As a Business Financial Consultant working on the Employee Retention Credit, I’ve researched what happens for small business owners after the ERC refund checks are mailed and cleared to have a comprehensive understanding of the process and overall impact.
What is the ERC?
The Employee Retention Credit (ERC) is a refundable tax credit available to eligible employers that paid qualified wages to employees during specific periods impacted by the COVID-19 pandemic. It was designed to incentivize employers to retain their employees and continue operations despite economic challenges.
In this blog post, we will explore the filing requirements and the process of adjusting disallowed deductions once the ERC is approved. Understanding these requirements is crucial for businesses to navigate the ERC effectively and maximize its benefits.
Filing an Amended Return:
After the ERC is approved, eligible employers may need to file an amended return to adjust for disallowed deductions. The disallowed deductions are related to qualified wages that have been claimed for the ERC. Section 2301(e) of the CARES Act, which governs the ERC, states that rules similar to section 280C(a) of the Internal Revenue Code apply for determining the deduction disallowance.
Understanding Disallowed Deductions:
Section 280C(a) of the Internal Revenue Code generally disallows a deduction for the portion of wages or salaries paid or incurred that is equal to certain credits determined for the taxable year. Similarly, section 2301(e) of the CARES Act applies a deduction disallowance for qualified wages equal to the amount of the ERC claimed by the employer.
In practical terms, this means that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the ERC received. However, it’s important to note that the employer does not reduce its deduction for the employer’s share of social security and Medicare taxes by any portion of the credit.
As well, it’s important to note that when amending tax returns for the ERC, the refund is NOT taken as income!
What’s the Average Adjustment:
I recently visited the Small Business Expo in NYC where there were many ERC Consultants and CPA’s. I polled a number of these professionals and found that, on average, their clients had to deduct 8-10% of the Credit for the disallowed deductions. That means for every $1 of the ERC refund, you may owe the IRS $0.08 to $0.10 when you file your amended return. Given this, it is wise to file the amended returns once the application is completed or soon after you receive the funds (in other words, before you spend it all!).
Conclusion:
The Employee Retention Credit is a valuable resource for eligible employers, offering financial support during challenging times. Understanding the filing requirements and adjusting disallowed deductions are crucial steps in maximizing the benefits of the ERC. Please note that all businesses are not created equally and the disallowed deductions could be zero or potentially widely vary depending on each businesses payroll.
At Rock Capital & Associates, our ERC program is powered by 7-Figures Funding which uses highly skilled tax professionals to process the applications.
If you’re interested in filing for the ERC, use our 5 minute estimator to see your potential credit!
