Understanding tax credits can be a minefield. But when you get it right, the rewards can be game-changing for your business. This is especially true for the Employee Retention Credit (ERC), a crucial lifeline for businesses looking to bounce back from the pandemic. But how do you determine if you’re eligible? And how can you use accounting tools like Xero to claim what’s rightfully yours? Let’s dive in.
Summarizing the Article
- ERC is a tax credit for employers that can be refunded, worth up to $26,000 per employee.
- ERC eligibility includes experiencing a decline in gross receipts or a full or partial suspension due to government orders.
- Recent legislation has expanded ERC benefits, including for businesses that received PPP loans.
- Xero accounting software can simplify the ERC claim process with its robust tracking and reporting features.
- ERTC Express is a popular option to maximize your ERC claim with minimal time commitment.
Understanding ERC Eligibility: A Simplified Guide for Businesses
Before we get into the details of filing for ERC, let’s make sure we understand what it is. The ERC is a significant relief measure for businesses, providing a refundable tax credit to those who kept employees on the payroll during the pandemic. This isn’t just a deduction; it’s a full-blown credit, meaning it can result in a cash refund from the IRS.
What is the Employee Retention Credit (ERC)?
The ERC is like a gift from the government, only this gift comes with a hefty check. For each employee you kept on during the pandemic, your business could get up to $26,000. It’s not a loan; you don’t have to pay it back. It’s your money, as long as you qualify.
Main Requirements for ERC Eligibility
So, who is eligible for this? Not every business will be eligible, but many will be. The main requirements for eligibility include:
- A drop in gross receipts during a calendar quarter compared to the same quarter in 2019.
- A complete or partial halt in operations due to government orders related to COVID-19.
But don’t forget this—recent changes mean that even if you’ve taken a Paycheck Protection Program (PPP) loan, you might still qualify for the ERC.
How New Laws Affect Your Business
As laws change, so do the chances for you to claim credits. The Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA) have brought about important changes that broaden ERC eligibility and benefits.
A Look at the Latest ERC Changes
The CAA and ARPA didn’t just modify the rules; they completely transformed them. Now, businesses that received PPP loans can also claim the ERC, and they can do so retroactively for 2020 and the first three quarters of 2021. It’s like discovering there’s a secret stash of money in your safe that you didn’t know about.
Changes in ERC Rules Over Time
In the past, businesses with a PPP loan were not eligible for the ERC. But that’s no longer the case. The rules have changed to be more accommodating, the wage caps that determine eligibility have been raised, and the percentage of credit has gone up. This translates to more funds for your business.
- For 2020, the ERC was designed to cover 50% of qualified wages up to $10,000 per employee annually.
- For 2021, the percentage increased to 70%, and the wage cap was raised to $10,000 per employee per quarter.
This is a substantial increase, and it’s why you should be examining your books—or better still, have a professional like ERTCFilingPros.com examine them with you.
Crucially, these legislative changes could mean that there is a significant amount of money that your business could claim. However, in order to access it, you need to take action. You need to understand whether you are eligible, collect the required paperwork, and understand how to complete the filing process.
Configuring Your Xero Account for ERC Monitoring
In order to benefit from the ERC, a strong system for tracking and reporting on eligible wages and activities is required. Xero’s cloud-based platform is perfect for this. Initially, you should make sure your Xero chart of accounts has specific payroll expense categories for the ERC. This could include wages, health insurance costs, and more, as these are all part of the qualified wages for the credit.
How Xero Simplifies ERC Reporting With Its Features
With features such as detailed reporting and payroll integration, Xero is a useful tool for ERC claims. It can generate reports to help identify eligible wages and make sure you’re claiming as much as you can. The user-friendly interface of Xero also allows for tagging transactions related to COVID-19 government orders, which makes it simpler to gather this data when filing for the ERC.
Maximizing ERC Benefits with Xero: A Strategic Approach
Having a plan is key to maximizing your ERC benefits. Start by combing through your payroll data in Xero to find qualifying wages. Keep in mind, the credit is not solely based on salaries; it also encompasses health insurance payments made for employees. Xero can help you manage this data effectively.
Then, use Xero’s budgeting tools to compare your current finances with past periods. This can help you determine the necessary decrease in gross receipts or point out the periods when your business was affected by government orders, both of which are important factors in determining your eligibility for the ERC.
Top Tips for Precise Payroll Documentation
There’s no room for error when it comes to applying for tax credits. Make sure your payroll is documented correctly in Xero by keeping employee information and wages up to date. Regularly balance your payroll transactions to keep your records clean. This attention to detail will be worth it when you need to prove your ERC claim to the IRS.
In addition, you can use Xero’s tracking categories to assign payroll expenses to particular departments or locations. This can be especially helpful if only specific areas of your business were affected by government orders, which could impact your ERC eligibility differently throughout the company.
Getting to Know Xero Reporting Tools
Xero’s reporting tools can be your best friend in the ERC process. The software’s ability to create payroll reports, track expenses, and compare financial periods is priceless. By using these tools, you can pull the exact data needed to back your ERC claim, ensuring that you’re not missing out on any money.
In addition, Xero’s modifiable reports let you see your finances from different perspectives. This could help you spot patterns that might influence your ERC eligibility, like a substantial decrease in sales during a specific quarter.
