How Business Owners Can Access Their COVID-Related Tax Credit Refund
Businesses affected by COVID-19 are eligible for an ERC tax credit. Here's how you can claim yours.
A little-known government program is offering financial relief for business owners impacted by the COVID-19 pandemic. The Employee Retention Credit (ERC) is a tax credit from the Federal government and part of the Infrastructure Investment and Jobs Act. The ERC is open to businesses of all sizes that retained employees during the pandemic-related shutdowns and slowdowns in 2020 and 2021. Although the program was officially sunsetted in 2021, the credit is available retroactively, with businesses having up to three years from the end of the program to review wages paid after March 12, 2020 and file a claim. The ERC could give businesses up to $26,000 per full-time employee if eligible, and benefits can be larger than the amounts a company received in PPP funding.
According to the IRS, the ERC is “a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
“For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19.”
Below we break down the ERC tax credit process, including eligibility requirements, necessary documentation and steps to apply.
Who is eligible?
The ERC is available to all types of small businesses—LLCs, LLPs, C-Corps, S-Corps, B-Corps, sole proprietors and non-profits with W2 employees. Three criteria govern who can receive the credit, with businesses having to meet only one to qualify. While eligibility details should always be reviewed with the IRS or a tax professional, generally, below are the ERC eligibility requirements:
- Reduced year-over-year revenue in 2020 or 2021
- Reduced revenue in those years due to government mandates, such as forced business shutdowns; or if the business was started after February 15, 2020
- Less than $1 million in gross annual receipts
What you’ll need
After reviewing the eligibility requirements, business owners can begin the application process by preparing the following paperwork:
- Employer’s Quarterly Federal Tax Return, Form 941
- Advance Payment of Employer Credits Due to Covid-19, Form 7200
- Reporting Agent Authorization, Form 8655
- PPP Application and Forgiveness, when applicable
Additional forms and supporting materials may be required, depending on your unique circumstances, which can include 2019, 2020 and part of 2021 financials, along with any official government-ordered shutdown or suspend operations notices.
How to apply
Business owners can apply online at https://www.irs.gov/forms-instructions after gathering the necessary forms. For third-party assistance with the application process, business owners can visit https://www.LendioDenver.com. If you go the “do-it-yourself” route, be prepared for a potentially long process if you select to complete the application on your own. While business owners can file for the credit themselves, the process for getting a full tax credit can be challenging with the application running to over 170 pages of IRS-required documentation with ongoing amendments to the program since inception. It is recommended that business owners seek the expertise of an experienced professional or third party to maximize the odds of a successful application.
Per the IRS, “eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter.” The IRS website indicates a six-week to six-month timeline to receive credits, yet we are seeing the process take six to eight months, with some applications taking more than 12 months to receive a credit.
If using a third party, such as Lendio, business owners may be asked to complete a pre-qualification application to begin the ERC process. In this instance, the local Lendio team performs internal prechecks after the pre-qual application is complete and works with the business owner to identify the documents needed to submit their application.
While the ERC program remains overlooked by many small businesses, it is a tremendous opportunity for businesses that have been negatively affected by the COVID-19 pandemic. If your business experienced a substantial decline in gross receipts but has since recovered and you didn’t claim the tax credit, it is possible to apply for the credit for retaining employees and persevering through the economic challenges resulting from the COVID-19 pandemic.
Bill and Leanne Airy are president and owner of Lendio Denver. Lendio Denver and its partners have secured over $5.7 million in tax credits for Denver-area small business owners. Bill is a Colorado native and experienced entrepreneur who founded his first small business in 2007 and sold several businesses before founding Lendio Denver. Contact him at 303-747-3538 or Bill@LendioDenver.com.