Biden encourages businesses to take advantage of the employee retention credit. Here's what you need to know

Over the last year, lawmakers have passed many tax breaks for businesses due to the coronavirus pandemic.

Now, the Biden administration is encouraging the hardest-hit businesses to take advantage of one especially large tax break, the employee retention credit.

The employee retention credit was first established in March 2020 in the CARES Act and has been expanded since in the December relief act and the American Rescue Plan Act signed in March.

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More than 30,000 small businesses have claimed more than $1 billion via the credit this year, the White House said Monday. Still, the Biden administration wants to increase awareness of the program and said the Treasury Department will release further guidance around the credit this week.

Here's what businesses need to know.

How the credit works

The 2020 employee retention credit gives eligible businesses a refundable tax credit of 50% of up to $10,000 in qualified wages paid per employee in 2020. That means eligible businesses can receive a credit of up to $5,000 per employee for last year.

The American Rescue Plan Act signed into law in March expanded the credit even further, making more businesses potentially eligible and pushing back when they could claim the credit through the end of the year. In 2021, eligible businesses can deduct up to 70% of up to $10,000 in qualified wages paid per employee per quarter — bringing the total annual amount of potential credit to $28,000 per employee this year.

That's a significant bonus for certain businesses. In addition to using it to reduce the employment taxes businesses need to pay, those with fewer than 500 employees can request an advance payment of the credit from the IRS and get it in cash if the credit is more than they'd owe on employment taxes.

"What we're finding is that it can be pretty darn significant," said Tony Nitti, CPA and partner in RubinBrown's Tax Services Group. "A lot of businesses can reduce their payroll deposit requirement to next to nothing or even negative numbers, basically where they get a refund back from the federal government."

Who is eligible

To be sure, there are strict eligibility rules for which businesses can claim the credit, which is designed to focus on those hardest hit by the pandemic.

For the 2020 credit, businesses must have either experienced a full or partial shutdown of operations during the year because of a government order limiting commerce, travel or meetings due to the coronavirus pandemic, or have had a more than 50% quarterly decline in gross receipts, according to the IRS.

The rules for the 2021 credit were expanded to include businesses that had either experienced full or partial shutdown or had seen a more than 20% quarterly decline in gross receipts.

"You might not have qualified in 2020, but you could in 2021," said Erin Vukelich, an accountant at JCCS Certified Public Accountants in Whitefish, Montana.  

In addition, the act passed in December clarified that you can apply for the credit if you've had a Paycheck Protection Program loan — but you can't double dip, so to speak, so you need to clarify which wages were covered by PPP and which ones are being applied to the credit.

This added a layer of complexity to the program, according to experts. Still, the additional benefit is significant — for some businesses that got PPP loans and are eligible, the amount they got from the 2021 credit doubled the total benefit.

"The numbers for 2021 are just tremendous," said Nitti.

The size of businesses that can claim the wages of all employees — versus only the ones that were working during the quarter — also changed for 2021. In 2020, businesses that had averaged more than 100 employees generally couldn't claim all wages, but in 2021, that number went up to an average of 500 employees.

Extra complexity

Due to the complexity of the program and the rules that changed between 2020 and 2021, businesses should make sure they're working with an expert to claim the credit on their employment taxes.

"It's very complicated, even though it's a very favorable," said Mark Steber, chief tax officer for Jackson Hewitt Tax Services. "Do not wade into this program without some competent help."

This is especially true if businesses had a PPP loan and are also eligible to claim the employee retention credit. To maximize both benefits, they'll likely need the help of a tax professional who can work with both the loan and payroll documents.

It's also still possible for businesses to claim the employee retention credit for 2020, even if they've already submitted their tax returns for that year, according to Vukelich.  

To go back and claim the credit, they must amend their 2020 returns, something quite a few businesses are choosing to do to get the benefit, she said.

Going forward, businesses should keep track of any documentation they need to prove eligibility, especially if they're made eligible by a local government order shutting down operations, said Vukelich.

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