In March of 2020, Congress introduced a new tax credit: the Employee Retention Credit (ERC) as part of the CARES Act. The ERC was a direct response to the pandemic and was designed to help businesses keep employees on the payroll. But the ERC got off to a rocky start and was quickly overshadowed by its pandemic cousin, the Paycheck Protection Program (PPP). Nearly a year and a half later, the IRS is still issuing new guidance on the program, even as Congress is considering phasing it out.
Business owners have dealt with a lot over the past year and a half - both the ERC and PPP are simple to claim and can offer relief retroactively.
On today’s episode of the Taxgirl podcast, Kelly is joined by Dan Chodan to sort out all the intricacies of the ERC and PPP, and what they mean for taxpayers. Dan is a tax partner at Trout CPA, located in Lancaster, Pennsylvania. He has spent the past two years leading Covid relief efforts for clients, including grant programs, the PPP, and tax credit relief.
Listen to Kelly and Dan talk about the ERC for business owners:
How does the ERC benefit business owners? As a refundable tax credit, the ERC is relief money. Its name may be part of the general confusion. Dan says, “We should be calling it PPP Round 3.”
As a payroll tax credit, how does it work? What are the mechanics? Filing the ERC is actually much simpler than the PPP: it’s only a few lines of paperwork.
Who is eligible for the ERC? Any businesses that saw a shutdown or partial shutdown of their business, and experienced a revenue drop of at least 20% (in 2020 businesses had to prove at least a 50% drop).
The timing can be complicated for retroactive filing for the ERC. It’s not too late to file and receive those funds. Dan says this could be “the great treasure hunt” for accountants; businesses can file as late as three years after experiencing a Covid-related shutdown.
Unlike PPP, there are no restrictions on the size of the business for the ERC. There are limits on how it can be filed depending on business size, but any business can claim the credit in some way.
Are there any business scenarios that absolutely would not qualify for the ERC? Is the credit all-or-nothing, or can a business qualify for some quarters and not qualify for others?
Since the ERC is based on payroll taxes, it has to do with W-2 employees and 941s. Since it’s only based on W-2 wages, so contractors aren’t qualifiable.
Business owners have learned many lessons over the last year and a half, from the way they keep records to how frequently they audit those records to the importance of up-to-date bookkeeping.
How can businesses stay on top of the changing guidelines and updates to the ERC? Dan suggests identifying a champion in the office whose sole responsibility it is to keep up with the current information.
How did Dan migrate toward focusing on pandemic relief? When the pandemic hit in March 2020 and his firm was working remotely for the first time, Dan says he was tapped to be the expert on PPP, which snowballed into learning all about ERC as well.
What are Dan’s thoughts about whether the program will be cut short or be extended? He says everything is currently still up in the air, though we may lose the fourth quarter of this year. There’s a newly proposed infrastructure law to the bill that would end the program at the end of September, rather than the end of 2021.
While it has been a long tax season and many tax professionals have been outspoken about feeling fatigued, Kelly and Dan chat about how the changes and new tax laws also provide some excitement to newer tax professionals in the field.
More about Kelly:
Kelly is the creator and host of the Taxgirl podcast series. Kelly is a practicing tax attorney with considerable experience and knowledge. She works with taxpayers like you every day. One of the things that she does is help folks out of tax jams, and hopefully, keep others from getting into them.