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Given the economic challenges that the nation experienced during the pandemic in 2020 and 2021, the government gave stimulus packages and incentives to business owners for them to retain their employees due to government shutdowns and mandated lockdowns. Now, as the economy is gradually getting better, the government has considered it essential to provide tax breaks to business owners who did not lay off employees during the pandemic. This is known as ERC credits, or a special type of tax credit that employers can apply for to receive tax credits and cash back for the years 2020 and 2021. You may have noticed that there is more coverage and higher tax incentives for 2021. The current administration has made these benefits available now, and these credits will affect your bottom line in the present, your next quarterly filing, and for the remaining four quarters of 2021.
The employee retention credit, also known as the ERC credit, is a new tax refund program established by the CARES Act. When the world was destroyed by COVID-19, business owners may have had no idea that there was a potential reduction in employers' tax dues. This refundable reduction could be part of a relief package aimed at businesses to encourage them to keep employees on their payroll. The Consolidated Appropriations Act, which went into effect in January 2021, expanded the ERC legislation. As a result of this expansion, all employers affected by the Covid19 restrictions and who obtained PPP loans may be eligible for ERC credits in 2020 and 2021. Employers would need dedicated tax professionals to create documents and forms in support of your claim and to ensure that it is compliant with all new federal implementing rules and regulations because the ERC credit is new and the legislation that covers it is dynamic.
How can you use ERC Credits?
These ERC credits could generate revenue for your company at a time of financial crisis and now that the economy is just getting back up and running. When you claim your ERC credits today, they will be able to cover your tax obligations for 2021 and will be retroactive to 2020. The excess tax credits will be refunded to the employer as cold hard cash. This will give you additional cash reserves for your company to operate at a better capacity. You will be able to file for this credit on your 941 filings for each quarter of 2021, and you should also receive an advance payment of some of the credit. This will provide you with additional capital for your business, which you can use to kickstart production, operations, and even inventory. At a time when cash flow is not as consistent as it should be, these credits are a life-saver meant to keep your business afloat and possibly be able to realize profits.
Who should claim ERC Credits?
To determine whether your company is eligible for ERC credits for a particular quarter, first ascertain whether your business was completely or partially shut down due to governmental edicts during some or all of the quarter. Also, seek to assess if the company's gross earnings reduced by about 20% for each quarter from 2019 to both the first quarter of 2020 or the successive quarters from 2020 to 2021. If you respond positively to either of those queries, your business is eligible for ERC credits. The following step is to calculate the number of employees you had in 2020 and 2021, as this will affect the amount of tax credit you are entitled to per employee. If you had fewer than 500 employees whose wages were paid from 2020 to 2021, you are entitled to a maximum of $10,000 per worker, which can be a significant sum for someone in need of funds. Businesses that received PPP loans in 2020 or 2021 are still eligible for ERC credits. However, if the business applied for loan forgiveness, this cannot be claimed as part of the ERC credits; however, the remaining wages that did not fall under the forgiveness loan can be eligible.
When should you file for ERC Credits?
The ERC credits are available for each of the four quarters of each year from 2020 to 2021, so the filing period for tax credit claims is till January 2024, giving enough time to get ready the paperwork. The business owner can also apply retroactively, which means that even if you have already filed your taxes for 2020 and 2021, you can still be granted the tax credits that will be claimed in the following quarters after 2021, with any excess refunded to the business owner. If you do qualify for the ERC credits, then it is best to be able to file it as soon as possible so that you can be able to put into good use the money that you can generate from the credits.
Getting help with filing ERC Credits.
If business owners can demonstrate eligibility criteria and a complete set of documentary requirements, the incentives embodied by ERC credits are quite substantial. The difficulty is that business owners lack the requisite expertise; rather, they should depend on a business associate or contractor to accomplish all of the forms and file the claims with the proper office. As a consequence, it is crucial that this consultant is very much into tax credit legislation and has a comprehensive understanding of the ERC credits rules. Partnering with a firm is beneficial as they have the workforce to organize the reports and other forms that must be appended to the claims. The firm would also be able to instruct the business owner on what documents or reports from the company are required to complete the claim attachments. Finally, this consultant should be aware of where and when claims should be filed, as well as have access to the agency in charge of reviewing claims and be able to work quickly if they need to be corrected or edited. A consultant would also ensure that your claims are filed correctly, increasing the likelihood of success.