The employee retention credit is a significant tax break. What there is to know

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Over the past year, lawmakers have passed numerous tax breaks for businesses due to the coronavirus pandemic.

Now, the Biden administration is encouraging the businesses most affected to take advantage of a particularly significant tax break, the employee retention credit.

The tax break was first introduced in March 2020 in the CARES Act and has since been extended in the December relief package and in the American Rescue Plan Act signed in March.

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More than 30,000 small businesses have claimed more than $ 1 billion through credit this year, the White House said on Monday. Nonetheless, the Biden administration is keen to increase awareness of the program and said the Treasury Department will release new guidance on credit this week.

Here’s what businesses need to know.

How does credit work

The 2020 employee retention credit gives eligible businesses a refundable tax credit of 50% up to $ 10,000 in eligible salary paid per employee in 2020. This means that eligible businesses can receive a credit of up to $ 10,000. to $ 5,000 per employee for last year.

The American Rescue Plan Act, enacted in March, further expanded credit, making more businesses potentially eligible and pushing back when they could claim the credit until the end of the year. In 2021, eligible businesses can deduct up to 70% of a maximum of $ 10,000 of eligible salary paid per employee per quarter, bringing the total annual amount of potential credit to $ 28,000 per employee that year.

This is a big bonus for some companies. In addition to using it to reduce the employment taxes that businesses have to pay, people with less than 500 employees can apply for an advance payment of the credit from the IRS and get it in cash if the credit is greater than what they owe on employment taxes. .

“What we’re finding is that it can be pretty darn important,” said Tony Nitti, CPA and partner in RubinBrown’s tax services group. “Many businesses can reduce their payroll filing requirement to next to nothing or even negative numbers, essentially where they get a refund from the federal government.”

Who is eligible

Granted, there are strict eligibility rules for which businesses can claim the credit, which is designed to focus on those hardest hit by the pandemic.

For the 2020 credit, companies must have undergone a total or partial shutdown of their activities during the year due to a government order limiting exchanges, travel or meetings due to the pandemic, or have experienced a Quarterly drop of more than 50% in gross revenue, according to the IRS.

The 2021 credit rules were broadened to include businesses that had either experienced a full or partial shutdown or a quarterly drop of more than 20% in gross revenue.

“You might not have qualified in 2020, but you did in 2021,” said Erin Vukelich, an accountant at JCCS Certified Public Accountants in Whitefish, MT.

The numbers for 2021 are just amazing.

Tony nitti

CPA and RubinBrown Tax Services Group Partner

Plus, the law passed in December made it clear that you can apply for the credit if you’ve had a paycheck protection program loan – but you can’t double down, so to speak, so you need to specify which salaries were covered. by PPP. and which are applied to credit.

This added a layer of complexity to the program, according to experts. Nonetheless, the added benefit is significant – for some businesses that have obtained PPP loans and are eligible, the amount they received from 2021 credit has doubled the total benefit.

“The numbers for 2021 are just amazing,” Nitti said.

The size of companies that can claim all employees’ wages – compared to only those that worked in the quarter – also changed for 2021. In 2020, companies with an average of more than 100 employees generally could not claim. all salaries, but by 2021 that number has grown to an average of 500 employees.

Additional complexity

Due to the complexity of the program and the rules that changed between 2020 and 2021, companies should make sure to work with an expert to claim the credit on their employment taxes.

“It’s very complicated, even if it’s very favorable,” said Mark Steber, tax director at Jackson Hewitt Tax Services. “Do not go into this program without competent help.”

This is especially true if the companies have a PPP loan and are also eligible for employee loyalty credit. To maximize both benefits, they will likely need the help of a tax professional who can work with both loan and payroll documents.

It’s also still possible for companies to claim the employee retention credit for 2020, even if they have already submitted their tax returns for that year, according to Vukelich.

To go back and claim the credit, they have to change their 2020 returns, which many companies choose to do to qualify, she said.

Going forward, businesses should keep track of all the documents they need to prove their eligibility, especially if they are made eligible by a local government order terminating their operations, Vukelich said.

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