Many businesses still find themselves on their heels from the rollercoaster that has been the past 18-20 months. Help is out there, but you have to first wrap your head around what it takes to qualify in order to zero in on the aid package that is right for you and your business.
Employee retention tax credit
As we have discussed in the past, the employee retention tax credit is an amazing opportunity for many businesses! Sadly, it's over 200 pages of IRS guidelines, three different documents that outline the rules, and enough red tape to make most employers decide it isn’t worth it. You might recall that there are 3 primary ways to qualify for the employee retention tax credit.
Partial shutdown – Read here!
Supply chain disruption – Read here!
Revenue reduction (keep reading!)
As you may expect, there are some pretty interesting/confusing rules around revenue reduction as it relates to qualifying for the employee retention tax credit. To simplify things a bit, if you look at any given quarter in 2020 and can show a 50% revenue reduction from that same quarter in 2019; then you qualify! The even better news is that you will continue to qualify until your sales rebound to a 20% reduction from the corresponding quarter from the previous year.
Simply put, a 50% revenue reduction year on year could qualify you for up to a $5,000 tax credit!
New year, new qualifications
In 2021, the rules actually changed in your favor! This year you need only show a 20% reduction in revenue compared to the corresponding quarter in 2020 in order to qualify. This lower threshold comes with the expected amount of strange caveats, but we can easily help you navigate those! One interesting additions is that you can actually use the quarter immediately preceding the corresponding quarter to qualify under certain circumstances.
For example, let's say that in the fourth quarter of 2020 you had a sales decrease of 22%, and in the first quarter you had a sales decrease of only 5%. Since your fourth quarter was down by more than 20% on the qualifier for the next quarter, which is the first quarter of 2021; you can still qualify!
Each quarter that you have that 20% decrease, then you get to qualify for that quarter and the next quarter.
Want to know something else great that changed for 2021? The amount of the credit goes from $5000 per employee, up to $7,000 per employee! Want to know what is even better? That is every single quarter! Theoretically, you could get $28,000 per employee over the course of the entire year.
Now, I say theoretically because, in reality, most people aren't going to hit that maximum. There are many exclusions around related parties, qualified wages, and other aid provisions like the PPP. Factors such as what you pay your employees also come into play when seeing what you qualify for. There are many nuances that go into calculating what you will actually get, but there are many businesses out there that will qualify for the full $28,000 per employee over the course of the year.
If you want help calculating what those revenue reductions look like, what periods they apply to, and what your potential tax refund is; please reach out!
Check out our video with more detail below:
For a layman’s guide to the employee retention tax credit check out our roadmap below:
Have questions that aren’t answered in the article or video? Book time with Brad today by clicking here!