As a business owner, you’re always looking for ways to maximize your tax savings. One often overlooked opportunity is the employee retention credit (ERC), a valuable tax credit designed to help businesses retain their employees during challenging times.
The ERC was introduced as part of the CARES Act in 2020 and was later expanded and extended through several pieces of legislation, including the Consolidated Appropriations Act and the American Rescue Plan Act. The credit is designed to provide financial relief to businesses that were impacted by the COVID-19 pandemic and have experienced a significant decline in gross receipts or were subject to government-mandated shutdowns.
So, how can you take advantage of this valuable tax credit? Here are a few key points to keep in mind:
1. Understand the eligibility criteria: To qualify for the ERC, your business must meet certain criteria, including experiencing a significant decline in gross receipts or being subject to a full or partial suspension of operations due to a government-mandated shutdown. The rules and eligibility criteria for the ERC can be complex, so it’s important to consult with a tax professional to determine if your business qualifies for the credit.
2. Calculate the credit amount: The ERC is a refundable tax credit that can be as high as $5,000 per employee for each qualifying quarter in 2020 and up to $7,000 per employee for each qualifying quarter in 2021. The credit amount is based on a percentage of qualified wages paid to employees during the eligible quarters. Again, working with a tax professional can help you accurately calculate the credit amount and ensure you’re maximizing your tax savings.
3. Coordinate with other relief programs: It’s important to note that you cannot use the same wages to claim both the ERC and the Paycheck Protection Program (PPP) forgiveness. However, you can take advantage of the ERC in addition to other tax credits and relief programs, such as the employee retention credit and the Families First Coronavirus Response Act (FFCRA) tax credits.
4. Take advantage of retroactive changes: The ERC has undergone numerous changes and expansions since its initial introduction in 2020. Most notably, the credit was expanded to cover more businesses and the maximum credit amount was increased. Additionally, businesses that previously did not qualify for the ERC due to receiving PPP loans may now be eligible to claim the credit retroactively for 2020. If you missed out on claiming the ERC in the past, it’s worth exploring your options for retroactive relief.
In summary, the employee retention credit is a valuable tax credit that can provide much-needed financial relief to businesses impacted by the COVID-19 pandemic. By understanding the eligibility criteria, calculating the credit amount, coordinating with other relief programs, and taking advantage of retroactive changes, you can maximize your tax savings and keep your business running strong. Be sure to consult with a tax professional to ensure you’re taking full advantage of this valuable tax credit.