Does Your Business Qualify for Employee Retention Tax Credits? [A Layman’s Guide]
The Employee Retention Tax Credit (ERTC) is a way for the IRS to give significant amounts of financial aid to employers who were impacted by the pandemic in 2020 and 2021. Of course, your response may be, “wasn’t every business impacted by the pandemic?”
The short answer is yes, so your business most likely qualifies for the credit! However, there is nuance to the 200-page guidance we have to abide by to do this right. After all, we can’t just ring up the IRS and say “Hey my business was impacted by Covid-19, where are my tax credits?”
They’ll have questions. They need to know the scale of impact on your business, and there are a lot of details to cover to paint a clear picture of how much aid your business should get and why.
So in this blog post, we’re going to cover that nuance to make doubly sure you know not just if you qualify, but have a good idea of why and how you qualify so you can feel more confident and clear as you start your process to claim your tax credits.
The Pillars of Qualification
There are 3 pillars of qualification for the Employee Retention Tax Credits.
- Did you experience a qualified dip in revenue?
- Did you experience a partial or full shut-down of operations?
- Did you experience a supply chain disruption that prevented your business from getting the necessary supplies to stay afloat?
- Did you start your operations after Feb 15, 2020?
These pillars seem simple on the surface, but you’d be surprised by the nuance. For instance, “partial shutdown” doesn’t mean what you’d think at first glance. In fact, you could’ve remained fully operational during the pandemic and still legally qualify for credits on the basis of a partial shutdown. We’ll explain why that is, and other nuances, here in the article as we go deeper into these.
Revenue Reduction Qualification for Employee Retention Tax Credit
Revenue qualifications are broken down into two years, 2020 and 2021. And each year is different.
In 2020 you would have had to experience a significant dip in revenue (50% or more) in any quarter compared to that same quarter in 2019.
If you can identify that 3 month period where your business experienced such a dip, you qualify for that quarter and the quarters after until your business revenue jumps back up to less than a 20% dip in revenue. At that point, you no longer qualify.
So in short, the significant dip quarter, and every quarter thereafter until you recover above a 20% decrease in revenue is what you would send to the IRS for review to receive your tax credits.
You qualify for 2021 if you experienced a 20% dip in revenue in any quarter, again, in relation to that same quarter in 2019. NOT compared to 2020.
In short: if you know you experienced a 50% dip in any quarter in 2020, or a 20% or higher dip in 2021 (than 2019), it sounds like you qualify and have financial aid waiting for you from the IRS. All you have to do is claim it, which we’ll go over later.
If you want to go into more detail on this pillar, see our blog dedicated to it here:
Not in the mood to keep reading, see a video here:
Next, let’s discuss the next pillar.
Partial or Full Shutdown of Operations (It’s not what you think)
If you experienced a partial or full shutdown of operations in 2020 or 2021, you probably qualify for Employee Retention Tax Credits. The thing is, “shutdown” is not as simple as the doors of your business being open or closed. It’s much more nuanced and much broader than people think, and most of our clients don’t realize they qualify for ERTC for this reason until we tell them.
This is because a partial shutdown of business operations includes having to modify business operations to meet compliance for Covid-19 mandates.
Some examples of having to modify business operations for Covid-19 include (but aren’t limited to):
- Limiting occupancy or social distancing indoors (common with retail, restaurants, grocery stores, gas stations as examples)
- Having to limit customer access, reconfigure your floor space, or otherwise modify how customers access your facility.
- Replacing dine-in with take-out only or any other “contactless” pickup and drop off services
- Having to take appointments only instead of accepting walk-in clients (tattoo and piercing businesses are one example of this)
- Having to apply a different format to your business operations to meet guidelines (requiring clientele and employees to wear face coverings & PPE, shifting work schedules food cleaning, implementing employee & customer screening, etc)
The nuance here is that these modifications had to have what the IRS calls “more than a nominal” impact on your business. Meaning: you have to demonstrate these modifications affect at least 10% of your business, whether that be revenue or hours worked.
An example of this nuanced qualification applied:
Let’s say a restaurant never shut down during Covid but had to make some changes. They stopped accepting dine-in patrons. Only took take-out orders and expanded into delivery orders to make up for the loss of revenue.
This is in addition to placing barriers indoors, enforcing social distancing, limiting occupancy, and requiring masks be worn by employees and patrons who came in for pick-up.
Before, dine-in orders accounted for more than 70% of their revenue. They had to forego that 70% and find different ways to serve their community and keep business open.
This restaurant never “shut down” in a literal sense of the word, but they DO qualify for a partial shutdown because they had to make modifications to their business that was more than nominal.
