Ryan J. McDonell, CPA
Tax Manager

Companies that have not applied for the pandemic-related Employee Retention Tax Credit (ERC) since it was introduced in 2020 still have time to take advantage of this tax benefit. The statute of limitations for filing amended payroll tax returns to claim ERC credits related to 2020 expires on April 15, 2024.   

Created by the Coronavirus Aid, Relief and Economic Security Act (CARES) of 2020, the ERC provides a payroll tax credit to help companies that were Impacted by government orders or experienced significant declines in gross receipts.

For the 2020 credit, the ERC is 50% of qualified employee wages, up to a maximum of $5,000 per employee per year. The ERC was expanded in 2021, to 70% of qualified employee wages, up to a maximum of $7,000 per employee per quarter. The ERC is unavailable for periods after Q3 2021 (except for recover startup businesses), when businesses started recovering from the effects of Covid-19.

Statute of limitations approaching

The statute of limitations for filing amended Form 941 Payroll Tax Returns is three years from April 15 of the year following the year in which the returns were due. The deadline for filing an amended return for all 2020 quarters will be April 15, 2024. (Important note: Since the ERC started on March 13, 2020, the credit for March 13 – March 31 is reported with the Q2 2020 payroll tax return.)

Companies that have not applied for the ERC for 2020 may still claim a credit if they meet the key qualifications in 2020:

1. They were subject to a full or partial business suspension due to government orders, or
2. They suffered a reduction in gross receipts for a 2020 quarter of at least 50% compared to the same quarter in 2019.

Filing an amended return

To apply for the retroactive ERC, your company must have the following documentation:

• Payroll data from any quarter in 2020 for which you are applying,
• The amount of the credit for which the company would qualify,
• Proof of a government shutdown order, OR
• Proof of a 50% or greater reduction in gross receipts compared with the same quarter in 2019.

Claiming a retroactive ERC tax credit is not as simple as it may sound. Besides getting the accounting right for the quarter you are claiming, there are costs and tax liabilities to consider, including:

• Some business owners don’t realize that taking the ERC changes their income tax liability for the affected year. Since the payroll taxes they ordinarily pay for that year are credited, their business expenses for the year are reduced, potentially increasing their tax liability.
• Businesses must take into account if they used PPP loan proceeds in the calculation of their ERC which may reduce the amount of the credit.
• As a consequence of changing income tax liability for the affected year, anyone claiming ERC tax credits retroactively must file amended income tax returns for that year, in addition to the amended Form 941 quarterly payroll tax returns. This may result in a tax liability that a business owner doesn’t immediately have the cash to pay. Planning to pay it out of the ERC refund may involve waiting six to 12 months for the refund to arrive.
• On the financial statement side, an ERC refund must be reported as a receivable once you determine you are eligible for the credit. Businesses that report their books and records on an accrual basis can’t report the credit on a cash basis.
• Preparing and filing amended tax returns incurs new accounting costs. You need to figure out in advance whether the ERC refund will be large enough to cover those costs, as well as the additional income taxes, and leave enough left over to make the exercise worthwhile.

If you would like to explore claiming the ERC retroactively for your company, contact your GT Reilly advisor.