Businesses Still Have Time to Claim the ERC

Amended Return Filings Available Through April 15, 2025 for Those That Qualify

The Employee Retention Credit (ERC) remains one of the best tax benefits out there for businesses – as well as tax-exempt entities – to keep doors open and employees on payroll during this difficult economy. Those employers that have not yet claimed (or incorrectly claimed) any ERC may still do so retroactively by filing amended payroll tax returns (Form 941-X) for tax years 2020 and 2021.

As this is a complex credit and subject to IRS scrutiny, it is imperative that you work with your CPA firm or another qualified, reputable tax professional.

When is the Deadline?

Here is an overview of how the program works and how to claim this credit for your business:

Originally available from March 13, 2020, through December 31, 2020, the ERC is a refundable payroll tax credit created as part of the CARES Act. The purpose of the ERC was to encourage employers to keep their employees on payroll during the pandemic.

Qualifying employers and borrowers that took out a Paycheck Protection Program loan could claim up to 50% of qualified wages, including eligible health insurance expenses (up to a maximum credit of $5,000 for the entire year). The Consolidated Appropriations Act (CAA) expanded the ERC. Employers that qualified in 2021 can claim a credit of 70% in qualified wages (up to a maximum credit of $7,000 per quarter).

The CARES Act does prohibit self-employed individuals as well as 2% or more owners of an S Corporation from claiming the ERC for their own wages. You also can’t claim wages for specific individuals who are related to you, but you can claim the credit for wages paid to employees.

Who is Eligible for the ERC?

Whether or not you qualify for the ERC depends on the time period you’re applying for. To be eligible for 2020, you need to have run a business or tax-exempt organization that experienced a significant decline in sales—less than 50% of comparable gross receipts compared to the same quarter in 2019.

If you’re trying to qualify for 2021, you must show that you experienced a decline in gross receipts by 80% compared to the same time period in 2019. If you weren’t in business in 2019, you can compare your gross receipts to 2020.

Alternatively, a qualifying employer may be one whose trade or business was fully or partially suspended during a calendar quarter due to governmental orders that limited commerce, travel or group meetings due to COVID-19.

If an employer’s business operations continued, but the operations were subject to modification due to a governmental order (for example, to satisfy social distancing requirements), the modification can be considered a partial suspension of business operations if the required modification had more than a nominal effect (10% or greater) on the business operations under all the facts and circumstances.  In addition to being tied to specific government shutdown order(s), the nominal effect must be documented and supported by one of the following:

• the gross receipts from that portion of the business operations is not less than 10 percent of the total gross receipts of the same calendar quarter in 2019, or
• the hours of service performed by employees in that portion of the business is not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business in the same calendar quarter in 2019.

How to Claim the Tax Credit

Some businesses, especially those that received Paycheck Protection Program loans, mistakenly believed they didn’t qualify for the ERC. If you’ve already filed your tax returns and now realize you are eligible for the ERC, you can retroactively apply by filling out the ​​Adjusted Employer’s Quarterly Federal Tax Return (941-X).

Since the tax laws around the ERC have changed, it can make determining eligibility confusing for many business owners. It’s also difficult to figure out which wages qualify and which don’t. The process gets even harder if you own multiple businesses. And if you fill out the IRS forms incorrectly, this can delay the entire process.

Amending Returns

If you receive credits, you will need to amend your federal business returns to reflect the ERC credit for those years in which they expensed their qualified wages (2020 and/or 2021). The wage expense will need to decrease in the amount of the credit received, which will result in an increase of income. This will also affect the shareholders/partners of that business, who will then need to amend their personal returns for those years.

Where is My Check? – IRS Processing of ERC Claims (Especially Amended Returns)

The Treasury Inspector General for Tax Administration (TIGTGT -1.3%A) recently issued a report on IRS administration of ERC and other Covid-19 tax relief. The TIGTA report notes a backlog of 447,435 unprocessed Forms 941-X (filed to claim the ERC and other Covid-19 relief tax provisions). The latest from the IRS is that number is now down to 207,000 unprocessed 941-X as of August 31, 2022.

Adding to the frustration for business owners is not having any sense of timing or update from the IRS on when their ERC payment will be processed and check issued.   A good rule of thumb for wait time is 7 to 9+ months.

IRS Scrutiny

On October 19, 2022, the IRS issued an announcement in the Internal Revenue Bulletin, warning employers that they are aware some third-party ERC promoters may have nudged employers to claim the ERC even when those employers did not qualify for the credit.  To the extent the IRS identifies an employer who improperly claimed the ERC when it otherwise did not qualify, the IRS has indicated that it intends to reclaim the credits with penalties and interest.

Given the IRS warnings in the notice, the takeaway is clear. First, employers who have not yet claimed the ERC but who are trying to determine whether they qualify should seek a tax opinion from a qualified tax professional.

Second, employers who have already claimed the ERC, particularly those employers who claimed the ERC through third-party promoters, should reach out to a qualified tax professional to have an independent determination made as to whether the employer truly qualifies and, if so, whether the employer complied with all parts of the law applicable to the ERC.

Third, if an employer has improperly claimed the ERC, the employer should consider taking proactive measures to regain compliance and potentially avoid significant penalties and interest on a later IRS examination. Fourth, employers should recognize that the IRS generally has a longer period of time to reclaim the ERC under section 3134(l) of the Code, which permits the IRS five (5) years rather than the ordinary three (3) years to select an ERC return for examination.

Questions?