New Business Eligibility
The ERC is also available to new businesses that began operations after February 15, 2020. These entities, referred to as recovery startup businesses, can claim the ERC. They don’t have to show a decline in revenue or a forced closure. However, their annual gross receipts must not exceed $1 million. To be considered a recovery startup business, the entity must have begun carrying on any trade or business.
Taking advantage of the Employee Retention Credit
The Employee Retention Credit (ERC) in 2023 is a refundable tax credit. It incentivizes businesses to keep employees on their payroll. This became especially significant during the COVID-19 pandemic. A business qualifies by showing a substantial decline in gross receipts or by being ordered to shut down due to government mandates. The credit applies to a percentage of eligible wages, which may include certain health plan expenses. The maximum credit amount varies from year to year.
How to Calculate the Credit
The way businesses calculate the ERC depends on their specific circumstances. For most businesses, the ERC is equal to a certain percentage of qualifying wages, plus certain health plan expenses. The maximum wage per employee varies annually. For a recovery startup business, the credit is limited to a certain amount per calendar quarter. Regardless of the number of employees, this remains constant.
Claiming the Credit
To claim the ERC, businesses must report their total qualified wages and related health insurance costs for each quarter. This information is typically reported on the quarterly employment tax return form. If a business’s employment tax deposits are not enough to cover the credit, they may receive an advance payment from the IRS. This is done by submitting the appropriate form.
Health Plan Expenses
Certain health plan expenses can also qualify for the ERC. This includes the employer’s share of the cost of maintaining a group health plan. The expenses must be allocable to the employees’ qualifying wages. This means that the expenses are divided among the employees in proportion to their wages.
Changes in Ownership can Have New Business Eligibility
A change in business ownership does not necessarily affect ERC eligibility. However, the new and previous owners must follow certain aggregation rules. They should carefully consider how these changes might affect their ability to claim the ERC. In some cases, the new owner may have new business eligibility for the credit, even if the previous owner was not.
Employment Tax Deposits
The ERC can be offset against the employer’s share of social security tax. However, if the credit exceeds the employer’s total liability, the excess is refundable. This ensures that businesses benefit fully from the credit, regardless of their level of social security tax liability. The refund is typically made after the business files its employment tax return.
Navigating Changes in the Law
It’s important to stay updated about changes in the law relating to the ERC. Any alterations could affect eligibility, calculation, and claiming procedures. The IRS often provides guidance about these changes on its website. Also, consulting with a tax professional can be beneficial for understanding the current state of the law.
Interaction with Other Tax Credits
The ERC can interact with other tax credits in complex ways. Businesses should be aware of these interactions to avoid unintended consequences. For instance, a business that receives a Paycheck Protection Program loan may not claim ERC for wages paid with the loan proceeds. A tax professional can help understand these interactions and how they might affect a business’s overall tax position.
Planning for the Future
The ERC offers substantial benefits for businesses, especially startups. These entities should carefully consider how to maximize their benefit from the ERC. This might include adjusting their operations or employment practices. At the same time, they should stay aware of potential changes in the law. As always, consulting with a tax professional is a wise step in the new business eligibility planning process.
Keep an eye on Congress
The United States Congress is gearing up to tackle the Employee Retention Credit (ERC) issue in 2023. Multiple debates are underway. Broadly, there are two contrasting perspectives on this tax credit. Some lawmakers argue for its expansion, others for its termination.
The proponents see it as a tool for economic recovery. They believe it promotes job security and encourages small businesses. They plan to increase the ERC, benefiting more employers. This group’s proposal includes enhancing the eligibility criteria for distressed industries.
The opponents argue it has served its purpose. They see the ERC as an unnecessary burden on the budget. They seek to phase out the credit and reallocate the funds. Their focus is on cutting expenditure and boosting other sectors.
These two stances will form the core of the debate. Despite differences, both sides aim for economic health. The exact outcome will depend on the consensus reached. A decision will likely emerge by late 2023.
Should the credit remain, revisions to the program are expected. These could include changes to the calculation or new business eligibility requirements. If discontinued, Congress will redirect the resources to support other economic initiatives. In either case, changes are imminent.