Can You Claim the ERC Retroactively?

If you didn’t claim the Employee Retentions Credit in 2020 because you received a Paycheck Protection Program (PPP) loan due to the Coronavirus pandemic, here’s the good news: If your small business has eligibility because you saw significant decline in business operations or partial suspension of business operations due to the government order, you can now go back and get the credit you missed the first time.

Thanks to Congress passing the Consolidated Appropriations Act of 2021 (CAA), employers and taxpayers that qualify for an Employee Retention Credit (ERC) under the new law can now claim the ERC credit retroactively for 2020. The process involves electing to treat qualified wages paid from the first through third quarters of 2020 as being paid in Q4 2020. For 2021, the updated law also lets eligible businesses file for an advance payment of the ERC, up to a certain amount.

Just be warned: Getting a retroactive refund for the tax credit might take some time. As employment tax and financial consultant CliftonLarsonAllen pointed out on its website, some businesses hoped the Internal Revenue Service would let them claim the retroactive credit on their first quarter 2021 tax filings by using Form 941, but that didn’t happen. Instead, eligible employers that received a PPP loan in 2020 but didn’t claim the ERC must file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to correct errors for the calendar quarter when the qualified wages were paid.

Form 941-X can’t be filed electronically, so you’ll have to download the paper document and mail it in to get the refundable tax credit. Here’s the problem: The IRS has a backlog of returns dating to last summer, and there have been delays in getting returns and refunds processed. Because of these delays, retroactive ERC payments could take months to process and receive.

Another potential complication due to the tax relief act is that eligible employers must reduce their deductions for qualified wages – including qualified health plan expenses – by the amount of the ERC (excluding the employer’s deduction for its share of Social Security taxes and Medicare taxes). If you don’t reduce the deduction for qualified wages, and subsequently file Form 941-X to claim the ERC, you might have to file an amended return to reduce the deduction for qualified wages. It is always best to consult a CPA or the IRS FAQs to fully understand how to get maximum amount of employee retention tax credit.

Here’s a look at some of the provisions introduced by the Consolidated Appropriations Act that are retroactive changes to the original effective date of the ERC provisions under the governmental order of the CARES Act as coronavirus aid, as cited by accounting firm KPMG on its website:

  • Employers who received Paycheck Protection Program may still qualify for the ERC with respect to wages that are not paid for with PPP loan forgiveness application or proceeds. 
  • Group health care plan expenses can be considered qualified wages even when no other wages are paid to the employee
  • The limit on per-employee qualified wages increased from $10,000 for the year to $10,000 for each prior quarter
  • The credit rate increased from 50% to 70% of qualified wages
  • Eligible businesses were expanded to include those with 500 full-time employees, up from only 100 FTE employees previously 
  • Rules were introduced to allow new employers that were not in existence for all or part of 2019 to be able to claim the credit amount now

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