ERC Credits and Your 2023 Tax Filings: A Business Owner’s Guide
The Employee Retention Credit (ERC) is a tax credit designed to help businesses affected by the COVID-19 pandemic. It encourages employers to keep their employees on the payroll by providing a credit based on a percentage of qualified wages paid to each employee. As we approach the 2023 tax filings, it is essential for business owners to understand how to claim the ERC correctly to provide financial relief and maintain a healthy workforce.
In this guide, we will provide an overview of the ERC program and explain the changes made to it for 2023. We will also provide examples of qualified expenses and discuss how they may impact a business’s ability to claim the credit.
Understanding the Employee Retention Credit (ERC)
Understanding the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is a tax credit designed to help businesses affected by the COVID-19 pandemic. It encourages employers to keep their employees on the payroll by providing a credit based on a percentage of qualified wages paid to each employee. The credit is available to eligible employers who retained employees and paid them wages during the pandemic. The ERC was enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020.
Eligibility for the Employee Retention Credit (ERC)
Eligible employers can receive a refundable credit of up to 50% of eligible wages (in 2020) for the whole year and up to 70% (in 2021) per quarter. This applies to wages paid out to employees between March 13, 2020, and September 31, 2021, for companies that were already in business when the pandemic hit. Additionally, companies that started or purchased their businesses after February 20, 2020, and are defined as a Recovery Startup Business (RSB) by the IRS, can avail themselves of this credit until December 31, 2021.
Calculation of the Employee Retention Credit (ERC)
Qualified wages include wages paid to employees during periods in which the employer’s operations were fully or partially suspended due to government orders related to COVID-19, as well as wages paid during periods in which the employer experienced a significant decline in gross receipts. The credit is calculated on a per-employee basis, with a maximum credit of $5,000 per employee for the whole year in 2020, and $28,000 per employee for the whole year in 2021.
Changes Made to the ERC for 2023
The ERC has undergone several changes since its inception, including adjustments to the eligibility criteria and the credit amount. In 2023, the credit will continue to be available to eligible employers who retained employees and paid them wages during the pandemic. However, there are a few key changes that businesses should be aware of. Let’s take a look.
Credit Rate
Firstly, the credit rate has been reduced from 70% to 50% per quarter for 2023. This means that eligible employers can receive a refundable credit of up to 50% of qualified wages paid to each employee in 2023. The maximum credit per employee for the whole year will also be reduced to $14,000 in 2023.
Eligibility
Secondly, the eligibility criteria for the ERC have been tightened. For 2023, businesses must have experienced a decline in gross receipts of more than 20% (previously 10%) in each quarter to be eligible for the credit. Additionally, businesses that were not in operation in any quarter of 2022 will not be eligible for the credit in 2023.
It is important for businesses to understand these changes and how they may impact their ability to claim the ERC in 2023. Properly claiming the ERC can provide financial relief to businesses and help them maintain a healthy workforce.
Understanding the Interaction between the ERC and PPP Loans
The Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) are two relief programs available to businesses affected by the COVID-19 pandemic. While businesses can apply for both programs, there are some important interactions between the two that businesses should understand to avoid unintended consequences.
Interaction between ERC and PPP loans in 2020
In 2020, businesses that received a PPP loan were not eligible for the ERC. However, the Consolidated Appropriations Act, 2021 (CAA) changed this, allowing businesses that received a PPP loan to claim the ERC retroactively for wages paid after March 12, 2020. However, the same wages cannot be used for both PPP loan forgiveness and the ERC.
Interaction between ERC and PPP loans in 2021
In 2021, businesses can apply for both the ERC and PPP loans, but the wages used to calculate the ERC cannot be used for PPP loan forgiveness. Additionally, the maximum credit amount per employee increased to $28,000 in 2021, making the ERC potentially more valuable than the PPP loan.
Taking advantage of both programs
Businesses can take advantage of both the ERC and PPP loans by using the PPP loan for non-payroll expenses, such as rent and utilities, and using the ERC to cover payroll expenses. This strategy can help businesses maximize the benefits of both programs.
In conclusion, businesses should carefully consider the interaction between the ERC and PPP loans when deciding how to allocate funds and which program to apply for. Seeking professional advice can help businesses ensure that they make the most of both programs while avoiding unintended consequences.
Red Flags Indicating a Business May Not Qualify for the ERC
There are red flags that can indicate a business may not qualify for the ERC. One such indicator is the lack of a significant decline in gross receipts or suspension of operations due to government orders related to COVID-19. Additionally, a business that fails to pay employee wages during the eligibility period may not qualify for the ERC. Lastly, using Paycheck Protection Program (PPP) loan funds for non-qualifying expenses, such as rent or utilities, may disqualify a business from claiming the ERC.
Importance of Consulting with a Qualified Tax Professional
It is crucial for businesses to consult with a qualified tax professional to determine their eligibility for the ERC. A tax professional can provide guidance on the eligibility criteria and help ensure that the credit is claimed correctly. Seeking professional advice can help businesses avoid potential risks and consequences associated with claiming the ERC improperly, such as audits, penalties, and legal consequences.
Final Notes
Claiming the ERC correctly is essential to providing financial relief to businesses and maintaining a healthy workforce. It’s important to review the eligibility criteria carefully and consult with a tax professional to avoid potential risks and consequences. By claiming the ERC correctly, businesses can receive financial relief and maintain their workforce during these challenging times.
Any Questions?
At Milikowsky Tax Law, we understand the importance of the Employee Retention Credit (ERC) for businesses affected by the COVID-19 pandemic. It’s crucial for businesses to meet the eligibility criteria and claim the credit properly to avoid penalties, interest charges, and even legal consequences.
If you’re unsure whether your business qualifies for the ERC or how to claim the credit correctly, we encourage you to consult with a qualified tax professional. At Milikowsky Tax Law, we have the expertise and experience to guide you through the process and ensure that you receive the maximum benefit from the credit.
Contact us today to schedule a consultation and take the first step towards financial relief for your business.
