Back in 2021, just as the COVID vaccines were rolling out, we were working closely with our clients to determine who could qualify for the Employee Retention Tax Credit (ERTC). This credit was one of the many federal relief measures available to businesses affected by the pandemic, and it was (and remains) quite beneficial to those who qualify.
As part of the American Rescue Plan Act of 2021, the ERTC requires businesses to show a 20% decline in quarterly revenue between 2021 and 2019. In other words, if a business had a 20% decline in Q1 revenue in 2021 compared to Q1 revenue in 2019, its owner could (as long as the business met the rest of the credit’s requirements) claim the credit against the business’ quarterly payroll tax.
When working with one of our business clients, we found out their controller was convinced the company didn’t qualify. This was unfortunate, as the company counted more than 300 employees on its roster; the more employees a company has, the more beneficial the ERTC credit can be. But according to the qualification standard mentioned above, the company did not qualify.
We weren’t 100% convinced the credit was out of this business’ reach. After looking at their situation further and doing some research, we were able to find a special rule that applied to the 2021 ERTC. The rule allowed businesses to reference a previous 2020 quarter to determine a revenue decline—in other words, it allowed for a “look back.”
We knew, through our understanding of this business, that it was still recovering from the pandemic at the end of calendar year 2020 (its revenue was down). With this understanding, we were able to look back to Q4 of 2020 and compare this revenue to Q4 of 2019. Because of the special rule, our client was able to claim the ERTC for the first quarter of 2021.
Being able to claim the ERTC in Q1 of 2021 was a big win for our client, as it resulted in an approximately $1.3 million tax credit. Our client received the funds from the United States Treasury, which resulted in an actual cash savings of approximately $900,000 (the payroll used for the ERTC was not deductible in the year expensed on the business tax return).
We were able to secure this win—the ERTC— for our client through a concerted team effort. Not only did we put our heads together to research the special rule but we also holistically evaluated the clients’ situation. Our true understanding of the business and familiarity of its current situation allowed us to know what was happening with its revenue and how the ERTC could be in reach.
If you’d like to talk about how our team could help you pay less tax, contact us today.