For a tax law, the Employee Retention Tax Credit has received an extra large helping of attention in the news. On September 14, 2023, the IRS announced an immediate moratorium on processing new Employee Retention Credit (ERC) claims leading to a surge of stories around the ERC being “frozen” or “halted.” Last week Congress responded by asking the IRS for details on how the agency will keep up with the backlog of claims while improving the process for preventing fraud.
Earlier this year, the IRS included the ERC on its “Dirty Dozen” list – a list of the worst tax scams for businesses and consumers to be aware of. The IRS was concerned by the growing number of illegitimate claims and messaging pushed by some processors claiming “anyone can qualify.” This latest moratorium is intended to give the IRS time to better evaluate how to mitigate fraud.
We applaud the IRS for their efforts to remove bad actors and fraudulent applications from their queue of applications. Doing so will create room for legitimate applicants to get access to the credit (even if that means more scrutiny on their application).
Unfortunately, all of the attention and news stories have made it difficult for legitimate small business owners to understand whether they should still apply for the tax credit or not.
What the IRS moratorium means for small businesses
While the IRS has authority over its processes for reviewing tax claims, it does not have authority to end the Employee Retention Credit. Meaning – while the IRS can temporarily pause processing new claims, any new claims made before the filing deadline must still be honored.
In practical terms, this means:
- Processing times will be longer – extending from 90 days to 180 days or more.
- Payouts for previously filed claims will continue through the moratorium but at a slower pace.
- The IRS will implement a more scrutinous compliance review period.
- Businesses can still submit an ERC claim, but the IRS will not review them until at least January 1, 2024.
Applying for the ERC
Naturally, some small business owners may wonder if attempting to apply for the ERC is still worth it given all of the warnings issued by the IRS. The reality is the tax law is complicated but a tax professional can help you navigate it successfully.
When selecting a professional to assist you with your filing, watch for the following “green flags” that they have the right expertise:
- The professional works with you to compile extensive documentation demonstrating your eligibility for the tax credit for each quarter you are applying.
- The professional performs government order research on your behalf and works with you to identify how those orders may have affected your business.
- The professional does not charge you upfront to see if you qualify.
- The professional has a history and a positive reputation in assisting with tax credits.
Eligibility requirements
Under the employee retention credit, small businesses can qualify for up to $26,000 per W-2 employee. In order to qualify, businesses must meet the following criteria.
First, you must have paid qualifying wages. This includes wages paid to W-2 employees if your business averaged 100 or fewer full-time employees in 2019 for tax year 2020 and averaged 500 or fewer full-time employees in 2019 for tax year 2021.
If you paid qualifying wages, you must also demonstrate either a decline in gross receipts or show that your business was sufficiently impacted by a government-mandated full or partial suspension of operations.
You may also qualify as a recovery startup business if you started the business after February 15, 2020, had an annual gross receipt under $1 million, and have one or more W-2 employees.
Deadline to apply
As of now, the deadlines for filing the ERC are the same. Businesses filing claims for Q2-Q4 of 2020 have until April 14, 2024, to submit a claim. For Q1-Q3 of 2021, businesses have until April 15, 2025, to submit a claim. For those who haven’t filed, the IRS’s guidance is to talk to a trusted tax professional and learn about how businesses qualify.
Information provided on this blog is for educational purposes only, and is not intended to be business, legal, tax, or accounting advice. Please consult with a professional advisor for advice specific to your situation. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio.
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