The Employee Retention Tax Credit (ERTC) is the only COVID-19-era tax incentive that Denver organizations can still claim. The federal tax credit provides eligible employers with a refundable tax credit for retaining employees during the uncertainty of the pandemic. Although it was prematurely terminated by the Infrastructure Investment and Jobs Act, taxpayers have three years after relevant Form 941s were due to make a claim. This means eligible employers can claim the 2020 credit until later this year, and a 2021 credit until 2024. The extended period provides the important time needed to navigate the dozens of updates and changes to determine eligibility. For those who do qualify, the ERTC can provide a significant tax savings opportunity.
The promise of large savings has captured the attention of many business owners, especially during tax season. This has been driven by online advertising and solicitation efforts of third-party companies promising huge tax savings to companies that are often not qualified. Unfortunately, this is often not the case and when inappropriate filings are made it is the business that suffers. In fact, the issue has become so prominent, the IRS recently released another warning about working with such companies. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
What is the ERTC?
It is a refundable federal tax credit designed to reward businesses that continued paying employees while down during the pandemic, or who experienced significant declines in gross receipts. The amount of credit is determined by the year in which it is claimed. For wages paid after March 12, 2020, and before January 1, 2021, the maximum credit is 50% of eligible wages up to $10,000 per year ($5,000 per employee). For wages paid after January 1, 2021, the maximum credit is 70% of eligible wages up to $10,000 per quarter ($7,000 per employee). This means in just 2021, there is a potential credit of $21,000 per eligible employee available.
Why the Warning?
The IRS has continued to witness third-party companies aggressively promote the ERTC on the radio and online. Unfortunately, these companies make wild promises about potential savings and mislead business owners about eligibility. For example, promises are often made about large credit amounts which are refundable. However, there is no mention that wage deductions claimed on the tax return first must be reduced by the amount of the credit. To make it worse, these businesses often charge large upfront fees or a fee based on the estimated value of the credit. Companies also are often not informed that the ERTC is a taxable benefit, unlike the PPP loans. Additional rules apply to related companies.
“While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits,” said Acting IRS Commissioner Doug O’Donnell.
Taxpayers who are claiming the credit are advised to carefully review eligibility guidelines to ensure the business qualifies. It is important to remember that taxpayers are always responsible for the information included on annual tax returns. Improper filing of the ERTC may result in the obligation to repay the credit along with any assessed interest and penalties.
Interested in Claiming the ERTC?
If a Denver business is interested in claiming the ERTC then it is important to work with a Certified Public Accountant (CPA) when determining eligibility. Why? This is because these professionals are state-licensed, have extensive education and training, and follow professional ethical guidelines. In addition, many firms have been in business for several decades and have a proven business track record. Many third-party companies have popped up overnight and do not have the same level of training and experience. In other words, CPAs can be trusted to objectively review eligibility and determine whether a refund is due.
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