The IRS announced an immediate moratorium on processing new Employee Retention Credit (ERC) claims on September 14, 2023. The moratorium will last through at least the end of the year in an effort to protect small business owners and taxpayers from scams and fraudulent claims.
As a small business owner, you may be wondering what this moratorium means for you and your business. Here’s everything we know and how you may still be able to apply for the ERC during the moratorium.
What we know
We know that the IRS is continuing to process ERC applications that were received prior to the moratorium. However, processing times will be longer, the IRS advised in its Sept. 14, 2023 update — potentially going from a 90-day turnaround to 180 days or more. The agency has increasingly shifted its focus to review claims for compliance concerns and recently announced that thousands of ERC claims have been referred for audit. It is also working on hundreds of criminal cases on promoters and businesses filing suspicious claims.
Payouts for these previously filed claims will continue through the moratorium, but at a slower pace due to the more in-depth compliance reviews. This payout period will extend to 180 days from its previously standard processing goal of 90 days, according to the IRS. However, a payout may take even longer if its claim requires the IRS to further review or audit it.
The IRS is implementing this more scrutinous compliance review period to protect businesses from facing penalties or interest payments that stem from bad claims that aggressive marketers pushed.
For any business owners wanting to submit claims after September 14, 2023, while the IRS is not reviewing new applications until at least January 1, 2024, you can still submit an ERC claim during the moratorium.
Applying for the ERC
Small business owners planning to submit an ERC claim after September 14, 2023 should ensure that their businesses are eligible for the tax credit prior to filling out the stringent application.
Pay qualified wages
First, ensure that your business paid qualified wages to your employees. The definition of qualified wages varies depending on the amount of employees your business had on the payroll in tax years 2020 and 2021.
For tax year 2020, the IRS defined a small business as a business that averaged 100 or fewer full-time monthly employees in 2019. For tax year 2021, it expanded the definition to include businesses that averaged 500 or fewer full-time employees in 2019.
Larger employers can claim the ERC but only for wages and some healthcare costs paid to employees who did not work.
Small businesses can claim the credit for all employees, whether they worked during the period or not.
Government-mandated full or partial suspension
Your business must have been impacted by either a government-mandated lockdown or decrease in revenue to be eligible for the ERC. You can qualify if your business was impacted by a full or partial suspension of operations due to a government COVID-19 order during any quarter (this includes restrictions on hours or capacity).
This area of eligibility criteria can be complex, so make sure to work with a vendor who is familiar with government orders, their impact, and the timeframe they were enacted.
Significant decline in gross receipts
If your business experienced a “significant decline” in gross receipts as defined by the IRS, then it can be eligible for the ERC. For tax year 2020, a significant decline means that gross receipts for a quarter are less than 50% compared to the same period in 2019. For the first 3 quarters in 2021, a significant decline means quarterly receipts are less than 80% compared to the same period in 2019.
If your business did not see a 20% decline in gross receipts in the first 3 quarters of 2021 compared to 2019, you can also elect to use the immediately preceding quarter for comparison. This means that if a business’s Q2 of 2021 isn’t eligible compared to Q2 of 2019, it can instead use Q1 or 2021 and compare it to Q1 of 2019 to meet eligibility requirements.
Recovery startup business
The ERC was amended in 2021 by The American Rescue Plan to let newer businesses gain access to the tax credit. A recovery startup business is defined as one that opened after February 15, 2020, and has annual gross receipts under $1 million. As long as you meet these two criteria and have one or more W2 employees, you don’t have to meet the other eligibility requirements. If your business qualifies as a “recovery startup business,” you can apply for the credit for Q3 and Q4 of 2021, and your business can receive a maximum of $50,000 in ERC per quarter.
If your business meets these requirements, then it may be eligible for the ERC. When applying, make sure that you have gathered thorough records proving wages paid, gross receipts, government orders, and other required documentation. Please note that businesses that improperly claim the ERC will be required to pay it back, potentially with penalties and interest.
Applying for the ERC during the moratorium period
You should consult an accountant or tax professional prior to filling out any forms. They will help guide your business through this stringent and potentially confusing process.
You can apply for the ERC during the moratorium period through Lendio. We’ll help you identify what documents you need to claim the ERC. We’ve partnered with ERC and tax experts to aid you in the complex application process. They can help navigate you through tricky tax laws and avoid costly mistakes while calculating the full tax credit that you qualify for. After your application is complete, we’ll file your ERC claim with the IRS.
Please note that this process will be extended significantly due to the moratorium. While you will be able to submit your application to the IRS prior to January 1, 2024, it will not be reviewed until after that date (and with more stringent compliance review terms).