The Employee Retention Credit (ERC) has been a popular topic of conversation throughout the pandemic, yet many organizations believe they don’t qualify, and even more have yet to claim it. There is a good chance you have been inundated with emails, text messages, and phone calls indicating your business or organization qualifies for cash from the federal government. Whether you’ve been too busy to focus on it or had no idea your business was eligible in the first place, we would like to help you understand what all the fuss is about. In doing so, you may consider taking a closer look at how the ERC may apply to your situation.
The Employee Retention Credit, also referred to as ERC, is a refundable payroll tax credit that businesses can receive on qualified employee wages and certain employee benefits beginning March 13, 2020, through December 31, 2021. The program was first introduced by the Coronavirus Aid, Relief and Economic Security (CARES) Act. It was signed into law during March 2020 to assist businesses that were impacted by the COVID-19 pandemic and to encourage businesses to keep employees on their payroll. Since its inception, the program has gone through many revisions with three different acts. The first being the Consolidated Appropriations Act, 2021 (CAA), enacted in December 2020, the second is the American Rescue Plan Act (ARPA), enacted in March 2021, and the third is the Infrastructure Investment and Jobs Act (IIJA), enacted in November 2021. The last act accelerated the end of the program from the initial date of December 31, 2021, to September 30, 2021, for most businesses. However, for wages paid by a Recovery Startup Business, the expiration date remains December 31, 2021.
March 27th, 2022, marks the second anniversary of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the $2.2 trillion economic stimulus bill that authorized the Employee Retention Credit (“ERC”). The ERC is a refundable payroll tax credit based on wages paid to employees at organizations that either (1) have been fully or partially shut down due to a government order OR (2) had gross receipts decline a certain percentage relative to gross receipts in the same calendar quarter of 2019.
Signed into law on December 27, 2020, the Covid-19 relief bill contains a favorable update to the Employee Retention Credit (“ERC”). The Employee Retention Credit was one of the more successful components of the CARES Act, but there are several significant updates to the credit that are even more favorable for qualified businesses. Several updates can be seen below, along with a comparison to the credit terms under the CARES Act. Unless stated otherwise, the effective date of the provisions covered by the new law will be January 1, 2021.
As the country continues to grind through the COVID-19 pandemic, states have been looking for ways to help businesses impacted by the unprecedented economic downturn. In addition to the incentives offered by the Federal government, several states have acted on their own either by authorizing new, COVID specific incentives, amending existing programs or by working within the confines of the existing rules and regulations of some programs.
A $2.5 million tax credit grant is making its way to 12 states in order to speed up processing times for Work Opportunity Tax Credit Program certifications!
On June 29, 2020, the Governor of California, Gavin Newsom, signed into law the fiscal year 2020-2021 state budget, which included provision AB 85, limiting the ability of certain taxpayers to use net operating losses (“NOLs”) and specific business credits for the 2020, 2021, and 2022 tax years. Specifically, for tax years beginning on or after January 1,2020 and before January 1, 2023, taxpayers with a net business income or modified adjusted income of greater than or equal to $1 million will have their NOLs suspended during the period, and businesses will be capped at claiming $5 million in business credits per tax year.
Since the beginning of the pandemic it has been a whirlwind of unprecedented economic impacts. With that came the Coronavirus Aid, Relief, and Economic Security (CARES) Act and a curtailment of enforcement actions by the Internal Revenue Service (IRS), including audits. Per the People First Initiative the IRS generally avoided launching new audits from April 1st through July 15th. This did not prevent the IRS from opening audits to protect the government’s interest in preserving statute of limitations. (See IRS, IR-2020-59) In a report released June 29th, National Taxpayer Advocate Erin Collins said that the IRS launched substantially fewer audits from April 1st to June 1st compared to the same period in 2019. The IRS launched 71% fewer Corporate audits, 79% fewer Partnership audits, and 65% fewer individual audits. In total across all types of examinations there was a 65% decrease during this time period. With July 15th approaching the assumption is that there will be an increase in audits launched. However, with the pandemic still in a critical state as numbers of COVID-19 cases rise it remains to be seen what will happen as things are more fluid and the rules of the game are constantly changing.
During this time of unprecedented economic challenges faced by small businesses during COVID-19, rare glimpses of bipartisanship are encountered to assist small business with economic relief. Due to the economic challenges faced by small businesses the economic relief provided is in a constant state of fluidity. This has been the status quo for the Paycheck Protection Program (PPP). The President signed into law the Paycheck Protection Program Flexibility Act (PPPFA) to address the concerns voiced by the small businesses utilizing the program. The Congressional intent of the new law is to allow greater flexibility for business to use the PPP loans that was not provided by the initial short-term fix of the PPP set up under the CARES Act. This new law provides the following expansions and flexibility to address the issues created by the CARES Act – PPP, that was a band aid and not a comprehensive bandage when it was enacted.
Despite the size of the veteran workforce, tapping into the population has proved to be a challenge for many non-governmental employers. In 2012, to address the challenges faced by Gulf War-era II Veterans, Congress passed the Vow to Hire Hero’s Act, which expanded the Work Opportunity Tax Credit (“WOTC”) with the addition of four new, veteran-specific categories. The WOTC was created in 1996 to provide a federal tax credit to employers that hire individuals from specific target groups. People from these target groups have been identified by the U.S. government as having historically high unemployment rates. By many measures, the WOTC has been a success and continues to have bi-partisan support in Congress.