The COVID-19 pandemic has set a formidable economic climate in the business world, affecting enterprises of all shapes and sizes. Like yourself, every small and medium-sized business owner is exploring tools and guidance to move ahead and position their company stably for now and the future.
Fortunately, the government has launched several programs to help businesses survive the current economic storm, and one such initiative is the Employee Retention Credit (ERC).
What is Employee Retention Credit?
Introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Employee Retention Credit, sometimes known as the ERC, is a refundable payroll tax credit program designed to serve as an incentive for small and medium-sized businesses affected by the COVID shutdowns to keep their payrolls running.
According to the regulations, taxpayers have access to the Employee Retention Credit for the whole calendar year of 2020 and the first three quarters of 2021.
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There have been many misconceptions about the Employee Retention Credit since the CARES Act, Public Law 116-136, was passed on March 27, 2020. To be eligible for the ERC program, you must either have experienced a considerable drop in revenue or have been subject to a complete or partial suspension due to directives (actual closures, restrictions on hours) issued by the government.
Since the ERC provision was about to be terminated in the fourth quarter of 2021, many business owners were under the impression that acquiring ERC was no longer beneficial.
However, this is certainly not true. You still have time until April 2024 to submit the revised Form 941 for the Employer’s Quarterly Federal Tax Return for 2020 and until April 2025 to file the 2021 form.
The Impact of ERC on R&D Credit
The ERC may potentially have credit values of up to $33,000 per employee over 2020 and 2021. However, the ERC eligibility standards and how they interact with other credit refunds are difficult to understand. If you do not have the appropriate plan in place, you risk losing money or, even worse, exposing your business to penalties from the Internal Revenue Service (IRS).
The Internal Revenue Service clarified this matter by stating that “double-dipping” is strictly prohibited, which refers to utilizing the same wages to create credits and obtain debt forgiveness.
This guideline presents an important question: how does the Employee Retention Credit affect the calculation of other wage-based deductions, such as the Research and Development (R&D) credit?
Regrettably, the one piece of advice the IRS has supplied on this subject is room for interpretation. Before taking a stance, our ERTC experts thoroughly investigated the policies and procedures governing both credits and the most recently published FAQs and Notices.
If your business has traditionally benefited from the R&D credit, we have some good and bad news to share with you.
The Consolidated Appropriations Act is the first legislation to explicitly clarify that an employee’s earnings cannot be included in both the R&D and ERC credit. We believe this exception only applies to credits claimed for the 2021 tax year since the Act was drafted with the intention that it would enter into force on January 1, 2021, and contains the first such reference to R&D credit.
Most businesses are only beginning the process of calculating their Research and Development (R&D) tax credits for the year 2020; thus, the effect of this exception won’t be noticed right now.
Nevertheless, it emphasizes how important it is to have a deliberate approach while claiming your ERC since your choices now might affect the value of your R&D credit for 2021 or in the future.
The Good News: Employee Retention Credit DOES Not Impact R&D for 2021
Before the Consolidated Appropriations Act, no other piece of law or official advice from the Internal Revenue Service (IRS) mentioned the R&D credit or its relationship with the ERC.
Nevertheless, the CARES Act, which first formed the ERC, specified that businesses were not allowed to double-dip returns for the paid leave credits or the Work Opportunity Credit (WOTC) introduced by the FFCRA.
Therefore, when interpreting tax laws and regulations, it is crucial to recognize what isn’t mentioned and to understand what is. It is possible that the fact that R&D is not mentioned at all was done on purpose. In any case, there is no legal basis, either via law or explicit IRS instruction, for deducting wages spent for the Employee Retention Credit from R&D calculations before the year 2021.
Can Businesses Benefit from Both the Credits?
Using the Employee Retention Credit, you can reduce the employer payroll tax liability by up to $5,000 per qualifying employee in 2020 and up to $7,000 in 2021. Note that it is important to keep meticulous track of the salaries allotted to the R&D credit. When calculating ERC and R&D credits, you must ensure there is no duplication of efforts between the two types of credits.
The Bottom Line
Businesses that get financial benefits from wage-based credits, such as R&D, need to be aware of their ERC strategy’s impact on future credits’ values. Suppose you are already claiming the ERC or believe you may qualify. In that case, you must strategize the plan to ensure that you are maximizing your credits from all sides while minimizing the risk of not complying with the requirements.
Even if your business has gained considerable ERC advantages in 2020 and 2021, the R&D tax credits experts at ERTC Express can assist you in filing the appropriate paperwork to collect your entitled R&D tax credits.
Remember that any reduction in the R&D tax credit claimed in 2021 as a consequence of consecutive ERCs would most likely benefit your business’s R&D tax credits for the next several years. For more information, visit www.ertcexpress.com or call 888-378-2826.