Commentary June 04, 2022 at 07:44 AM Share & Print
What You Need to Know
- The rules for claiming the employee retention tax credit were expanded in 2021, so some small businesses may still file amended payroll tax returns to do so.
- Small-business owners have up to three years from their original filing deadline to retroactively claim the credit.
- The IRS has also provided retroactive penalty relief for taxpayers who owe added income tax.
Many small-business clients have already taken advantage of the CARES Act relief provisions for 2020 and 2021. Others, however, may still be eligible for assistance if they failed to take full advantage of the relief provisions in past years.
Generally, businesses were eligible for the refundable employee retention tax credit (ERTC) if their business operations were suspended in 2020 or 2021, if they sustained a certain level of revenue loss or if they qualified as a recovery startup business after Feb. 15, 2020.
The rules for claiming the ERTC were expanded significantly in 2021, meaning that some small-business clients may not have taken advantage of the relief. It’s still possible for those clients to file amended payroll tax returns — so it’s critical to fully understand the rules to make sure clients are getting the full amount they deserve.
Expanded 2021 ERTC
The employee retention tax credit is no longer available for wages paid after the third quarter of 2021. Still, some small-business owners may not have realized that they qualify for the 2021 credit, and they have up to three years from their original filing deadline to retroactively claim the credit.
Typically, employers were eligible to claim the ERTC if their business operations were suspended in 2020 or 2021. They were also eligible in 2020 if they experienced a 50% revenue decline compared with the same quarter in 2020. For 2021, however, businesses may qualify if their revenue declined by only 20% when compared with the same quarter in 2019.
Under the original law, employers were not eligible for the ERTC if they also received a Paycheck Protection Program (PPP) loan. That rule was later eliminated, so that businesses that received PPP loans could also take advantage of the ERTC (however, if PPP loan proceeds used to pay wages were forgiven, those wages were not eligible for the ERTC).
The amount of the credit was also significantly increased in 2021. Originally, the credit was capped at 50% for up to $10,000 in wages (so, $5,000 per employee). In 2021, the amount was expanded so that employers could claim up to $7,000 per employee per quarter (up to $21,000 total in 2021).
Many employers have also been confused about the rules for working employees. Originally, employers with 100 or more employees were prohibited from claiming the credit with respect to wages paid to working employees (in other words, only wages paid to employees who were not working or who were working on a reduced schedule counted).
For 2021, that rule applies only to employers with 500 or more full-time equivalent employees — meaning that many more business clients may qualify for the 2021 credit (members of a controlled group were required to aggregate employees for purposes of determining eligibility).
Further, employers that qualify as recovery startup businesses qualify for the ERTC in the third and fourth quarter of 2021 even if they didn’t otherwise qualify under the rules.
Business owners can claim the ERTC retroactively for wages paid in previous quarters by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Retroactive Penalty Relief
The IRS has also provided relief for taxpayers who owe additional income tax because their deduction for qualified wages was reduced by a retroactively claimed employee retention tax credit if the taxpayer is unable to pay the additional tax because the ERTC refund has yet to be received. The IRS has acknowledged that this often occurs because of its own Form 941-X processing backlog.
Under current law, the employer must reduce its income tax reduction for the qualified wages by the amount of ERTC claimed in the tax year where the wages were paid or incurred (2020 or 2021). If the taxpayer claimed the credit retroactively, they may not have received their refund. Taxpayers in this situation can be eligible for penalty relief for inability to pay their tax liability if they can show reasonable cause, rather than willful neglect, under Notice 2021-49 provisions.
While the ERTC is now a thing of the past, it’s not too late for small-business clients to maximize the value of their credits for 2020 and 2021. Clients that were originally disqualified should examine the expanded rules for 2021 to determine whether they’re eligible for relief.