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Employee Retention Credit (ERC) FAQs

What is Employee Retention Tax Credit?

The Employee Retention Credit has been a hot topic for businesses recently and you’ve probably heard about it, but still have some questions. So, what is the ERC? The Employee Retention Credit (ERC) is a refundable payroll tax credit filed against employment taxes. ERC was introduced with the Coronavirus Aid, Relief and Economic Security (CARES) Act in 2020 during the COVID-19 pandemic to help businesses recover from the economic fallout that occurred.

It essentially provides funding to businesses to make up for some revenue lost during the pandemic. Some companies might even argue that the ERC has been their lifeline post-COVID-19, enabling them to retain critical employees and continue business operations.

The ERC has been amended three separate times after it was originally enacted as part of the CARES Act by the Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act), the American Rescue Plan (ARPA) Act of 2021 and the Infrastructure Investment and Jobs Act (IIJA).

Credit from the ERC can potentially reach up to $28,000 per employee for 2021. It essentially rewards companies that had employees on payroll during the pandemic. Since the United States government orders created restrictions that financially affected businesses, this is a way of compensating those impacted businesses.

Where did the Employee Retention Tax Credit come from?

Because many businesses faced economic decline during the pandemic, the U.S. government passed the ERC as an opportunity for businesses to get funded for lost revenue. It encouraged employers to keep their employees on the payroll, even if they were not working during COVID-19.

The goal was to sustain the economy during the coronavirus pandemic. Congress voted to pass a $1.9 trillion relief bill so that businesses could benefit. The IRS initially predicted that 70 percent of businesses would claim the Employee Retention Credit.

How do you qualify for the Employee Retention Tax Credit?

Your business may be eligible for the ERC if its operations were fully or partially suspended by governmental COVID-19 orders, thereby limiting commerce, travel, or group meetings. You might also be eligible if your business experienced a significant decline in gross receipts during 2020 or within the first three quarters of 2021. New startup businesses that began operations after February 15, 2020, may also qualify, regardless of revenue.

There are two main ways to be eligible for stimulus refunds:

1) Employers are eligible for ERC if they match the required decline in revenue within any quarter of 2020 or 2021.

2) Employers are eligible if they have W-2 employees.

Up to $5,000 can be credited per employee from March 13, 2020, to Dec. 31, 2020, as well as up to $21,000 per employee between the period of Jan. 1, 2021, to September 30th  30, 2021. Depending on how large your company is, you could earn up to six or seven figures back in funding. Eligibility can be determined by electing to use the immediately preceding calendar quarter.

Why is working with us the best way to file?
We assist you with forms like these to help ensure your information is accurately filled out and would be happy to set up group meetings to guarantee total transparency during this process while providing filing guidance for your business.

Partnering with us can save you time and effort when filing your ERC. Whether it be finding if your business is eligible for ERC or filing for advance payment of employer credits and R&D tax credits, we’re here to walk you through the whole process and ensure that your statement is accurate.

Research & Development (R&D) FAQs

What is Research & Development Tax Credit?
The Research and Development (R&D) tax credit, also known as Research and Experimentation (R&E) tax credit is a United States government sponsored tax initiative.

It results in a dollar for dollar reduction in a company’s tax liabilities and is one of the best things American businesses can do to reduce their liability tax. Companies can submit documentation to file using the IRS Form 6765.

The research and experimentation tax credit was essentially designed as an incentive to make research activities more affordable for businesses, strengthening American innovation.

Where did the R&D Tax Credit come from?
Originally, the R&D tax credit was created in the 1980s by U.S. Representative Jack Kemp and U.S. Senator William Roth. It has since expired eight times and been extended fifteen times. It was created for protecting Americans, encouraging investment in development, and increasing research activities along with basic research payments. With the competitiveness of today’s business world, Congress is encouraging businesses to increase their research activities; they do want to increase economic growth after all.

In the past, the Alternative Minimum Tax (AMT) actually did prevent businesses from being able to file. Then Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA) which reduced the corporate tax rate, thus increasing the value of R&D tax credit.

