Common Misconceptions about the Employee Retention Tax Credit
There are many misconceptions regarding the Employee Retention Tax Credit (ERTC), despite the fact that it is an excellent incentive for businesses that retained workers during the COVID-19 pandemic. The tax credit applies to wages received between March 13, 2020 and September 30, 2021. This article addresses some common ERTC myths about the program and eligibility.
1. Gross Receipt Tests
If an eligible employer’s quarterly gross receipts decrease by 50% or 20% from the comparable period in 2020 or 2021, respectively, they may be eligible for the ERTC.
Here’s what you need to know:
- Many qualified employers believe a loss in revenue makes them eligible, but a rise makes them ineligible. This isn’t true. The law says nothing about increased revenue.
- “Failing” the Quarterly Gross Receipts Test does not disqualify an organization from passing in a subsequent quarter. A qualified employer may not pass the fourth quarter of 2020 Gross Receipts Test, but may pass in the first quarter of 2021.
- Multiple methods exist for applying the gross receipts test, including the primary method as well as the alternative quarter election.
2. Partial or Full Suspension Test
The Partial or Full Suspension Test, which must be met if operations are suspended in whole or part by a government order, is often ignored. As with Gross Receipt Test, there are misconceptions, including:
- Why many potentially qualified businesses will experience sales or gross receipts increase in 2020 and 2021, causing them to wrongly think they no longer qualify.
- Gross receipts test is one of two ways a firm might qualify for ERTC. An eligible employer can generate record quarterly total sales in Q1 2021 and still qualify for the ERTC if COVID state orders restrict their operations.
- Many business owners assume they’re ineligible because their company was considered “suspended”. The law mandates a pause, not a shutdown. In many cases, the suspension order won’t affect the applicant. Disruptive commands may qualify. Partially suspending operations could potentially be imposed by the government.
3. Tax Credit Amount Details:
- Qualifying firms can get $5,000 per worker for 2020 and $7,000 per employee for every quarter during the first 3 quarters of 2021.
- Small businesses that launched during COVID may qualify in Q4 2021 (termed as Recovery Startup Businesses).
- Non-Recovery Startup Businesses can receive up to $26,000 per employee, plus interest. This refundable credit will be sent to eligible employers.
4. Does Your Business Qualify?
- If you’re a small business employer you may be eligible for the major and substantial ERTC tax refund.
- Many organizations, including charities, breweries, restaurants, medical and dental practices, car dealers, and other types of businesses may be under the incorrect assumption that they don’t qualify for the ERTC while in fact they could be getting a significant check from the IRS.
5. Are Non-PPP Loans aren’t Eligible?:
Another myth is that a PPP-loan recipient can’t claim the ERTC. When the tax credit was first issued, this was true, but subsequent legislation removed that requirement. Employers who got a PPP loan can now register for the ERTC.
The Employee Retention Tax Credit is a great incentive for businesses, but as outlined in this article it’s often very misunderstood. As there is no risk or upfront cost to apply for the ERTC, and as there are many ways to qualify, the best course of action is to complete the quick application form to see if your business qualifies for a potentially significant refund.