Things Every Business Owner Needs to Know About the ERC:
Like every tax law, there are always limitations, conditions, and consequences. Here are the ones you need to be aware of:
Owners and Family Members Not Eligible.
Owners and family members on payroll are NOT eligible for the ERC. Those wages are removed from the wage pool in determining "qualifying wages."
PPP Wages for Forgiveness Excluded
As we explain here, any wages used for PPP forgiveness must be subtracted from the qualifying wage pool before determining ERC for that quarter.
Tax Ramifications
Sorry, Virginia, there may be a Santa Claus but he doesn't work for the IRS. Yes, there are tax ramifications for receiving the ERC. A business who receives the ERC must amend its business tax return for the year corresponding to the ERC claim year (ie 2020 and/or 2021); and must subtract from "Wage/Salary Expense" an amount equal to the ERC paid to taxpayer. For example, if a business showed a wage expense of $100,000 for 2020 and received ERC for 2020 in the amount of $25,000, then the business must amend its 2020 tax return and lower the wage expense by $25,000 to $75,000. The result of this may increase the tax burden (if the business did not report a loss greater than $25k in our example) for the taxpayer or the owners if the business is taxed as a "disregarded" entity. However, the good news is the tax burden will be much less than the ERC received so it will still be a positive result.