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Is the Employee Retention Credit Taxable?

You may have heard about the Employee Retention Credit (ERC) — also called the Employee Retention Tax Credit (ERTC) — that is putting capital back into eligible small and medium-sized businesses. However, this payroll tax credit has undergone several changes since it was first introduced as part of the CARES Act and extended through the Consolidated Appropriations Act of 2021

Because of this, accurate information on the subject can be hard to come by. As an ERC originator, Innovation Refunds has in-depth knowledge of the nuances and intricacies involved in submitting an ERC claim so your business doesn’t leave any money on the table. 

We’re commonly asked, “Is my business’s ERC refund taxable?” Technically, a company’s ERC is a payroll tax credit and not taxable income, but there are some implications that require a deeper look.

IRS delays in processing ERC claims 

Although getting the Employee Retention Credit processed was estimated to take 4-6 weeks, the turnaround time for the IRS has now been extended to 6-9 months due to the volume of claims. With these delays, comes extra time to think about all of the ways the money can be used once it arrives. But what about taxes?

Tax code gets complicated quickly, especially when there are new laws and regulations on both a federal and state level.

Is my ERC refund taxable?

The short answer is no. The refund is not taxable under IRC § 280C. However, because these refunds are payroll tax credits, they’ll reduce the amount your business can expense for payroll in each qualifying quarter. 

The reduction of expenses could result in an increase in net income — which is potentially taxable. State tax laws regarding the ERC refund vary, so it’s recommended to consult with an ERC originator before adjusting your books. 

Paycheck Protection Program taxes

Another piece of legislation that stemmed from the CARES Act was the Paycheck Protection Program (PPP), which enabled some small businesses to take out a PPP loan that would be forgiven if it was used for qualifying purposes. This program has now ended. 

According to the Tax Foundation, “Congress chose to exempt forgiven PPP loans from federal income taxation.” However, some states may tax these loans by treating them as taxable income. The good news is, even if your business has or had a PPP loan, it can still apply for the ERC, regardless of the state it’s in.   

   

How do the ERC’s benefits outweigh its tax impact?

Businesses like yours are getting hundreds of thousands of dollars back from the US Treasury. This is capital that can be used in many ways to grow your business.

Some ways your business can use its ERC refund include:

  • Expansion. With your company’s refund, you can start thinking about new products, services, and locations to scale your business. 
  • Improvements. From building repairs to tech upgrades, the ERC allows you to pick up where you left off pre-COVID and plan ahead for the future.
  • Marketing. The ERC provides you with the opportunity to invest in new marketing initiatives that can help expand your company's customer base and grow its impact online. 

Where do you start your ERC journey?

With all this information, you may wonder where to begin your business’s ERC journey. It all starts with filling out our questionnaire to see if your company is eligible for ERC assistance. If it qualifies, our team can help you navigate each step so no detail falls through the cracks.

Beyond checking your business’s eligibility, it’s important to have a plan in place before you start spending the ERC refund. Whether you hire a consultant, create your own strategy, or collaborate with employees, you have many ways to prepare for success. By taking these steps, you can continue building a bright future for your business.

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