Established in 2020 under the CAREs Act, the Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to enable employers to keep their employees on the payroll during the COVID-19 pandemic. However, various myths and misconceptions surround the Employee Retention Tax Credit, inhibiting most small business owners from applying for the tax credit. In this article, we highlight four common misunderstandings that may prevent you from maximising ERTC.
1. You do not qualify for ERTC if your business received a Paycheck Protection Program loan
When the ERTC tax credit was first established, employers could not qualify for the Paycheck Protection Program (PPP) loan and the Employment Retention Tax Credit. However, congress alleviated these limitations in the Consolidated Appropriations Act (CAA) of 2021, allowing you to be eligible for both credits. The paycheck protection program funds should be spread over half a year and only account for 2.5 times the monthly payroll costs. This provides you with many uncovered employee wage costs you could claim in the employee retention credit.
2. An increase in revenue results in disqualification
Most employers assume that if their business realised significant growth during the pandemic, they are not eligible for the employee retention tax credit. However, there are various ways to qualify for ERTC, including gross reduction and the pandemic’s impact on your business. This means that whether or not your business’ revenue increased during the COVID-19 pandemic, you are eligible for an employee retention tax credit if:
- You altered your business working hours due to the pandemic
- Your trades experienced a partial or total suspension because of the emergency lockdown
- There was a partial shutdown of your company
- The social distancing affected your business’ capacity
- There were supply and shipment issues
- The pandemic affected your meetings and business travels
3. Your company is an essential business, so you are not eligible for ERTC
There is no distinction between an essential or non-essential business in terms of ERTC eligibility. This means that even if the state or local orders deem your company as an essential, changes or the COVID-19 pandemic make you eligible for the employer retention credit.
For instance, if your essential business remained open during the emergency lockdown but could not travel to meet your customers or your suppliers were closed. In that case, you qualify for ERC. You are also eligible for the employer retention tax credit if a section of your business is deemed non-essential and was affected by the shutdown.
4. Only small businesses with less than 500 employees are eligible for ERC
To be established as a qualified employer, you should prove that your business operations had been partially or fully suspended during the pandemic or that the company experienced a substantial decline in its gross receipts. If these conditions are met, you qualify for the ERC regardless of the number of your employees. The number of your staff comes in handy solely when evaluating the qualified wages you should consider when determining the credit.
Endnote
The employee retention tax credit provides an effective way to counter the losses accrued during the COVID-19 pandemic. Debunk the above myths to determine your ERC eligibility to get a cash infusion that will help your business to thrive.
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