Highlights of the Employee Retention Credit Changes
As the pandemic disruptions evolve, so has the U.S. Government’s response to mitigate its impact on the economy. Employers, particularly, stand to be directly affected due to the revisions in the Employee Retention Credit (ERC).
Crucial Updates to ERCC
In an attempt to streamline the credit claim system and curb the possibilities of fraudulent activities, some critical ERC updates have been introduced. First, there is now a moratorium on new ERC claims up to December 31, 2023, due to the rise in questionable claims. Second, a new system has been initiated, allowing for the assessment and recovery of erroneous refunds related to fraudulent ERC claims.
Most importantly, businesses are being cautioned against aggressive ERC promotions, which are currently targeting unsuspecting ventures, especially those owned by small businesses.
Changes in ERC for the Current Fiscal Year
The significant changes have been in the eligible expense categories and the thresholds for employee count. First, the limit per employee per year, which used to be $5,000 in 2020, has been increased to $7,000 for each quarter in 2021. Secondly, there has been a change in the employer size for ERC eligibility. Only those businesses with up to 500 full-time employees can now participate in the ERC program.
An important addition to the ERCC legislation is the eligibility of Paycheck Protection Program (PPP) loan holders. Given the overlapping timeframe of both programs, several PPP loan recipients initially missed out on the ERC benefits. However, this update plans to rectify this and ensure maximized relief for American businesses.
Lastly, the deadline for the ERC claim has been extended to 3 years from the filing date of the payroll tax return, providing a significant relief to businesses still recovering from the pandemic fallout.
Highlights from Recent IRS Announcements
The Internal Revenue Service (IRS) has cautioned businesses about the rise in aggressive ERC promotions that potentially level two forms of harm. First, they could distract businesses from legitimate claims, and second, they could lure proprietors into fraud, where they might lack the discernment to differentiate between legal and illegal activities.
Understanding IRC Section 2301’s Adjustments
IRC Section 2301 has established the guidelines for ERC, and any adjustments to the credit are reflected in this section. Notably, the section provides for an increase in the “qualified wages percentage” for the year 2021.
Furthermore, the contingency payments to promoters, where a portion of the ERC is given out as fees, pose a significant risk for employers since they could lead to payment issues if claims are later deemed invalid. Therefore, the IRS has recommended that businesses consult trusted tax professionals to navigate these nuances.
Impact of the Changes on Businesses and Employers
The introduction of these ERC changes are likely to have far-reaching effects on businesses and employers.
Impact on Small and Medium Scale Enterprises
Small and medium scale enterprises are likely to find these changes largely beneficial. First, these businesses, unlike their larger counterparts, will receive full credit for the wages they pay. With the increase in the maximum limit to $7,000 per employee per quarter in 2021, from the previous limit of $5000 per employee per year in 2020, small businesses stand to benefit greatly from the ERC changes.
Also, these businesses will have greater protection against unscrupulous ERC promoters attempting to fraudulently claim credits. The IRS’s heightened measures against such activities provide a safer landscape for smaller businesses.
Role of Business Size in ERC Eligibility After Updates
The role of the ‘size’ of a business in determining ERC eligibility has significantly evolved after the updates. Initially, any business – irrespective of the number of employees – was eligible for the ERC benefits provided they met specified conditions like compulsory closure due to government orders or suffering significant gross receipts losses when compared to 2019.
However, under the new updates, only businesses with a workforce count of up to 500 full-time employees qualify. This crucial change ensures that relief measures prioritize small to medium-sized businesses that have been hardest hit by the pandemic fallout.
Large employers, classified as those with more than 500 employees, are eligible for credits only for the wages paid to employees that are not providing services due to suspended operations or reduced business.
Implications on Wage Calculation and Compensation
Changes in wage calculation and compensation are key sub-areas affected by the ERC changes. There is, in fact, a significant increase in the credit amount allocated to employee compensation. As previously mentioned, the credit limit per employee per year has increased from $5,000 in 2020 to $7,000 per employee per quarter in 2021.
Impact on Tax Credits and Refunds for Businesses
The revised ERC rules also impact tax credits and refunds for businesses. Due to the rise in fraudulent claims, many businesses stand to face audits and the possible recapture of credits or refunds if these were claimed erroneously or maliciously. Moreover, the imposition of penalties is on the table for businesses found guilty of fraudulent tax credit claims.
Role of IRS in ERC Claims Processing
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Overall, the Internal Revenue Service (IRS) has a significant role in implementing and processing these newly revised ERC claims.
Moratorium on Processing New ERC Claims
With the avalanche of ERC applications, the IRS has imposed a pause on processing new claims until December 31, 2023. However, to help businesses navigating this pause, the IRS has provided a comprehensive question-and-answer guide on the Employee Retention Credit.
Revised Processing Time for Claims
The IRS has also changed the standard processing time for Claims. Previously, businesses would expect a response to their claim within a few weeks. The revised processing time could extend up to 180 days or more.
Introduction of a claims withdrawal program
A withdrawal program has been introduced for businesses to withdraw their claims, especially if they were submitted with insufficient understanding of the eligibility requirements.
Preventive Measures Against Fraudulent Claims
To prevent fraudulent and erroneous claims, the IRS is requesting additional information. Besides, stringent measures have been implemented against promoters charging contingency fees with rigorous penalties for those found guilty of misconduct.
Navigating the Revised Policies of ERC
As the revised policies take effect, businesses must adapt and navigate through these changes wisely.
Changes in Gross Receipts Eligibility Requirements
One of the key changes lies in the requirements of gross receipts for businesses to be eligible. Businesses are deemed eligible if they show a 20% reduction in gross receipts for a 2021 quarter compared to the same quarter in 2019.
Understanding Retroactive Claims with Form 941-X
To amend a previous claim, businesses can use Form 941-X for retroactive adjustments. Employers should carefully assess these adjustments considering the potential repercussions and penalties if any mal-practices are found.
Avoid Common Missteps in ERC Application
Above all else, businesses are advised to Thoroughly consult the IRS’s FAQs before filing a claim. This can help employers avoid any common missteps that could result in erroneous applications, consequential penalties, or reclaim of granted credits.
Getting Expert Help and Guidance for ERC Changes
Navigating changes this extensive could be challenging. Therefore, despite having comprehensive guidance available, consulting a trusted tax advisor is highly recommended. These professionals can help guide businesses through the complexities and potential pitfalls of the new ERC legislation.
Frequently Asked Questions
For those who need a quick-reference, here are some of the most frequently asked questions on the topic.
What Are the Major Changes in ERC for This Fiscal Year?
The major changes include the revision in the eligible expense categories, an increase in the maximum credit limit per employee from $5,000 to $7,000, and changes in employer size for eligibility.
Will the Changes Affect My Eligibility for ERC?
Yes, it might. The revised rules now consider only businesses with up to 500 full-time employees as eligible for ERC.
What Is the New Processing Time for ERC Claims?
In light of the rocketing number of ERC applications, the standard processing time has been extended to up to 180 days or more.
What If I Made an Error in My ERC Claims Submission?
In case of errors or insufficient understanding of the eligibility requirements, applications can be withdrawn following the new rules.
Where Can I Get Help to Understand These Changes Better?
Businesses should consider seeking advice from a trusted tax professional. Additionally, the IRS has published a detailed FAQ section on its website to help employers understand the ERC changes better.
Navigating these changes may seem daunting, but with correct understanding and careful strategizing, businesses can make the best of even the most complex changes in ERC. It remains crucial to understand the implications of these changes to secure your benefits in the revised ERC legislation effectively.