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Claiming the Employee Retention Credit for Tax Years 2020 and 2021

RVG & Company
April 25, 2022

Even though tax years 2020 and 2021 have closed, it is still possible to claim the Employee Retention Tax Credit (ERTC) for those years. President Biden signed the Infrastructure Innovation and Jobs Act back in November 2021, which ended the ERTC a quarter early. This early “cut-off” eliminated the 4th quarter of 2021 as a qualifying quarter for the ERTC – but it did not prohibit taxpayers from claiming the credit for prior eligible quarters in tax years 2020 and 2021.

Qualifying wages paid prior to October 1, 2021, can still be used to claim the ERTC for applicable quarters and time periods, assuming the gross receipts or government shutdown tests are met. Employers may claim 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 ERTC for all qualifying quarters of $26,000 per employee.

In addition, employers that received Paycheck Protection Program (PPP) loans are eligible to receive the ERTC.

Due Date for Claiming ERTC and Amending Payroll Tax Returns

The ERTC for 2020 and 2021 may be claimed on an amended quarterly payroll tax return (Form 941X). Each quarter must be amended on a separate form. After the IRS processes Form 941X, a check is issued to the taxpayer for the credit amount. The statute of limitations for filing amended payroll tax returns is three years from the due date of the return. For example, to apply for the Employee Retention Tax Credit for the 2nd quarter of 2020, the amended return must be submitted by July 2023. As a result, there is still time to apply for the ERTC.

Wages used to claim the ERTC cannot be deducted on a tax return. Therefore, filing an 941X after a tax return has been filed for 2020 or 2021 will require the filing of an amended tax return (corporate, partnership or S – Corporation) because wages used to calculate the ERTC are disallowed as a tax deduction in 2020 and 2021.

It should be noted that the IRS has up to 5 years to audit the amended Form 941X returns and the supporting information.

ERTC Qualifications

  • Reduction in Gross Receipts: To qualify for the ERTC the employer must have a decrease in gross receipts for 2020 and / or 2021. The decrease must occur in each quarter where the ERTC is claimed. To meet the test in 2020, the employer must have a decrease in gross receipts of 50% when compared to the same quarter in 2019. To meet the required decrease in 2021 the employer must have a decrease of 20% of gross receipts when compared to the same quarter in 2019.
  • Government Shutdown: Also, an employer will qualify for the ERTC if there was a government order to fully or partially shutdown operations because of the COVID-19 pandemic.
  • Large Employer Rules: For 2020, employers with 100 or fewer full-time employees: all employee wages qualified for the ERTC. For employers that had 100 or more full-time employees: qualified wage are wages paid to employees that did not perform services for the employer due to COVID-19 related circumstances. For 2021, employers with 500 or fewer full-time employees – all employee wages qualified for the ERTC.
  • Wages Paid to Owners and Relatives: Wages paid by an employer to majority owners and their relatives are not eligible wages for the ERTC. An individual is considered to constructively own stock in an employer that is owned, directly or indirectly, by the individual’s family members, including their spouse and their siblings. Thus, the ownership structure and the status of related party employees must be evaluated. Also, self-employed individuals are not eligible for the ERTC, however, wages paid to their employees are eligible.

Interaction of ERTC and PPP

Initially, the CARES Act prohibited an employer to receive both a PPP loan and the ERTC. The CARES Act was revised to permit employers to receive both, however, an employer cannot claim the ERTC for wages that were paid with PPP loan proceeds. The IRS has issued guidelines regarding the interplay of the ERTC and PPP. In addition, there are strategies that can be used to maximize the benefits of both opportunities.

Conclusion

RVG & Company can assist in evaluating your company’s potential to claim the ERTC for 2020 and 2021. While there are several factors and qualifications to consider, the credit can provide a significant benefit as the economy unwinds from the impact of COVID-19. If you would like to discuss any of the provisions contained in the President’s latest tax proposal, please contact RVG & Company at 954.233.1767.