking.

If the second factor test is met, any of these businesses may still qualify for the credit.

Secondly, an employer with a significant drop in gross revenues.

IRS Revenue Procedure 2021-33, released on Tuesday, Aug. 10, 2021, allows employers to exclude the amount of forgiveness of a PPP loan and the amount of Shuttered Venue Operators Grants or Restaurant Revitalization Fund grants from the definition of gross receipts solely for the purpose of calculating eligibility for the ERTC. The safe harbor must be applied consistently across all entities.

What are the steps for claiming the Employee Retention Tax Credit retroactively?

The IRS published Notice 2021-20, which provides guidance for employers claiming the Employee Retention Tax Credit, on March 1, 2021. This notice, however, only gives guidelines for the credit for wages paid between March 12, 2020 and September 30, 2021. Businesses should note that this is the program's revised end date. Further, the IRS website previously published the ERTC FAQs in the bulk of the notice.

image

You can retroactively claim the employee retention tax credit if you received a PPP loan, according to the notice. Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, must be filed by employers for past quarters during which qualified wages were paid. The IRS provides three examples (Q&A no. 57) to illustrate its process.

Among the seven examples provided in IRS notice 2021-20 (Q&A no. 49) is a scenario of how an employer with a PPP loan determines if wages are eligible for a tax credit. The amount of qualified wages eligible depends largely on how the wages were accounted for in the application for PPP loan forgiveness. In certain cases where more expenses were used than necessary to justify the forgiveness, qualified wages may be included in reported payroll costs on the forgiveness application. When combining the minimum wage cost with other expenses that qualify for loan forgiveness, the IRS will justify the loan forgiveness based on the minimum wage cost.

IRS rules, however, make it clear that expenses eligible for PPP forgiveness that were not included in the loan forgiveness application cannot be deducted later. In order to maximize the qualified wages eligible for ERTC, it is important to include all eligible expenses, such as utilities, rent, and operations expenses, on the PPP loan forgiveness application.