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Business owners who are thinking about applying for the potentially lucrative Employee Retention Credit should set aside some time to apply soon — and should expect to wait months to get it.
Deadlines for the Covid-19 relief tax credit, which could amount to thousands of dollars per employee for eligible businesses, will ramp up in 2023, and the process could take a substantial amount of time — although there is some good news on that front, as processing times have been getting faster.
The ERC, one of the few remaining Covid-19 relief options for businesses, could provide an important windfall for businesses grappling with an uncertain economy as recession fears mount. But it will take a proactive approach.
Processing times for the ERC
Experts say the time it takes to apply for the ERC — gathering documents and working with professionals to fill out the paperwork — could vary widely depending on the size of the business, how complicated the credit is for it and the size of the potential credit.
It also depends on how much due diligence goes into the applications, according to Justin Elanjian, partner-in-charge of the Paycheck Protection Program and the ERC at accounting firm Aprio LLP.
“On one hand, you have these fly-by-night ERC service providers who advertise turnaround times in a few days. On the other hand, you have firms out there who are putting forth a greater degree of due diligence to properly assess an employer’s eligibility for the credit and, depending on the fact pattern, could take several weeks,” Elanjian said.
Elanjian stressed it might take more time to prepare the ERC application because a business may have utilized other Covid-19 relief programs such as a PPP forgivable loan. In short, it is hard to predict how much time a business might need, so businesses should give themselves plenty of time with ERC deadlines approaching.
"We would conservatively recommend allowing for no less than eight weeks from start of the project to the filing of the appropriate tax forms to claim the credit as once the statute of limitations expires, the ability to claim the credit for the respective period is gone," Elanjian said.
ERC deadlines approaching
Small-business owners will start to see the window close on the ERC this year, so they should act soon if they want to pursue the credit, experts say.
The ERC is filed on a company's amended 941 tax form, which is filed quarterly. That means the credit's statute of limitations also falls off quarterly once the deadline for an amended return passes.
For the initial quarter of the ERC — the second quarter of 2020 — the deadline to file an amended return is July 31, 2023. That will start a series of quarterly deadlines for the various quarters eligible for ERC. For the third quarter of 2021, the last quarter in which most businesses will be eligible, the deadline to file is Oct. 31, 2024.
The good news for small-business owners is that, for many businesses, the time it takes to get the ERC back and get that money has gotten shorter in recent months.
“We are seeing most claims now being paid in three to four months from the time that they are filed,” said Robert Kluge, lead adviser at accounting firm Enterprise Accounting in St. Louis, Missouri, in an email. "Originally, it was closer to six to nine months."
Elanjian agreed that, for some businesses, the wait for the ERC to get processed is shorter than it had been before — but that there was still “tremendous inconsistency” within the program.
He said the IRS is dividing the claims based on their size, with all claims going to a team at the IRS for review. But once that review is done, credits of more than $200,000 are forwarded on to a second review, while those under $200,000 are processed.
“The IRS has noted that second review may take anywhere from three to nine months, noting that’s after the period when the initial review takes place,” Elanjian said in an email. “Until late December, claims over $200,000 were getting held in review for months on end. In some cases, this waiting period exceeded one year. However, in late December, the IRS started processing and disbursing refunds over $200,000 in bulk and that’s continued over the course of the last month, which has been a significant relief to the employers who desperately need this funding.”
What is the ERC?
The Employee Retention Credit was initially set at 50% of up to $10,000 in qualifying wages per employee for the last three quarters of 2020. The American Rescue Plan Act extended and expanded the ERC to include up to 70% of $10,000 in qualifying wages per employee per quarter in 2021 for the first three quarters, making it much more lucrative to business owners.
To qualify, businesses needed to record a drop in revenue during 2020 and or the first three quarters 2021 compared to 2019, or they had to be operating under significant government restrictions, which includes many restaurants, daycares and other businesses. Companies that qualify in all available quarters could receive up to $26,000 per full-time employee over the entire credit — although that's not common.
The program has become popular enough that the Internal Revenue Service, is warning business owners to scrutinize solicitations involving the ERC.
Experts say there are some quick and easy rules to follow to help protect your small business from operators who might not be able to deliver the tax credit in a responsible way. That includes asking to make sure you get the ERC justification in writing, that they have the appropriate insurance if something goes wrong and that they have a history of working with businesses on tax credits.
Business owners who are interested but ineligible for the ERC or have already claimed it might want to take a look at other tax credits available to small businesses. Meanwhile, business owners unsure about the future will also have to contend with a series of tax changes in the years to come, according to recent new analysis by the Tax Foundation.
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