Claiming the ERC? You Might be Able to Cash In Sooner Than You Planned
May 12, 2021
30 Second Summary
- Businesses can receive an advance on ERC by filing Form 7200.
- The option of an advance provides a critical lifeline for businesses that need more cash flow.
- Assess the criteria for Form 7200 to determine whether filing for an advance is the right choice for your business.
The full story
Did you know you can receive advance payments for the Employee Retention Credit (“ERC”)? Filing Form 7200allows businesses to request advance payments from the IRS before the close of a quarter. This can be done in conjunction with retaining payroll tax deposits (when there aren’t sufficient employment taxes to cover the cost of qualified wages).
Here’s what you need to know about filing for the advance:
- The advance is available for each quarter you are eligible to claim the ERC, as long as the credits are available.
- Pending possible extensions from future legislation, the last day to file Form 7200 for the ERC is August 2, 2021 (for the 2nd quarter of 2021).
- You may not file Form 7200 for the quarter after Form 941 is filed for that quarter.
- Only small businesses that averaged 500 or fewer full-time employees in 2019 are eligible to file for the advance in 2021.
- This restriction is subject to aggregate rules for controlled groups.
- The amount of the advance is limited to 70% of the average quarterly wages in 2019.
- If your business didn’t exist in 2019, you can use the average quarterly wages for 2020.
- If your business is seasonal, you can use average quarterly wages from the same quarter in 2019 as the quarter your filing the 7200.
- Filing Form 7200 is not the same as claiming the credits; you claim credits on your quarterly or annual employment tax returns.
- You will need to reconcile any advance credit payments and retained payroll tax deposits on Form 941 each quarter.
- If you want to file for the advance and plan to file multiple employment tax returns, you must file a separate Form 7200 for each return.
- If your business uses a third-party payer, like a PEO or CPEO, they are not entitled to the credit or the advance – you are.
- You are responsible for accounting for the credits, any liability arising from improperly claimed credits, filing Form 7200, and providing your third-party payer with a copy of your submitted form to reconcile the credits on future employment tax returns.
- The IRS will apply any advance amounts to past-due tax accounts before paying out the advance.
When trying to decide whether filing for the advance is the right choice for your business, consider this example scenario:
Your business is entitled to an ERC of $100,000 and was required to deposit $80,000 in employment taxes. The credit allows you to retain the entire $80,000 of taxes and file for an advance payment for the remaining $20,000.
If you think this scenario sounds similar to your situation, then Filing Form 7200 might be a smart choice.
Filing for an advance on your ERC credit may be just the tool you need to keep your business running at full capacity. Aprio’s ERC team can help you determine if filing Form 7200 is right for you, and we have the skills and experience to help ensure all the necessary requirements for filing are met, documented, and substantiated.
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Aprio’s goal is to provide the most up to date information, along with our insights and current understanding of these programs and regulations to help you navigate your business response to COVID-19.
The rules regarding SBA programs are constantly being refined and clarified by the SBA and other agencies In certain instances, the guidance being provided by the agencies and/or the financial institutions is in direct conflict with other competing guidance, regulations and/or existing laws.
Due to the evolving nature of the situation and the lack of final published rules, Aprio cannot guarantee that additional changes or updates won’t be needed or forthcoming and the original advice given by Aprio may be affected by the evolving nature of the situation.
You need to evaluate and draw your own conclusions and determine your Company’s best approach relative to participation within these programs based on your Company’s specific circumstances, cash flow forecast and business strategy.
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Aprio encourages you to contact your legal counsel to address the legal implications of the impact of the CARES Act and specifically your participation in any of the SBA programs.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.