President Biden signed the Infrastructure Innovation and Jobs Act back in November 2021, sunsetting the Employee Retention Tax Credit (ERTC) program one quarter early (with some exceptions for recovery startups). This early “cut-off” eliminated the 4th quarter of 2021 as a qualifying quarter for the credit – but it doesn’t preclude taxpayers from still claiming the credit for prior eligible quarters.
Qualifying wages paid prior to October 1, 2021, can still be used to apply for the ERTC for applicable quarters and time periods assuming the gross receipts and/or government shutdown/partial shutdown tests are met.
Employers could earn up to $5,000 per employee in 2020, and up to $7,000 per employee per quarter in 2021 (excluding Q4 2021), for a total potential benefit across all qualifying quarters of $26,000 per employee. That’s a major potential benefit for taxpayers who qualify for the credit.
Due date of amended payroll return filings
The ERTC is claimed on an amended quarterly payroll tax return (Form 941X). Once the IRS processes Form 941X, a check is issued to the taxpayer for the credit amount, plus interest. The statute of limitations for filing amended payroll tax returns is three years from the due date of the return, meaning to apply for the Employee Retention Tax Credit for the 2nd quarter of 2020, the amended return needs to be submitted by July 2023. So, there’s still time to apply for the credit.
While the actual credit will be refunded to the taxpayer, one major consideration when applying for the ERTC is that the credit is taxable in the year the wages were paid, not when the credit (money) was received.
Phrased another way, if a taxpayer now submits Form 941X for a quarter in 2020, even if they don’t receive their credit check until fall 2022, they will need to amend their 2020 income tax return and increase taxable income. Non-profits may not need to amend. Mechanically, this works by reducing the wages deducted on the tax return by the amount of the credit. Similarly, if a taxpayer applies for the credit for a given quarter in 2021, the wages used to calculate the ERTCs are disallowed as a 2021 tax deduction.
Taxpayers applying for the 2021 Employee Retention Tax Credit might consider extending their 2021 tax return to allow time to recognize disallowed ERTC wages on an originally filed tax return; that’s to prevent the administrative hassle of filing a 2021 amended return for credits claimed post-return filing. For income tax extension purposes, a taxpayer may decide to factor in the estimated increase to taxable income (or decreased net operating losses) from the ERTC when calculating 2021 extensions.
Partial government shutdown – nominal portion
Didn’t meet the gross receipts decline test or have a full business shutdown as a result of a government order? There’s still a chance organizations that were essential businesses could qualify for the Employee Retention Tax Credit. To qualify under a partial government shutdown, a business unit that comprised at least 10% of the gross receipts in the same quarter in 2019 and was suspended from operations (as a result of a COVID-19 government shutdown order), would qualify the entire organization.
As an example, if Business Unit A was shut down for a period of time at the onset of COVID-19, and the unit generated 15% of 2nd Quarter revenue in 2019, that could potentially qualify the overall business for the ERTC during the 2020 shutdown period.
Furthermore, in this example, it’s not only Business Unit A that has qualifying wages for the credit: all wages of all business units of the company would qualify during this period of time. Thus, as long as a nominal portion (10%) of the business was suspended, it could be enough to qualify the whole business for the credit.
Talk to a pro
Questions around planning and if your business could qualify for the credit? Connect with a member of our Barnes Dennig COVID-19 Advisory Team for a free consultation. We’re here to help.