The Lucrative Tax Credit You Might be Neglecting
A number of key House Democrats have recently written a letter to Speaker Pelosi (D-CA) asking that the employee retention credit (ERC) be retained for the fourth quarter of 2021.
The letter—led by Congressman Antonio Delgado (D-NY) and Stephanie Murphy (D-FL)— emphasizes the benefits of the ERC as a “crucial lifeline” for small businesses. This Democrat letter follows on from a recent bipartisan open letter calling for the ERC to be retained for the fourth quarter.
Unaware of the ERC? The Employee Retention Credit (ERC) provides a tax credit of up to $7,000 per employee per quarter and is available for small- and medium-sized businesses that meet one of two categories:
- the business has seen a reduction in revenues because of COVID
- the business experienced business disruption, be it project delays, reduced hours of operation, supply chain issues, temporary closure, etc. (on a federal, state, local or regulatory level).
What’s more, businesses whose operations were deemed essential by the government (such as the automotive industry) or who took advantage of the PPP can still qualify for the ERC—even if they didn’t see a dip in revenue or increased hiring.
In fact, according to work done by the Alliant Group, 70 percent to 80 percent of businesses qualify for the credit, for which $80 billion of aid was set aside.
“It’s truly important that the credits are utilized,” says Ceilidh Evans, senior associate at the Alliant Group. “The employee retention credit in my years of doing this, this has been the most powerful incentive we’ve seen yet. You should assume you qualify.”
The ERC was expanded and enhanced in a series of bills over the past year and is intended to be in place for all of 2021. However, in the Senate’s proposed infrastructure bill, the ERC was eliminated for the fourth quarter of 2021 as a cost-saving matter. Since then, however, the number of small and medium businesses applying for the ERC has increased by the thousands each day.
So, what should shops do to take advantage of the ERC? One, take a close look at whether you qualify for the first three quarters of 2021 and, before that, 2020. To claim the credit, an employer can reduce the quarterly 941 deposit. A refund can also be requested on Form 941 and employers that did not claim the credit previously can change previous 941 forms to claim the credit.
Also, plan to take the ERC for the fourth quarter and begin preparing the necessary paperwork and documentation. Eric Hylton, former IRS commissioner, says that documentation—and constructing a narrative that shows why you are eligible for the credit—is crucial should you get audited in the future.
Lastly, before applying, make sure to check in with your tax advisor, accountant or a firm like the Alliant Group to determine how to best claim the credit and if it makes sense for you.
Time Ticking on EIDL
Another popular COVID-19 relief program is the Economic Injury Disaster Loan, or EIDL.
It was a hit with business owners, mostly due to a $10,000 grant component. Eligible business owners were able to secure the grant as part of the EIDL loan program. The Small Business Administration, which manages the program, disbursed around 447,000 of those grants through Oct. 21, according to MassLive.
There is another grant program, called the Supplemental Targeted Advance, that provides an additional $5,000 to certain employers, even if they received a grant as part of EIDL already. Criteria are that a business operates in a low-income community, it can prove more than a 50 percent economic loss due to COVID-19, and that it has 10 or fewer employees.
The loan program, which includes the grant portion, has been widely used. Some 2.8 million loans for $283 billion have been approved, MassLive reports. In the fall of 2021, the SBA increased the loan cap from $500,000 to $2 million. The SBA also expanded the potential uses for the loan funds, including the ability to pay down other debt.
It’s important to know that these programs end in 2021, according to current rules.
To apply for the grant portion, owners must apply for the EIDL through the Small Business Administration. Accepting a loan is not required to accept a grant.