By now, you have likely heard about the Employee Retention Tax Credit (ERTC) program, a government incentive for businesses to retain employees throughout the Covid 19 pandemic. It was created by the CARES Act and extended and altered by successive pieces of coronavirus relief legislation.
The ERTC has provided massive tax credits for many small businesses across the country and is still available for businesses that were affected by the pandemic between March of 2020 and September of 2021. Businesses and nonprofits that meet the criteria for the tax credit can amend their payroll tax returns for three years from the date of the originally filed returns.
Further information on calculating the potential dollar value of your credit and the general criteria for determining your eligibility can be found in this McClintock Minute article from November 2021. As always, the tax professionals at McClintock are happy to discuss the ERTC with you, and in the meantime, read on for a refresher about the program and the key steps to follow, missteps to avoid and an example calculation.
ERTC filings and/or amended filings are a great way to increase cash flow and reduce taxes paid — however, they come with the potential burden of filing amended income tax returns. Therefore, in claiming the tax credit, a business must reduce its payroll tax expense on their income tax return. This applies to all for-profit entities that file either a Form 1120 or a 1040 with a Schedule C. The reduction of the payroll tax expense will increase the taxable income for the filer and assess additional income taxes.
Furthermore, for those amending a flow-through tax return — either an 1120S or 1065 — the amended return will produce amended K-1’s, which will lead to the requirement to file an amended 1040 for each owner. This additional tax will reduce, but never eliminate, the total benefit of the ERTC credit — however, it should be considered when deciding on amending returns for the ERTC.
Calculating net benefit
The example below outlines a calculation for evaluating the overall savings of a credit. As you can see, the credit is still worth the work and additional tax and fees, but the net dollars at the end of the process are much less than the initially calculated credit.
ERTC Credit: $100,000
Amended Payroll Returns: ($3,000)
Amended 1120S: ($3,000)
Additional 1040 Tax: ($35,000)
Amended 1040 Returns: ($4,000)
Net Benefit: $55,000
Keys to the credit
There are three keys to receiving the credit and avoiding any changes under audit:
- Know the criteria and the calculation.
- Complete ALL filings, not just the ones that create a benefit.
- Retain your calculations and support.
At McClintock and Associates, we stand ready to assist your company in getting the most from the ERTC and the rest of your return. Please contact one of our trusted tax advisors with any questions or to schedule a consultation.