The Tax Cut and Jobs Act (TCJA) was created to help lower business’ tax rates. They created the R&D tax credit and made it permanent while eliminating other corporate tax credits. As a result of the TCJA, there were changes in tax deductions beginning at the end of December 2021. Before the TCJA was created, companies had to reduce regular credit to 20% of Qualified Restoration Expenditures (QRE) to 13% of QRE spending or be forced to have reduced credit on alternative simplified credit. If you’re interested in learning more, the IRS has created specific guidelines for businesses to file for research and development tax credit in Internal Revenue Code (IRC) Section 41 and Section 174.

How do you qualify for the R&D Tax Credit?

Many businesses are not aware if they actually meet eligibility qualifications. Some believe there are special rules needed to qualify. While the correct documentation is required, in reality, over 60 industries can qualify for R&D credit in over 30 states, to offset tax liabilities. Some businesses’ daily operations can even qualify them, allowing them to receive basic research credit if it puts them over a certain base amount. Even start-ups can use this to their advantage.

Here are some of the factors small businesses and large businesses alike must be doing to qualify:

Create new or innovative products
Change existing products
Create new processes, techniques, prototypes, or software development
Hire engineers and designers for internal use or contract research to complete the job

There’s also an IRC section defining a four-part test to determine if a business is eligible for tax cuts and credit:

1) Qualified purposes – The purpose of business development has to either be creating new or improved business operations. It does not need to be something completely innovative.

2) Elimination of uncertainty – Companies must prove that they have tried to eliminate uncertainty when developing or improving products. Contract research expenditures in connection with the taxpayer’s trade can be deducted if uncertainty can be eliminated.

3) Process of experimentation – The company must prove its methods of process such as trial and error or simulation when attempting to reach a certain result in development. Oftentimes some of these processes involve computer software development and engineering.

4) Technological in nature – The experimentation must be related to the hard sciences such as physics, biological sciences, engineering, biology, or chemistry. But, the company is not required to expand upon these principles.

Creating or innovative new products or processes are known as qualified research activities, according to the IRS. The amounts incurred or paid during the research activities such as employee wages and supply costs are known as qualified research expenses. By increasing basic research activities in your business, you should qualify to file for the research and development tax credit and can receive regular credit or basic research credit.

What should you pay attention to?
To file, you must claim some of the credit as a payroll tax credit against the employer section of your social security taxes. It is calculated based on the increases in research expenditures and activities. Small businesses can even use R&D credit to offset payroll taxes of a current tax year if their expenditures are greater than a certain base amount. Companies can no longer expense costs identified as IRC Section 174 research expenses. Instead, these expenses are charged to a capital account and deducted over 5-years.

The best way to calculate your R&D tax credit is by multiplying the fixed base percentage by the average of the business’ gross receipts from the last several tax years. Gross receipts are the total amounts of sales a business has, without eliminating expenses or costs.

When filing, there are two standard efforts to keep in mind: the Regular Research Credit (RRC) and the alternative simplified credit (ASC). The ASC tends to be the most favored of the two as it is simpler. The RRC method is better for businesses with a low base amount, including startups while the ASC method is better for companies with higher base amounts or who have complications with mergers and acquisitions. Keep in mind – you can decide between the two ways when filing in the current year, but be sure to submit the correct documentation to get your R&D credit.

Why is working with us the best way to file?

It’s normal to have questions when filing for Research and Development, also known as research and experimentation tax credit, especially when tax hikes are in full swing. In fact, oftentimes businesses will file with the incorrect documentation. If you have any questions regarding the correct documentation, we would be happy to provide you with a documentation checklist.

Partnering with Stenson Tamaddon is important when filing for R&D tax credit to ensure all is done to keep you in compliance and maximize your overall return – and that’s why we’re here! We’ll take a look at your expenditures, base amount, tax rate, contract research, and gross receipts in all open tax years to determine how much credit you qualify for so that your business is able to receive its basic research credit. All records are kept for our internal use only.

Contact us today to learn how we can set your business up for success when filing for R&D credit.

Work Opportunity Tax Credit (WOTC) FAQs

What is the Work Opportunity Tax Credit Tax Credit?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who invest in hiring Americans from certain target groups who have previously faced barriers to employment.

The goal of this is to act as an incentive for employers to exemplify workplace diversity in return for a maximum tax credit. It is supposed to promote the hiring of American workers of a certain target group while providing a federal tax incentive to employers who hire them. Employers have until December 31, 2025 to file. The amount of the tax credit under the WOTC program depends on the target group the employee belongs to as well as qualified wages paid and hours worked. Taxable employers can carry the current year period’s unused WOTC back one year or forward 20 years.

