The finish line for the 2020 tax season is coming into view, and many small business owners are still scratching their heads in utter confusion and fear. It’s been a roller coaster ride for many small businesses with PPP loans, PPP forgiveness, and now the Employee Retention Credit (ERC). Knowing where they stand and what’s available is proving to be almost too much to bear as the clock keeps ticking.
The good news is the IRS posted information recently on how businesses can receive the ERC. Companies that didn’t receive forgiveness on PPP loans in 2020 can instead claim the Employee Retention Credit for the final quarter of 2020 and the first two quarters of 2021. This perk comes thanks to a provision in last month’s coronavirus stimulus package.
“The tax credit allows small businesses to claim $7,000 per employee per quarter in 2020, which adds up quickly,” said Roger McCloud, CEO of IRON Tax, Accounting & Financial Solutions. “For example, a company with 36 qualified employees would save more than $1 million. But, many likely will miss the opportunity and could pay hundreds of millions in avoidable taxes.”
However, McCloud warns that many small businesses may miss out. The following are five reasons why small businesses could be left out to dry and not receive funds through the ERC:
1. COVID-19 Burnout
The pandemic has drastically reduced small business revenues. And with less money to claim, the filing paperwork gets easier—or does it? Many small business owners might erroneously believe that they can prepare their own taxes this year and save some money. This thinking might hold up in a regular year without the excessive amount of tax changes and the extra opportunities to recover losses offered by the IRS and Congress. Chances are a terrible case of COVID-19 burnout has caused many small business owners to check-out at some point and lose track of all the tax opportunities. If small business owners are not 100 percent up-to-speed on the latest tax laws, they could miss out.
2. Rejected PPP Loan Forgiveness Application
When PPP loans became available, they were the saving grace for many small businesses. When talk of loan forgiveness started swirling around, many of those business owners were relieved at the possibility. However, when the forgiveness feature arrived, it took the wind out of some sails as it became clear the loan forgiveness was shackled with criteria. This rejection set a tone of defeat that has kept some small business owners from considering other possibilities, such as the ERC.
3. Second Draw PPP Eligible
The good news is small business owners have several avenues to recover money on their taxes from a disastrous 2020. The bad news—the hasty creation of such policies and the lack of time to educate people makes the entire process confusing. Unfortunately, when some people have had enough, they just throw in the towel. For instance, some small business owners may have gotten fed up since their business was not eligible for the first draw PPP and not realize they were suitable for the second. Additionally, many might falsely believe that receiving a PPP loan disqualifies them from the ERC; however, this is not true. For many businesses, their payroll is large enough to allow an employer to qualify for both.
4. No Significant Decline in Gross Receipts
So much of the tax language lends itself to interpretation, and small business owners need to let a tax professional do the interpreting. Language such as “no significant decline in gross receipts” might have some small business owners assuming they don’t qualify. Even if the business owner hasn’t seen a significant decline in gross receipts, they could still be eligible for the ERC if the business operations were fully or partially suspended at some point.
5. Only Small Companies Qualify
Another fallacy business owners have fallen victim to is thinking only companies with fewer than 500 employees qualify for the 2021 ERC. The number of employees has never been one of the qualifications for receiving the ERC. It appears negative media coverage of larger companies who got PPP loans is responsible for spreading this misnomer.
The ERC details are complicated and require a tax professional’s careful eye to scan all of the rules and additions. Roger McCloud, CEO of IRON Tax, Accounting & Financial Solutions, is one such tax expert who can get all you deserve for enduring such a challenging year.