The Employee Retention Credit is an excellent resource for any qualifying business that was able to keep their employees on their payroll in 2020 and/or 2021. Unlike a tax deduction, the ERC is a dollar-for-dollar tax credit that can offer serious tax relief to businesses who have been impacted by the Covid pandemic. Companies who were able to retain their employees could receive up to $26,000 per employee retained, depending on the duration of their employment.
A lot of taxpayers who are eligible for the tax credit have passed up the opportunity because of misconceptions about the ERC. Perhaps the most common misconception is that if a company received a Paycheck Protection Program (PPP) loan, they are ineligible to receive the Employee Retention Credit. While that had been true at the outset of the pandemic, the Treasury Department changed that in March of 2021, when it issued Notice 2021-20, which provided formal guidance regarding the ERC and specified that businesses who have received PPP loans are still eligible for the ERC.
The guidelines issued in Notice 2021-20 had been added to the Employee Retention Credit FAQs (frequently asked questions) section of the IRS website, but that didn’t offer the full weight of an IRS notice. While the information posted in the IRS FAQs is meant to provide clarity and certainty, an IRS notice provides greater legal authority than the information in the IRS FAQs. IRS notices are published in the Internal Revenue Service Bulletin and can be cited as a reasonable defense against a possible penalty. This offers greater defense than the information in a FAQ, which the IRS disclaims as being non-binding and lacks the substantial authority to be used in a defense against possible penalties.
IRS Notice 2021-20 Summary
In addition to ensuring that taxpayers who received PPP loans could receive the ERC moving forward, Notice 2021-20 also ensured that businesses would be able to file for the tax credit retroactively, which was especially important because so many businesses — especially small businesses — had assumed they were ineligible. Thankfully, the IRS offers some flexibility for companies that have overlooked the ERC. If your business was eligible for the ERC in 2020, you have until April 15, 2024 to file for the credit for the first, second, third, and fourth quarters of that year. Businesses who didn’t file for the Employee Retention Credit for 2021 have until April 15, 2025 to file amended payroll returns for all quarters of 2021.
Before Notice 2021-20 was issued, businesses who had received small business loans through the Paycheck Protection Program were unable to take advantage of the ERC. This changed in December of 2020 with the Consolidated Appropriations Act, which allowed businesses who’d received PPP loans to be retroactively eligible for the ERC. Notice 2021-20 took the extra step of formalizing this measure while also offering new guidance regarding how businesses can document their eligibility to receive the ERC.
Notice 2021-20 may sound like it was just a formality, but for many businesses, the policies it has instituted can make the difference between receiving and not receiving the ERC. PPP loans were a lifeline to many small businesses in 2020 and 2021, with over 11 million businesses and individuals receiving them. With the PPP restriction lifted, this resource is available to millions more businesses.
Even with more businesses being able to reap the benefits of the ERC, they must still meet the same requirements for qualification that they had to before the notice was issued. In order tTo be eligible, businesses must show that their business operations were fully or partly suspended due to a governmental order. Alternately, businesses can demonstrate their eligibility for the tax credit by showing that there has been a significant drop in gross receipts compared to the same period in 2019. For 2020, businesses must prove that there has been at least a 50 percent drop in gross receipts compared to the same period in 2019, while in 2021, businesses were only required to show that there was a 20 percent drop in gross receipts compared to the same period in 2019.
Notice 2021-20 also offered some clarity on some longstanding language in the CARES Act that had been ambiguous to taxpayers. People who read the IRS notice will see that there is a clear definition of a “nominal” decline in operations and gross receipts. While the IRS had adopted this language previously, it was never explicitly defined until the issuance of Notice 2021-20, which specified that a “nominal” decline in gross receipts is less than ten percent. Similarly, a “nominal” suspension of operations would be a decline of less than ten percent in employee hours compared to the same period.
Why Is Working with Us the Best Way to Receive Your Credit?
At Stenson Tamaddon, our proprietary technology will determine the value of your tax credit down to the penny. With tax regulations changing, it’s difficult to know how to maximize the benefits of the R&D tax credit. In fact, it’s not uncommon for tax specialists to have their own questions or uncertainties about tax credits. When you work with us, we can guide you through the process of claiming your credit, ensuring that you provide all of the necessary documentation to maximize your credit. Even more importantly, Stenson Tamaddon is committed to compliance, which means that all of our communications and record reporting conform to IRS guidelines. By making compliance a priority, we can minimize the potential for miscalculations or additional costs. Beyond that, in the event of an IRS audit, our panel of outside legal and tax professionals will support your business and defend your claim.
Contact Stenson Tamaddon today to learn more about how the Research and Development tax credit can improve your company’s bottom line.