Not too long ago, the federal government introduced the Employee Retention Credit (ERC) to provide a refundable employment tax credit to help business owners with the cost of keeping staff employed. The ERC is a tax credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act that provides a refund of applicable employment taxes for employers who qualify. The program will run through the first quarter of 2025.
How Does the ERC Work?
In a nutshell, the ERC tax credit is equal to 70% of qualified wages an eligible employer pays to employees between March 12, 2020 and January 2021. A qualified business can get a tax refund up to $28,000 per employee who receives a W2 at the end of the year.
Simple as it sounds, determining eligibility for the tax credit will likely require an ERC processor to review your application to determine if you qualify and potentially maximize any refunds available to your company. You’ll need to demonstrate that you either needed to fully (or partially) suspend business operations, experienced a reduction in sales, or suffered through supply chain issues.
Full or Partial Suspension of Business Operations
Did you need to close your business during 2020 or 2021? This could include being limited by an inability to travel, restrictions to meetings in groups, or other restrictions to doing business.
Gross Receipts Reduction
Did you see a drop in revenue during 2020 and/or 2021? The criteria is different for 2020 and 2021, but any reduction will be measured against the current quarter and how that compares to pre-COVID revenues in 2019.
Supply Chain Disruption
Did you experience a disruption in your supply chain? Was it difficult to get the raw materials or other goods you needed to sell your products or otherwise do business?
If you suffered any, or all, of these three business disruptions, you could qualify for some kind of tax credit and a qualified ERC processor can walk you through the IRS paperwork and determine what kind of tax credit your business is entitled to.
How Long Does it Take to Receive the Credit?
Because the refund amounts can vary from business to business it’s not uncommon for some business owners to wait six to nine months to receive their ERC refunds. Because these refunds are from the IRS and accepted by the lenders working with the ERC, it is possible to have the refund amount advanced to you in a matter of a couple of days compared to the months-long wait for the refund to be processed.
The lender advances the ERC to the business owner the total value of the ERC less any fees earned for making the advance (8%-11% in the case of dash.fi) when the claim is submitted to the IRS. The payment from the IRS will then be captured via a lockbox account for the lender rather than being sent to the business.
Frequently Asked Questions
Does the ERC credit need to be repaid?
No. This is not a loan. It’s a refundable tax credit. When the processor files the ERC claim, they request a refund check for the business from the IRS.
Can’t businesses just have their CPA file? Why would they need an ERC specialist?
Your CPA could file for you, but they may not be familiar or prepared for the complexity of the ERC tax code (over 200 pages). The ERC is taken on payroll returns and not business income returns, which is what most CPAs deal with. Many ERC processors see a high number of referral clients from CPAs.
How long does it take to get an ERC credit?
Completing the required documents and the analysis to determine the potential credit usually takes 2-3 weeks (depending on the provider, there is usually no charge for this). Then the business owner will decide to move forward and select their desired payment option before the processor files the claim. Once filed, refunds are released based upon the IRS backlog.
Currently the IRS has stipulated a five-month minimum turnaround for ERC refunds. Many ERC processors suggest ERC credits of less than $200,000 are taking 4-6 months for the IRS to send a check. Credits more than $200,000 are taking 6-9 months to process.
Can businesses get ERC refunds if they already took a Paycheck Protection Program (PPP) loan?
Yes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, modified the ERC credit rules. This allows a company to have a PPP loan and still take advantage of the ERC credit. However, a business can’t use the same dollar for dollar funds. Processors consider this when processing an ERC credit on behalf of the business.
My revenue went up in 2020, can I still qualify for the ERC?
Yes. There are circumstances where a business with a revenue increase could still qualify for the ERC. A full or partial shutdown of a business due to COVID-19 could qualify. The IRS describes this as, “A government authority required partial or full shutdown of a business during 2020 or 2021. This includes operations being limited by commerce, inability to travel or restrictions of group meetings.”
Qualifying events may include:
A restaurant that closed or limited its onsite dining (such as closing down every other table due to COVID-19 restrictions)
A business that needed to meet with clients in person and had to cancel meetings due to COVID-19 restrictions
A business that to reduced its operating hours because of COVID-19 restrictions and cleaning requirements
A business that delayed production timelines caused by supply chain disruptions
A business that had a planned event that was canceled or restricted the number of people who could attend due to COVID-19 restrictions
Is there a deadline to apply?
The IRS will accept the 941-X Amended Quarterly Payroll Tax return to participate in the ERC program until the first quarter of 2025.
What documents are required to submit a file?
2020 and 2021 Profit and Loss Statement
2020 and 2021 Payroll Summary
2020 and 2021 Quarterly Payroll Reports (Form 941, Form 943, Form 944)
PPP loan information (if applicable)
COVID Government Suspension information (if applicable)
Supply chain disruption information (if applicable)
How does the business receive the credit?
The IRS mails a physical check to the address the business has on file for each applicable quarter that a business qualifies.
How are lenders advancing funds against the ERC credits getting repaid?
Lenders and processors are working together to implement an escrow service that receives the check from the IRS and then dispurses repayment to the lender. When an ERC applicant decides to get an advance against their ERC tax credit, the processor introduces them to the ERC lender.
The ERC lender then instructs the processor to submit a Form 8822 on behalf of the client to change the address on file with the IRS to the address of the escrow provider. The processors also submit a Form 8821 so the processor and the lender are notified when the IRS dispurses the check.
Instructions regarding where the IRS sends the check are part of the ERC filing packet.
The business agrees to using the escrow service and signs off on the treatment of the check so the escrow service provider is empowered to send repayment to the lender.
What is the relationship between dash.fi and the processor?
dash.fi is the FinTech embedded into the ERC processors workflow in order to execute origination functions on behalf of the bank, assist in gathering underwriting items, and confirm each borrower qualifies pursuant to the underwriting guidelines.
What types of small businesses are most commonly qualifying for the ERC program?
Restaurants
Retailers
Gyms
Vehicle sales
Construction
Travel
Conferences
Surgeons or clinics associated with elective surgeries
Manufacturing
Shipping
E-commerce
Consulting firms
Law firms
Accounting firms
