How Small Business Owners Can Make the Most of the ERC at Tax Time

February 27, 2023

If you’re a small business owner, you know that you must remain vigilant and take advantage of every opportunity to stay ahead of the competition. While small business owners are always thinking of ways to cut costs and create more revenue, there’s another factor to consider—refundable tax credits from the government. The Employee Retention Credit (ERC) is a payroll tax refund from the federal government offered to businesses that kept employees on payroll during COVID-19.If you’re eligible, you may receive a refund of up to $26,000 per employee. These funds could allow you to maintain and strengthen your competitive edge, grow your business, build a safety net and set yourself (and your employees) up for a brighter future.

The IRS anticipated that approximately 70%-80% of small and medium businesses (as well as tens of thousands of charities) were good candidates for taking the ERC. To date, the actual numbers of businesses and charities applying for the ERC is far below that. Small and medium businesses (as well as tax- exempts/charities) are leaving billions of dollars on the table.

However, there are a number of factors to consider about whether you may qualify to take advantage of the ERC. Do your homework on which companies are offering ERC assistance and ask some key questions. Among them are four important ones:

  1. Did my business shut down during the pandemic? Amidst the height of the COVID-19 pandemic, many small businesses—especially those not deemed essential—took severe financial hits and had to be shut down. With that said, the IRS has kept the definition of a government shutdown fairly open, allowing room for varying situations. Depending on your business’s operations during COVID-19, it may qualify for shutdown requirements, making it potentially eligible for the ERC.However, a word of caution here: Many employers were subject to government orders requiring them to modify their operations, such as social distancing or the sanitizing of equipment or furnishings. For an employer to qualify for the ERC, the IRS requires that the governmental order caused more than a nominal effect on operations.
  2. How did the supply chain affect my business? Regardless of industry, the supply chain has been a hot topic for small businesses, and it has only become more prominent in our post-COVID reality over the past three years. If your suppliers (and not your own business) were subject to a government order suspending business operations, the IRS has said that in order for you to claim the ERC, you must have been unable to obtain critical goods or materials from alternative suppliers, and because of that, the supply chain disruption must have forced your own operations to be fully or partially suspended.
  3. Where is my business located? If your business is in a single location, eligibility will be easier to assess than businesses with multiple locations. Companies operating in multiple locations were often subject to a variety of government orders. Some locations may have operated as normal while others were shut down. To qualify for the ERC, the IRS requires that the employer has established a policy to operate its business consistently across all locations.  Fortunately, there are many ERC companies such as Innovation Refunds with highly qualified professionals who are skilled in the ERC’s nuances, which can help your small business navigate the process on this question and others as easily as possible.
  4. How was my business financially impacted? If revenue increased for your small business during 2020 and 2021, you are not automatically disqualified for the ERC. Your business could still be eligible to receive the ERC if you experienced limitations in commerce, group meetings, and/or business travel, or if you were subject to a partial or full suspension due to a COVID-19 government order.

Small businesses often serve as the heartbeat of communities across the nation and yet many are unaware of the ERC and whether they may qualify. Knowing more about this important refund will help you determine the best path forward for your business.

Howard Makler is the co-founder and CEO of Innovation Refunds, a dedicated team of champions for small businesses who, along with a network of tax attorneys, CPAs, and tax professionals, have helped more than 10,000 companies receive billions of dollars in ERC refunds. Innovation Refunds’ value is derived from its extended network of enterprise partners, financial institutions, cutting-edge technology resources, and trusted advisors.