If you haven’t yet explored the Employee Retention Tax Credits (ERTC) here are the quick facts that you will need to determine if you may qualify for the credit for your business.
HOW DO YOU QUALIFY
If your business was partially or fully shut down due to government orders related to COVID-19 during 2020, you will automatically qualify for these credits. You also automatically qualify if your business started during 2020 after February 15 and had an annual gross revenue of under $1,000,000.
For those business owners who were not shut down by government orders, you must qualify based on a reduction of income in 2020 or 2021 compared to the same quarter in 2019. For 2020, you must have experienced a 50% or greater reduction in income for Quarters 2, 3 or 4 compared to those same quarters in 2019. For 2021, you must have experienced a 20% or greater reduction in income for Quarters 1, 2 or 3 for 2021 compared to the same quarter of 2019.
If you received forgiveness for PPP loans during 2020 or 2021, it would not keep you from qualifying for the ERTC, however you cannot use wages paid with PPP funding as part of the credit calculation and it would reduce the amount of your eligible credit.
HOW DO YOU APPLY FOR THE CREDITS
After you calculate the eligible credit, you must amend your 941 payroll tax returns for the quarter for which you are applying. The refund is based on filing these amended returns. You have up to 3 years from the filing of the original quarter to file the amendment. Thus, Q2 2020 would have to be amended and filed no later than the end of Q2 2023 to apply for the credit, and so on.
HOW ARE THE CREDITS TREATED FOR TAX PURPOSES
These ERTC credits are considered a reduction of tax-deductible wages for the period in which you are receiving the credit. While you may not be getting the credit until 2022 or 2023, you must report it for the tax year in which it applies and amend your income tax returns accordingly to report the additional taxable income. This filing is required and will generate an income tax obligation for the past year being amended.
If you believe that you may qualify and are ready to take the next steps, please let us know and we will provide you with the contact information for a qualified payroll consultant that can handle the ERTC calculations and amend your payroll tax returns. They will provide an estimate of your credit and the cost for preparing the amended payroll tax returns so that you make an educated decision.
In addition to the amendment of your 941 returns, Phocus will need to be engaged to amend the tax returns for the business and each owner after the credits are calculated for each tax year included with the credits. Once we know the scope of your required amendments, we will give you a package price to amend the required income tax returns and provide you with an estimated income tax cost associated to receiving the credit.
Please reach out to me or any of the CPA’s on the team to discuss questions that you may have.
As always, thank you for allowing us to be your Trusted Advisors.
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