Case Studies: ERC Success Stories with Xero
Real-world examples can provide a better understanding of the impact of the ERC and how Xero plays a role in securing it. Let’s look at a few case studies that show how to successfully navigate the ERC landscape with the help of Xero.
- A manufacturing company applied for the ERC using Xero to manage payroll costs and received a substantial refund, which they used to buy new equipment.
- A non-profit used Xero’s reporting capabilities to record a government-enforced closure and successfully claimed ERC credits to fund their operations.
These examples highlight the real-world advantages of understanding and applying for the ERC, and how Xero can make this process easier.
Example 1: Retail Business Uses Xero to Navigate ERC
A retail store in the Midwest experienced a significant decrease in foot traffic due to COVID-19 restrictions. They used Xero to meticulously track their sales and payroll expenses. This data was essential in determining their eligibility for the ERC, and they ultimately received a credit of over $100,000.
- All transactions related to ERC in Xero were identified and tagged for easy reporting.
- Xero’s payroll reports were used to calculate the total qualified wages for the credit.
- The required decline in gross receipts was demonstrated by comparing quarterly financials within Xero.
This strategic approach was made possible by Xero’s capabilities and enabled the retail business to successfully navigate the ERC claims process.
Example 2: How a Tech Startup Used Xero to Maximize ERC Credits
A growing tech startup was unsure if it was eligible for the ERC, particularly because it had already received a PPP loan. By using Xero’s comprehensive financial reports, they could clearly separate the use of PPP funds from wages that were eligible for the ERC. This separation was key in claiming a credit of $150,000, which helped fund additional research and development.
By comprehending the relationship between PPP and ERC, and utilizing Xero to accurately record their payroll costs, the startup was able to not only obtain crucial funding but also set itself up for continuous expansion in a difficult economic environment.
Get Started: Begin Your ERC Claim Process
Now that you’re equipped with the right information, it’s time to get started. The first step in starting your ERC claim is to go through your financial records. Check for any indications of eligibility: reduced revenue, government orders impacting your operations, and payroll records during these periods. Xero’s accounting platform is a great resource to help you sort out this data.
How to Claim ERC with Xero: A Simple Guide
This guide will help you understand the process of claiming ERC using Xero:
- Check the Eligibility Criteria: Make sure that your business fulfills the ERC eligibility criteria for 2020 and 2021.
- Establish Tracking: Be certain that your Xero account is prepared to track all payroll expenses that are eligible for the ERC.
- Create Reports: Utilize Xero to create detailed payroll reports for the periods in question.
- Keep Everything Documented: Maintain a detailed record of all documentation that supports your ERC claim, including government orders and financial statements.
- Seek Expert Advice: Think about contacting professionals like ERTCFilingPros.com, who specialize in maximizing your ERC claim.
Once everything is in order, it’s time to file your claim. The process can be intricate, but with the right preparation and expert help, you can successfully navigate it.
So, don’t delay. If you think your business qualifies for the ERC, start going through your books and use Xero to get your claim in order. The potential financial gain is too big to ignore, and time is running out on these tax credits.
Top Choice: ERTCFilingPros.com
When it’s time to file your ERC claim, you want to get it right to maximize your credit and reduce risk. That’s why ERTCFilingPros.com is here. They provide a specialized service to make sure you receive every dollar you’re eligible for, with a process that’s so efficient it takes less than 15 minutes of your time. Plus, they’re specialists in audit-proof documentation, which is vital for IRS support.
Questions You May Have
When you start the ERC claim process, it’s normal to have questions. Here are some answers to the questions we hear most often, including a detailed retroactive ERTC claim guide for your convenience.
What Makes a Business Eligible for ERC?
A business becomes eligible for ERC if it experiences a substantial decrease in gross receipts—over 50% for 2020 or over 20% for 2021 compared to the same quarter in 2019—or if the business operations were completely or partially halted due to government orders related to COVID-19.
Am I eligible for ERC if I have a PPP loan?
Indeed, you are. Recent changes in legislation have made it possible for businesses with PPP loans to also be eligible for the ERC. However, you cannot claim the ERC for the same wages covered by the PPP loan.
What Impact Does the New Legislation Have on My ERC Claims?
The most recent legislation, such as the CAA and ARPA, has not only extended the ERC program, but also broadened its eligibility. As a result of these changes, businesses can now claim the credit for wages paid up to the third quarter of 2021 and also claim the credit for 2020 retroactively.
What Paperwork is Required to Apply for ERC in Xero?
If you’re using Xero to apply for ERC, you’ll need to have comprehensive payroll reports, evidence of eligibility such as financial reports that show a decrease in income, and documentation of any government mandates that impacted your business.
Where Can I Find Professional Assistance for ERC Filing?
If you’re in need of professional assistance for filing your ERC, consider working with a company such as ERTCFilingPros.com. They are experts in ERC claims and can walk you through the process to ensure your business receives the highest possible refundable credits. For a deeper understanding of the accounting aspects of the ERC, you may refer to the insights provided by Grant Thornton.
To sum it up, the ERC provides a significant chance for companies to recover some of the financial losses they incurred during the pandemic. With the right resources, like Xero, and expert advice, you can make your way through the claim process and obtain the money that will help you maintain and expand your business. Keep in mind that these credits won’t be around forever, so you need to act now. So, check your records, seek advice from professionals, and do what you need to do to claim what you’re rightfully owed.