Throughout the COVID-19 pandemic, federal, state, and local initiatives have aimed to help businesses of all sizes stay open, in order to reduce the disruption that the pandemic causes to the economy.  Tax credits are one of the ways that the government encourages businesses to do things that are beneficial to the economy and to society in general, such as keeping employees on the payroll, operating in industries or in geographic area where demand is high, and adopting environmentally sustainable practices.  This spring, Alabamans are looking forward to an extended summer of in-person socializing, but before that can happen, there is an extended tax season.  Like last year, the IRS has postponed the deadline for filing income tax returns; this year, the deadline is May 17.  Therefore, tax season remains in full swing for the next few weeks, and business owners who are eligible for it would be wise to claim the Employee Retention Tax Credit.  An Alabama business law attorney can help you make major legal and financial decisions related to your current business project.

What Is the Employee Retention Tax Credit?

A tax credit is an amount of money subtracted from your tax obligations.  It is different from a tax deduction, which is an amount subtracted from your taxable income.  A $5,000 tax credit is better than a $5,000 tax deduction, because the deduction only reduces your tax obligations by a percentage of $5,000, while an equivalent tax credit is simply a $5,000 discount on your tax bill.

The Employee Retention Tax Credit is available to businesses that experienced a decrease in gross receipts as a result of the pandemic, especially those that were required to suspend their operations in part or in full because of stay-at-home orders or government mandates about social distancing.  Here are some of the key provisions of the Employee Retention Tax Credit:

  • For your 2020 tax return, you are eligible for the credit for every quarter where your gross receipts were at 50 percent lower than they were for the equivalent quarter of 2019.  The maximum amount of the credit is $5,000 per employee.
  • For the first two quarters of 2021, you can get a credit of up to $14,000 per employee, and this is credited against the Social security tax you pay for the employees.  To be eligible, your company must have experienced a 20 percent decrease in gross receipts.
  • For the second two quarters of 2021, the same credit amounts and eligibility requirements apply, but the amount is credited from the total taxes you pay, not just Social Security taxes.
  • If your business received a PPP loan, you are still eligible for the tax credit, but only if your PPP loan has not been forgiven.

Let Us Help You Today

The right time to talk to an Alabama business & corporate litigation attorney about how the business decisions you are considering will affect your tax obligations is anytime, not just during tax season.  Contact Cloud Willis & Ellis for help with your case.