Up-to-Date With ERTC Changes? Accounting Professionals Can Help With Tax Credits

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Many small business owners are worried about getting into trouble with the IRS for underpaying their taxes. At the same time, they may not be aware they're missing valuable tax credits and paying too much. Find out how working with an accounting professional can help you capture eligible tax credits.

Are you confident that your business's income and payroll tax returns are correct? Maybe you're not worried about the IRS coming after you for underpaying your tax liabilities but are instead concerned about paying too much. These are scenarios that many small business owners find themselves in, especially with all of the ERTC changes in the last two years.

According to a survey by the business consulting firm Clutch, 93% of small business owners said they are either very or somewhat confident in their ability to file their tax returns. However, the data also shows that 30% believe they are overpaying their taxes — often because they're not familiar with all the tax credits they might be eligible to claim.

If this sounds familiar, you may want to consider working with an accounting professional. Here's why.

Employee retention tax credit challenges abound

Did you take advantage of the employee retention tax credit (ERTC) in 2020 or 2021? Congress enacted the ERTC in March 2020 as part of the CARES Act to encourage businesses to keep workers on the payroll and continue paying group health benefits during the COVID-19 pandemic.

Initially, employers were allowed to claim up to $5,000 per eligible employee in 2020. Congress later extended and expanded the ERTC, allowing employers to claim up to $7,000 per eligible employee for each calendar quarter of 2021. However, as part of the $1.2 trillion infrastructure package passed in November 2021, Congress terminated the ERTC early for most employers. For the fourth quarter of 2021, the credit was only available to "recovery startup businesses," defined as businesses that began operations on or after February 15, 2020 and had average annual gross receipts of $1 million or less.

Frequent ERTC changes made claiming the credit a moving target. Qualifying for, calculating and claiming the ERTC could be confusing because it was a payroll tax credit rather than an income tax credit. This meant eligible employers could claim it on Form 941 and reduce their employment tax deposits by their anticipated credit or request an advance of the ERTC from the IRS on Form 7200, Advance Payment of Employer Credits Due to COVID-19.

The good news is that, even though the ERTC ended early, it's not too late to claim it for 2020 or 2021. Eligible businesses can claim a retroactive ERC refund for wages paid in past calendar quarters by filing an amended quarterly payroll tax return. To do so, you'll need accurate and up-to-date payroll data.

If you need help with gathering this information or claiming the ERTC retroactively, an accounting professional can help. For instance, ADP recently launched an expanded ERTC offering to assist organizations with determining if they qualify for the ERTC and guiding them through the claiming process. This consultative conversation can benefit the right clients during tax season with substantial credits if they have the right process to capture them.

Commonly missed tax credits can impact organizations

The ERTC isn't the only tax credit business owners might overlook at tax time. Working with an experienced accounting professional could help you lower your tax burden with other commonly missed tax credits, including the following.

Research & Development Tax Credit

The idea of research and development may bring laboratories and white lab coats to mind, but the Research and Development (R&D) Tax Credit isn't just for businesses with a scientific focus. It's available to any business that incurs expenses in attempting to develop new or improved products, services, processes, software, techniques or formulas on U.S. soil.

Generally, the credit is worth 6% to 8% of your qualifying R&D expenses. You can apply the credit to your federal income tax liability. However, companies that have been in business for less than five years and have under $5 million in gross receipts can choose to apply up to $250,000 of the available credit to their payroll taxes instead.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit is available to employers who hire individuals from certain targeted groups, including long-term unemployment recipients, veterans, ex-felons and people who receive temporary assistance for needy families (TANF), supplemental nutrition assistance program (SNAP) or supplemental security income (SSI) benefits.

If you hire employees from one of the applicable categories and employ them for at least 120 hours, you may be eligible for a federal income tax credit worth up to $9,600 per eligible employee.

Getting the assistance you need

If you're still taking the DIY route to file your business taxes, you may be missing out on valuable tax credits without realizing it. It's an accountant's job to stay up to date on available tax breaks and the rules for claiming them, so they may see opportunities for tax savings that you might miss.

If you're worried you already missed out on claiming these or other valuable tax credits, it might not be too late. Consider working with an accounting professional to see which credits you might qualify for and whether you can amend a prior year return to claim the credit retroactively.

Did you know?

Your accountant can do a lot more than handling your small business accounting and filing your taxes. If your accountant uses ADP's Accountant Connect SM, they'll have access to an extensive library of resources for adding value to your business, including compensation benchmarking, cash flow management, HR compliance, client insights, industry reports and business valuations.