The past few years have wreaked havoc on the economy, and small businesses have suffered the most. When lockdowns took effect in March 2020, large chains had financial resources to fall back on, and many could keep conducting business online with delivery and pick-up orders. On the other hand, many small businesses went months without generating any revenue and had to dip into their savings to stay open.
Since small businesses are an important cornerstone of the American economy, the government offers many programs to help entrepreneurs plan, launch, manage, and grow their businesses, like the employee retention credit (ERC). However, determining a business’s eligibility and navigating the application process can be overwhelming. That’s why consulting with professionals like ERC Tax Experts will help small businesses make the most out of these programs.
Government Programs for Small Businesses
The Small Business Administration (SBA) has supported and advocated for American entrepreneurs since 1953. It’s no secret that large businesses have a huge influence over the governing bodies of our country. As a cabinet-level federal agency, the SBA ensures that small business owners have a say in the policies and programs that affect their livelihoods.
What are they?
The Small Business Administration runs several programs that fit into one of two categories: funding programs and contracting assistance programs. As part of their funding programs, the SBA may guarantee loans for small businesses, help connect them with debt or equity investors, offer low-interest loans to help businesses rebuild after a disaster, provide surety bonds, or bestow grants for scientific research and development. Contracting assistance programs are designed to ensure that small businesses can compete against large businesses for government contracts to provide products or services. In addition, the SBA provides mentoring and education to small businesses looking to apply for government contracts and helps connect to larger companies to win sub-contracted government work.
Why do we have them?
All of the SBA’s programs are designed to help entrepreneurs achieve their goals. Large companies have more resources at their disposal, particularly financial resources. Without support from the government, small businesses would have a hard time competing. The SBA provides many avenues for small businesses to access additional resources.
What are the benefits?
The SBA can provide small businesses with direct access to funding, help them take advantage of opportunities for funding from other parties, or educate business owners on the best practices for starting and maintaining their businesses. Funding provides small businesses the capital they need for overhead costs, employee wages, and products and materials. Education and mentoring help entrepreneurs develop a sustainable plan for growing their businesses. Considering that as many as 50% of small businesses fail within their first 5 years, the SBA’s purpose is to help as many businesses as possible succeed and continue doing business for 5 years, 10 years, and beyond.
Understanding Employee Retention Credits (ERC)
When widespread lockdowns were announced in March 2020, many small business owners feared the effect that closures might have on their businesses. However, by the end of the month, Congress had passed a $2 trillion economic stimulus package called the Coronavirus Aid Relief and Economic Security (CARES) Act to support small businesses, distressed industries, and individuals who lost employment as the result of closures. Two programs in the CARES Act were specifically designed to encourage small businesses to keep employees on their payroll: the Paycheck Protection Program (PPG) and the Employee Retention Credit (ERC). The PPP offered low-interest government-backed loans to help cover the payroll cost for small businesses unable to make their usual sales. Most PPP loans were also eligible for full or partial forgiveness.
The ERC, on the other hand, is a tax credit. Unlike the PPP loans, which involve the government giving money directly to small businesses, the ERC tax credit allows businesses to claim a lower taxable income and receive a larger tax return. In addition, the federal government extended the ERC program through 2021, and businesses are still eligible to claim this credit up to 3 years retroactively.
How does ERC work?
The ERC is for businesses with no more than 500 employees. To be eligible, a business’s gross receipts for eligible financial quarters of 2020 and 2021 must have declined significantly compared to the same quarter of 2019. Exactly how much financial decline a business must have experienced to qualify varies by year. For example, for Q2, Q3, or Q4 of 2020, eligible businesses must have seen a 50% reduction in receipts from the same quarter in 2019. However, for Q1, Q2, or Q3 of 2021, businesses that saw a reduction of 20% or more from the same quarter in 2019 are also eligible for the ERC.
The ERC is a payroll tax credit. Employers can claim a credit equal to 70% of qualified wages they pay to employees each quarter up to $7,000. To retroactively claim this credit, businesses must file the IRS form 941-X by April 15, 2024, for 2020, and April 15, 2025, for 2021.
Why should I apply?
If a business qualifies for ERC tax credits, the refund could be up to $7,000 per employee per quarter. The program includes six financial quarters, which adds up to $42,000 per employee for 2020 and 2021. A small business could easily get back millions of dollars from claiming this credit. While the economy is on the upswing after COVID, the future is still uncertain. Access to this capital can help protect businesses from unexpected losses or allow them to invest in the growth of their business. It’s important that small businesses take advantage of the ERC before it’s too late.
Why Work with ERC Tax Experts
Filing taxes is not the most exciting or rewarding part of owning a business. That’s why many business owners choose to enlist the help of a certified accountant or other tax professionals. Since the ERC credit is relatively new, many financial professionals might not yet understand its nuances. At ERC Tax Experts, we’ve made it our entire mission to explain how ERC benefits small businesses and helps entrepreneurs take advantage of this program. Schedule your free consultation today to get started.
