As part of the 2020 CARES Act, which aimed to aid businesses hit by the COVID-19 epidemic, the Employee Retention Credit (ERC) was established.
Despite its usefulness, there are many misconceptions about the ERC that can lead to confusion or even prevent businesses from claiming this credit. In this blog post, we will explore some of the common misconceptions about the ERC and provide the facts to help businesses make informed decisions about their eligibility and claiming credit.
Misconception 1: Only businesses that were shut down due to government orders can claim the ERC
Fact: This is one of the most common misconceptions about the ERC. Not only can firms that were ordered to close owing to COVID-19 qualify for the ERC, but so can those that saw a large drop in gross receipts or were suspended entirely or in part as a result of the virus. They do not have to be shut down by a government in order to qualify.
Any company whose quarterly gross receipts have dropped by 20% or more in comparison to the same quarter in 2019 is eligible to apply for the ERC. Additionally, businesses that were fully or partially suspended due to a government order can claim the ERC for wages paid during the period of suspension.
Misconception 2: Businesses that received a Paycheck Protection Program (PPP) loan cannot claim the ERC
Fact: Another common misconception is that businesses that received a PPP loan cannot claim the ERC. While it is true that businesses cannot claim the ERC for the same wages used to calculate PPP loan forgiveness, they can claim the ERC for wages not used in the PPP loan forgiveness calculation.
For example, if a business received a PPP loan and used 60% of the loan proceeds for payroll costs, it can still claim the ERC for wages paid that were not included in the forgiveness calculation. This can provide additional financial assistance to businesses impacted by the pandemic.
Misconception 3: Only small businesses can claim the ERC
Fact: This is not true. The ERC is available to businesses of all sizes as long as they meet the eligibility requirements. However, there are certain limitations for businesses with more than 500 employees. For businesses with more than 500 employees, only wages paid to employees who were not providing services due to COVID-19 can be claimed for the ERC.
Misconception 4: The ERC is only available for wages paid during the first few months of the pandemic
Fact: The ERC is available for wages paid from March 12, 2020, through June 30, 2022, for eligible businesses. This means that businesses can claim the credit for wages paid in 2021 and even in 2022 if they meet the eligibility requirements.
Misconception 5: Businesses can claim the ERC and the Work Opportunity Tax Credit (WOTC) for the same employee
Fact: This is not true. Businesses cannot claim both the ERC and the WOTC for the same employee. Both the ERC and the WOTC provide financial aid to companies that take on employees from underrepresented groups who have difficulty finding work. Businesses must choose which credit to claim for each employee, but they cannot claim both.
Understanding the facts about the Employee Retention Credit (ERC) can help businesses make informed decisions about their eligibility and claiming the credit. Despite the common misconceptions about the ERC, it is a valuable resource for businesses impacted by the pandemic.
As always, it’s important to consult with a tax professional to determine eligibility and the amount of credit that can be claimed. By dispelling these misconceptions, businesses can take advantage of this valuable resource and receive the financial assistance they need.