The COVID-19 pandemic was a difficult time for everybody in America, but businesses were hit exceptionally hard. Many experienced government shutdowns and decreased sales, with some even having to lay off employees. To help the situation, the Employee Retention Credit (ERC) was established through the CARES Act to provide financial relief to businesses in the form of a refundable tax credit. ERC funding is intended to offer financial relief to businesses who kept employees on the payroll through these difficult times.
ERC Funding Program: How It Works
As with many government programs, the ERC funding program can seem confusing at first, but it is actually pretty straightforward. It's just a matter of qualifying, calculating your funding, and then receiving your ERC funding.
Qualifying for ERC Funding
There are two ways for a business to qualify for the ERC funding program. The first is the suspension test. To pass the suspension test, a business must be able to prove that they were subject to a governmental order. They then must show that this order had a noticeable impact on the operations of the business. An example of this would be a governmental order limiting the amount of patrons allowed in a restaurant at any one time, which then had a noticeable impact on the amount of revenue the business was making.
The second way to qualify for the ERC funding program is the gross receipts test. Passing this test is slightly different depending on which year it is being conducted for. For 2020, gross receipts for any quarter must be less than 50% of what they were for the same quarter in 2019. For 2021, gross receipts for any quarter must be less than 80% of what they were for the same quarter in 2019.
A business only needs to pass one of these tests to qualify for the ERC funding program.
Calculating ERC Funding
The amount of ERC funding a business receives is based on the amount of qualified wages it paid. Qualified wages generally include any taxable income, including:
Other taxable wages
All qualified wages must be included to ensure the maximum possible funding is received. Once all of the qualified wages paid are calculated, it is time to submit the ERC funding claim to the IRS.
Receiving ERC Funding
After a claim is submitted, it typically has taken 4-6 months to review the claim and disburse funds. There is nothing that can be done to speed up this part of the process. It is important to complete the first two steps quickly, so the IRS review can begin as soon as possible. Given the recent news from the IRS regarding processing, it is a bit of an unknown how long it will take going forward which is why it is important to get your claim in ASAP.
Are ERC Funds Running Out?
ERC funds are not running out. As the funds are dispersed in the form of a tax credit, there is no set amount of money set aside for the program. Any business who qualifies should be able to receive an ERC refund, provided that they apply for it with accurate information. However, government programs are subject to changes without much warning.
In a recent change, the IRS paused the acceptance of new ERC applications to combat a flood of scam claims that they received. On September 14, the IRS ERC pause was put into effect while the IRS added more safeguards to their program to “prevent future abuse and protect businesses from predatory tactics”. This pause will continue to the end of this year.
The surge in scam claims to the IRS comes from a large number of ERC mills who charge heavy upfront fees to submit claims for businesses who do not fully qualify. Five Star ERC Experts has always utilized a compliant fee model whose ERC specialists consist of certified tax professionals, guaranteeing audit protection for fully qualifying businesses who want to apply for the ERC tax credit.
Are ERC Funds Still Available?
Yes. The program has not ended, only the processing is delayed. To receive ERC funds for wages paid in 2020, a claim must be submitted to the IRS by April 15, 2024. For wages paid in 2021, a claim must be submitted by April 15, 2025. The IRS has made it clear that no exceptions will be made for claims submitted after these deadlines, so businesses should be sure to submit claims soon to avoid accidentally missing out on ERC funding.
What Can ERC Funds Be Used For?
The ERC is not a government loan or grant, but a tax refund. This means that there are no stipulations placed on how ERC funds can be spent. However, it may be a wise idea to invest the money back into the business. Depending on what business you’re in, this could be done by giving employees bonuses, investing in new equipment, buying real estate, or using the money to launch a new product. Alternatively, as the business owner, you are free to keep the ERC funds as profit, which can be very helpful after making it through the lean years of the pandemic.