In short: if you were actually shut down during Covid, your business likely qualifies. But even if you weren’t shut down, your business still probably qualifies! So don’t count yourself out just yet.
Looking for more information, see our blog dedicated to this qualifier here:
Or, check out our video here:
Supply Chain Disruption Qualifier for Employee Retention Tax Credit
The supply chain disruption qualification – of all of them – is probably the most straightforward (and the most difficult to qualify for).
Simply put, the supply chain disruption qualification is for you if you weren’t able to get supplies that affected more than a nominal amount of your business operations due to a supplier being fully or partially shut down for Covid-19.
Where this gets tricky is that it doesn’t include what we call “demand side-shock” shortages. An example of this is PPE suppliers that had to prioritize hospital orders as restaurants and other businesses developed a higher demand for PPE as a result of Covid.
Instead, this would need to be a case of your manufacturer or supplier being directly partially or fully shut down for Covid, and you can’t get your supplies from them or any other supplier. You were effectively prevented from getting supplies your business already needed as a result of Covid-19 provisions shutting down your supplier with no available substitutes.
Need more details around this qualifier, look no further than here:
To relax and watch a video instead, click below:
Startup After Feb 15, 2020
The last (and lesser-known) qualifier is that you started your operations after Feb 15, 2020. This is a straightforward qualification and you can receive up to $50,000 per quarter simply for being a startup.
If you’ve read through this and know you qualify or even have more questions, you’re welcome to reach out to our team and we can help clear those questions up for you.
We can help you find out if you really do qualify, discuss what the process and your options are, and help protect you from getting audited as well as getting the highest possible return.
Click here to schedule a call with our team.
How Small Business Can Get Government Funding for Covid Relief
The recent Covid-19 outbreak has left many small businesses in the United States struggling to keep their doors open, and these companies might be eligible for tens of thousands of dollars in tax credits if they have been able to maintain employment. There are certain requirements that must be met in order to qualify for these credits, but most companies do qualify even if they don’t know it.
These tax credits entitle businesses to apply for financial relief if they meet a few basic requirements, and most small businesses qualify regardless of the number of employees. Covid outbreaks often affect local communities in more ways than one, and these businesses are often some of the first to be affected by the virus.
How Do Employee Retention Tax Credits Work?
The Employee Retention Tax Credit is a way the federal government can help small businesses that have been struggling to make ends meet in this Covid-19 crisis. This credit gives these companies up to $28,000 per employee per year in tax credits if they have done everything they can to keep their staff employed during 2020 and 2021. There are, however, some qualifications that must be met before a company will qualify for these funds.
How Do I Qualify?
There are 3 ways to qualify for the Employee Retention Tax Credits.
Revenue Reduction is the first way to qualify.
In 2020 your company’s revenue would have dipped by at least 50% in any quarter compared to the same quarter in 2019.
You qualify for 2021 if your revenue dipped by 20% in any quarter, again, as it relates to the same quarter in 2019. Do NOT compare 2021 revenue to 2020 to qualify for this.
Partial or Full Shutdown is the second way to qualify.
This is broader than people expect because it doesn’t mean a literal “shut down” of business operations – though that does qualify too.
Businesses that have been forced to make drastic changes due to Covid-19 mandates and compliance are also eligible for the tax credit, even if they remained fully operational.
The IRS requires that businesses have a “substantial” effect on revenue or employment in order to qualify for tax credits. This means it must have impacted more than 10% of your business (revenue or employee status).
Supply Chain Disruptions are the final way to qualify for ERTC.
Simply put, the supply chain disruption qualification is for you if your supplier was shut down due to Covid-19 and you weren’t able to find a substitute.
What this doesn’t cover is “demand side-shock”. An example of this is that Covid might have increased the demand for personal protective equipment (PPE) suppliers, which would lead to hospital orders taking precedence over order fulfillment from other groups. Since the supplier wasn’t shut down (fully or partially) by Covid-19, this is considered by the IRS to be a demand-related issue and not an issue of Covid-19 compliance & mandates, which is ultimately what the ERTC is here to provide relief for.
How Much Can I Qualify For?
The answer to this question depends on the number of qualified employees you have and when you retained them.
For qualified employees retained during the qualified quarter(s) in 2020, you can get up to $5,000 per employee per quarter.
In 2021, the number goes up. You can receive up to $7,000 per employee per affected quarter, amounting to up to $28,000 per employee per calendar year as the maximum payout.