Where did the Work Opportunity Tax Credit come from?
The WOTC was created back in 1996 as part of Section 1201 of the Small Business Job Protection Act of 1996 and has since been updated on multiple occasions. Even back then, employers at for-profit organizations could claim a tax credit against federal tax liabilities for hiring members of certain groups. Tax-exempt employers can claim WOTC against their payroll taxes.

In 2015, The Protecting Americans from Tax Hikes Act (PATH Act) allowed qualified employers to claim WOTC for targeted group employee categories that were apparent before the enactment of the PATH Act as long as the individual began working for them after December 31, 2014 and before January 1, 2020. In the fiscal year of 2021, over 2 million certifications were filed by state workforce agencies. These SWAs received over $18 million in support of the WOTC program.

Workforce programs such as this one were created as a voluntary act for businesses. Therefore, businesses do not need to send a job offer to an individual in one of the target groups. However, businesses are encouraged to invest in American job seekers who have faced barriers to unemployment in order to establish diversity in the workplace.

How do you qualify for the Work Opportunity Tax Credit?
When looking into employer eligibility for the WOTC program, there are a few qualifications businesses must meet. Employers must verify that the new hire was part of the target group in order to claim work opportunity tax credit.

What is the target group for an eligible employee?

Ex-felons – those who have been previously convicted of a felony who have been released within the last 12 months
Recipients of state help under title IV of the Social Security Act (SSA)
Qualified veterans – veterans who have served over 180 days or were discharged sooner because of a service-connected disability
Summer youth employees between the ages of 16-18 who are employed from no longer than May 1st to September 15th
Applicants who qualify for supplemental security income (SSI) benefit
Individuals who are long-term family assistance recipients or require temporary help for needy families (TANF)
A designated community resident living in empowerment zones or rural renewal counties – empowerment zones are economically distressed communities, eligible to receive tax incentives and grants from the federal government
Individuals who are part of a supplemental nutrition assistance program under the Food and Nutrition Act of 2008
A qualified long-term unemployment recipient
Individuals referred after completing a rehabilitation program
Individuals must have a required certification from a state workforce agency, must be within one of the ten targeted groups, and be in their first year of employment in order to be eligible. Several factors that can prevent an employer from qualifying are if they hire a family member, former employee, or someone who will have a large share in the company. In order to be eligible, employees must work a minimum of 120-400 hours. Within a qualified first-year period for employees who worked between 120-400 hours, credit is 25% of these first-year wages. For employees who worked over 400 hours, 40% of first-year wages can be credited.

If you are interested in creating a diverse workplace by hiring individuals within the specified target groups, there are many resources to help you find qualified candidates such as American Job Centers. Some examples of these can be the Veterans Administration, social services offices, and various vocational rehabilitation centers. Some candidates even have certain certifications that tell potential employees the amount of credit they could earn if they hire this ‌individual.

What should you pay attention to?
After employees are deemed as part of the target group, employers must file for the tax within 28 days of the employee’s start date. Employers can find out if employees are a member of the target group by asking them to fill out a questionnaire upon hire.

To file for WOTC, the (Internal Revenue Service) IRS Form 8850 must be completed, along with several forms from the Department of Labor. IRS Form 8850 acts as a pre-screening notice to make a certification request to the state workforce agency (SWA). DOL requires employers to fill out an Individual Characteristics Form (ICF) and ETA Form 9061 or 9062. The purpose of the forms are to ensure the individuals qualify as one of the targeted groups. All forms can be submitted via email, online, or direct mail.

Both new businesses who do not have much tax credit and larger companies with a large credit portfolio can take advantage of the WOTC. Plus, businesses can apply for more than one credit for the same employee. However, credit is limited to the business’ income tax liability. Credit will not affect the employer’s Social Security tax liability on their tax return. Taxable employers can claim WOTC as a general business credit against their income taxes.

Why is working with us the best way to file?
The work opportunity tax credit can confuse those who have not previously filed. Working with us will save you time and effort, and will ensure you file correctly to find out the amount of your business’ income tax liability. We will make sure that all the requirements for the IRS, DOL, and U.S. Employment and Training Administration are met in order to successfully create your WOTC account. Contact us today.
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