In the wake of the COVID-19 pandemic, the U.S. government introduced several relief measures to support businesses facing economic challenges. Among these measures, the Employee Retention Credit (ERC) stands out as a significant financial reprieve for businesses. However, like all legislative measures, the ERC has undergone several changes since its inception. This article delves into the key changes to the ERC that businesses should be aware of for 2023.
A Deep Dive into the ERC Changes
As the business landscape and the economy evolved, so did the nuances of the ERC. These changes, aimed at providing more targeted relief and adapting to the shifting needs of businesses, have made the ERC a more robust and beneficial tool. There are eight key changes that businesses should be aware of. Let’s explore each of these changes in detail.
- ERC Extension
Initially, the ERC was set to cover the period from March 12, 2020, through Dec. 31, 2020. However, subsequent legislation extended the credit into 2021. The American Rescue Plan further extended the credit to Dec. 31, 2021, but the Infrastructure Investment and Jobs Act (IIJA) curtailed this, ending the program on Sept. 30, 2021, for most businesses. Only recovery startup businesses can claim the credit for the last quarter of 2021.
- Increased Qualified Wages
For 2020, the ERC equaled 50% of up to $10,000 in employee wages. This was enhanced in 2021, where the credit was set at 70% of up to $10,000 in wages for each quarter, allowing businesses to claim up to $21,000 per employee for the entire year.
- Changes to Gross Receipts Eligibility Requirements
To qualify for the ERC, businesses had to demonstrate a decline in gross receipts. In 2020, this decline had to be at least 50% compared to the same quarter in 2019. In 2021, this requirement was relaxed, with businesses only needing to show at least a 20% decline.
- Increased Credit Limits
The potential credit amount saw a significant boost from 2020 to 2021. While businesses could claim up to $5,000 per employee in 2020, this limit increased to $7,000 per quarter in 2021.
- Definition of Large Employer
The definition of a “large employer” shifted from those with more than 100 full-time employees in 2020 to those with more than 500 full-time employees in 2021. This change in definition impacted which wages could be claimed for the credit.
- PPP Loan Holders Can Apply for the ERC
Initially, businesses that received a Paycheck Protection Program (PPP) loan could not claim the ERC. However, subsequent legislation altered this, allowing PPP loan recipients to apply for the ERC, provided they claimed different wages for both benefits.
- Inclusion of Certain Government Employers
The ERC was expanded in 2021 to include specific governmental employers, such as those described in section 501(c)(1), and institutions like colleges or universities primarily providing medical or hospital care services.
- Fourth Quarter of 2021 Limited to Recovery Startup Businesses
The IIJA stipulated that only recovery startup businesses could claim the ERC for the fourth quarter of 2021, limiting other businesses to the first three quarters.
Navigating the ERC Landscape: Tips and Considerations
Understanding the ERC’s intricacies is crucial for businesses aiming to maximize their benefits. Here are some tips to ensure a smooth ERC application process:
- Use Form 941-X for retroactive claims.
- Ensure accurate calculations, considering all eligible wages and health plan expenses.
- Stay updated with the latest eligibility criteria and avoid common pitfalls, such as miscalculations or overlooking specific requirements.
- Maintain detailed records to support your claims and be prepared for potential IRS audits.
- Seek expert advice if you need clarification on any aspect of the ERC.
In conclusion, while the ERC offers a significant financial boost for businesses, staying updated with its evolving landscape is essential. By understanding the changes and ensuring compliance with the latest requirements, businesses can confidently navigate the ERC terrain and optimize their financial benefits.