Warning: there is information out there saying you must have been fully shut down by the government or forced to make significant changes in order to qualify for these tax credits. This information is not true, even though many accountants might even believe it. This is due to the 200 page guidance being very difficult to study & understand – even for CPA’s. So it’s easy to skim and come to the conclusion that it’s difficult to qualify. The truth is that the guidance is 200 pages explaining a WEALTH of ways you DO qualify for more of a return and can be protected from triggering an audit in doing so. According to IRS.gov, you’re could be eligible for credits even if you stayed fully operational during the pandemic. This is just one example of several misunderstandings about qualifications for the ERTC.
This is also why we highly recommend speaking with a specialist about your chances of qualifying.
How Do I Claim My Tax Credits If I Qualify?
If you think your business qualifies, get the process started now- this opportunity will not last long.
How? It depends.
If You Missed Your 2020 or Early 2021 Credits
For people who have already submitted their federal tax returns, the good news is that we can request a refund. So even if you missed your credits in 2020 and the first part of 2021, we can go back and amend your return to retroactively determine what you are owed and submit that from the IRS.
For Current Periods
For current periods there are a couple of ways to request the money.
The most common way to qualify for these credits is to include the calculations for the payroll tax credits in your current quarter payroll tax return, or your 941.
If you use a payroll company you will have to tell them the amounts of your qualified wages, your tax credits, and your estimated refundable and non-refundable portions.
If you file your own returns, you’ll need to include this information on your 941. Another way is to request an advance. This involves faxing a different form with the IRS toward the beginning of the quarter to give the IRS time to process it.
Another way to get the funds is to reduce your payroll tax deposits by the amounts during the quarter. This will have to be reconciled at the end of your quarter so the IRS can understand why you stopped paying your payroll tax during the quarter.
In each scenario, once completed the IRS will send you a check for the amount in excess of any credits you received during the quarter.
CPA vs. DIY
Applying for this credit without a CPA that specializes in the Covid-19 Tax Credit could hurt your chances to receive the most money back. Or worse, make an error that puts you at risk for an audit.
This is a new type of credit with over 200 pages of complex guidance (rules and regulations) from the IRS. Even most CPA’s struggle to understand it unless they specialize in this type of tax credit. Many CPA’s who don’t specialize in this credit actually refer their clients to us for this program to make sure they get specialized support.
This is because we do specialize in the ERTC. Our sole focus is helping businesses small and large recover from the financial impact of COVID-19 and get relief. So we’ve studied the guidance, and are successfully helping clients get their tax credits with confidence that they’re not going to experience an audit for doing so.
What’s Your Process?
Having us help you with your Employee Retention Tax Credits is very simple. First we’ll have a no-strings-attached call with you to simply determine if you qualify and if it’s mutually beneficial for us to help you. You can ask any questions you want, we’ll have answers, and we’ll support you in deciding for yourself if this is something you want to do.
If we both decide to work together on your ERTC, we’ll start our 3-step process.
Step 1: Data-Gathering
Much like attorneys have to gather their data (evidence) before building a case, we have to gather our data (evidence) before going to the IRS with forms explaining why you qualify for the credit.
Some of this data is from your business (revenue, profit reports, employee payroll reports, etc.) and some of it is from the government, such as state and local provisions for Covid to paint a clear picture for the IRS of how Covid has impacted your business.
The idea here is to gather as much documentation as possible to account for what happened to your business during Covid.
Step 2: Analysis
This is where we “build the case”, or connect the dots between government requirements during Covid-19 and the tangible, documented, irrefutable changes that happened to your business as a result.
We use the documents gathered in step 1 to paint a picture of your business’s Covid-19 story, simply put.
Step 3: Submission
Once we’ve “built the case”, it’s time to prepare documents and file them. Filing happens in a few different ways and each one depends on the type of filing we select for your business. Some forms are required to be mailed in, while others are electronic and others still are faxed.
Each filing has a different expected turnaround time for you to receive your funds.
We’re happy to discuss turnaround times, your case, qualifications, and potential for return on a quick call. Click here to schedule yours today.
Employee Retention Tax Credit: Mistakes & Challenges with Securing Your Credits
So, you’ve learned that the IRS may give you money to help you recover from the havoc COVID-19 caused your business in 2020 and 2021. But not through PPP, PPP2, Restaurant Revitalization Fund, or Shuttered Venue Operators Grant. No, there’s a new kid on the block called the Employee Retention Tax Credit (ERTC), which was approved through the CARES Act.
Of course, like most things with the IRS, the ERTC is complex. Most CPAs don’t know what to look out for. This is why it’s important for you to be informed, know how to avoid getting audited, if you qualify (even if others told you you don’t), and how to make sure you’re getting your maximum return.
Now, to be clear, employee retention tax credits are complicated. The IRS doesn’t make it easy for you. But that’s what we’re here to help with.
So, here are the biggest mistakes & challenges small businesses need to avoid to secure their ERTC.
#1: Thinking Receiving PPP or Other COVID-19 Relief Disqualifies You
It used to be true that you were limited on the types of relief you could claim, but that’s not true now. With the CARES Act, you can now claim ERTC Credit even if you already received relief from PPP, PPP2, or another program.
The key is to account for those other forms of relief and to not “double-dip”. So if you did receive PPP, PPP2, or funding from another program, this needs to be documented and accounted for when you file.
#2: Thinking Your Business Didn’t Experience Enough Downturn too Qualify
In 2020 you needed a 50% downturn in a single quarter compared to that same quarter in 2019 to qualify. That is true. But in 2021 the requirement is a lot more forgiving, with only a 20% downturn requirement (again, compared to 2019).
#3: Thinking Your Business Doesn’t Qualify for Partial Shutdown
Partial shutdown doesn’t mean “doors are no longer open for business”. Your business could have stayed fully operational during the entire pandemic and still qualify under the partial shutdown provision.
This is because businesses forced to make changes due to Covid-19 compliance are eligible for the tax credit even if they remained operational.
Eligible modifications include (but aren’t limited to):
- Replacing dine-in with take-out only
- Having to take appointments only instead of accepting walk-in clients
- Limiting occupancy or social distancing indoors
- Having to apply a different format to your business operations to meet guidelines (requiring clientele and employees to wear face coverings & PPE, etc).
- Having to place physical barriers in your business
- Having to move to teleservices and close in-person office locations
Tax credits are available to businesses trying to retain employees by making modifications. The IRS guidelines require these changes be “more than nominal” in impact on business, meaning they would have an effect greater than 10% of revenue, or more than 10% of employees.
#4: Not Submitting Enough Documentation
Chances are you have all of the documentation necessary to file and claim your ERTC. But we’re noticing that many business owners who try to do it themselves, and even some CPA’s who haven’t studied the 200-page ERTC guidance in full struggle to understand how much documentation is necessary to file.
When you file, make sure to provide complete and thorough documentation that paints the full picture you want the IRS to see to agree with you that you qualify for the tax credits.
#5: Thinking “Demand Side-Shock” Is A Supply Chain Disruption Qualifier
One of the pillars of qualification for the employee retention tax credit is if your supply chain experienced significant disruption and you weren’t able to get supplies.
However, not just any disruption counts. Specifically, what we’re seeing is companies thinking they qualify if they had a particularly difficult time getting PPE. However, the IRS doesn’t see this as a Covid-19 issue so much as a demand issue. As in, since the manufacturers of PPE experienced a mass increase in demand during the pandemic, they had to prioritize hospital, frontline emergency worker orders, etc. over, say, restaurants.
Since the supply issue was due to demand, it doesn’t qualify. However, if your supplier experienced their own partial or full shutdown due to Covid regulations, and your business was more than nominally impacted as a result, that does qualify.
#6: Assuming This Is a Scam Without Talking to Your CPA
We get it. In today’s world it’s kind of difficult to believe the government is just handing out money. But the truth is, it is.
And you don’t have to believe us. Talk to a qualified CPA. Either your own, or a referral from a friend, to ask if the Employee Retention Tax Credit is real. Have that conversation with a licensed professional before assuming it’s a scam or too good to be true. You could be missing out on quite a bit of tax credit to help your employees and business bounce back from this.
#7: Trying to DIY It
We’d be remiss to not point out that there are some risks with trying to DIY your ERTC claim. Namely that of potentially triggering an audit, and of course not getting the full amount you could.
While it may seem cheaper and even less scary in the short term to DIY your filing, we highly recommend working with your CPA, or calling a team of specialists like ours, to help you avoid triggering an audit and get the most for your return.
#8: Waiting too Long
Just like PPP, PPP2 and other funds that popped up to help with the pandemic, the ERTC has an expiration date. The money will run out.
Not only that, but it can take longer to get your funds if you file amendments for past quarters than it does when you file current. If you haven’t added this filing to your process yet for quarterly taxes in 2021 do not wait any longer.
You can amend past quarters that you qualify for and stay up to date moving forward to make sure you’re receiving all of the tax credits you’re entitled to relatively quickly.
Get in touch!
This is a lot of information and your head might be spinning right now! Don’t worry, I understand all of it so that you don’t have to. Reach out today and set up a meeting so I can answer all the questions you probably have!
Have questions that aren’t answered in the article? Book time with Brad today by clicking here!