In the stormy seas of economic adversity brought on by the COVID-19 pandemic, many businesses in Arizona have needed a lifeboat just to keep their operations afloat.
For those impacted, the Employee Retention Credit (ERC) is a lifeline — one that offers enough financial relief for small to medium-sized businesses to not just survive, but thrive.
But of course, if you just need some help regarding the ERC, get in touch with us or head on over to our ERC attorneys page and leverage the skills and experience of our tax experts.
Otherwise, join us to learn everything you need to know about the ERC in Alabama and get your business back on track.
What is the ERC deduction in Alabama?
The ERC deduction in Alabama is a refundable tax credit introduced by the IRS to offer financial relief to small and medium-sized businesses hard-hit by COVID-19. The primary intent of this tax credit is to incentivize businesses to retain their employees, thereby promoting economic recovery across the state.
It accomplishes this by covering 70% of the qualified wages paid to employees disbursed from March 13, 2020, through December 31, 2021. However, it's crucial to note that the credit has a cap — it is restricted to $7,000 per employee for each quarter within this stipulated period.
So, while it's a valuable avenue for financial support, there are some limitations to consider.
Eligibility for the Alabama ERC grant 2023
To qualify for the ERC, businesses need to meet specific eligibility criteria, which is applicable to both taxable organizations and tax-exempt entities that were operational during the COVID-19 pandemic year, 2020:
- Impact on your business operations: If you were compelled to reduce or suspend your business activities due to governmental orders related to the pandemic, you could likely qualify for the Alabama ERC grant in 2023.
- Financial performance: Did your business experience a significant drop in gross receipts? If it did, then your ERC eligibility will depend on a careful examination of these gross receipts.
It's worth pointing out that a “minor” downturn in your business performance is insufficient for ERC qualification. Both your business operations and gross receipts need to have taken a substantial hit, affecting your ability to pay wages and continue business operations.
If you're unsure as to whether your business meets the criteria, we recommend heading over to our ERC qualifications guide, or booking a consultation with one of our tax attorneys for a more personalized assessment of your eligibility.
Calculating the ERC in Alabama
Given the credit percentage mentioned above, determining the ERC value that your business is eligible for might seem simple.
In reality, the process is actually quite complex as it’s subject to a myriad of nuances and changes applied to the ERC framework from 2020 to 202.
If you want to make the most out of this tax benefit, then precision and a good understanding of these factors is key:
- Tax filing history: A record of compliance with the IRS will go a long way in terms of eligibility. Any past tax filings should be complete with accurate and up-to-date records.
- Financial resilience: Your business must show proof that it’s taken measures to maintain financial stability in the face of challenging times. An example of this could be implementing cost-cutting strategies or establishing a plan to increase revenue streams.
- Company size: Only businesses with fewer than 500 employees are eligible for the ERC. Additionally, staffing needs to be taken into consideration when calculating the amount of tax reduction that the company is eligible for.
- Qualifying wages paid: This is a crucial factor when calculating the ERC as it determines the extent of the tax reduction. Generally, companies that paid qualifying wages to their employees are eligible for higher amounts.
Looking on the bright side, the value of the ERC in the Heart of Dixie for 2021 holds great significance.
With a maximum limit of $10,000 per employee per quarter and a credit rate of 70%, businesses have the potential to receive up to $7,000 per employee per quarter. This lifeline is a tremendous support for small to medium-sized businesses in Alabama.
But for claims relating to 2020, there are a couple of differences:
- Credit rate: 50% instead of 70%
- Eligibility: Limited to businesses that employed fewer than 100 people in 2020.
In short, while understanding the eligibility criteria by itself can be complex, in practice, it requires even more precision and attention to detail.
To make sure you get the most out of this tax benefit, take the time to review the information in our ERC calculation guide.
Applying for the Alabama new employee retention credit
Let's say you've determined your eligibility for ERC and now have a good idea of how the tax benefit is calculated. The next stage is the application process, where precision and careful documentation becomes even more crucial.
ERC application begins with the accurate recording of your qualified wages and associated health insurance costs for each quarter. These need to be reflected in your quarterly employment tax returns and define the exact credit amount your business is entitled to.
The paperwork involved necessitates a thorough understanding of Form 941. As of the second quarter, this form becomes a pivotal tool in demonstrating your eligibility for the Alabama new employee retention credit.
One thing that most business owners tend to overlook is that there's more to the ERC than just tax credit. It's also a means to alleviate your tax burden by offsetting the employer's share of social security taxes. This implies that for every employee who meets the eligibility criteria, you can decrease your social security tax liability by that employee's full credit amount.
An incentive to make sure that your business does not overlook any reduction in social security taxes is what's known as the refundability provision.
For cases where the credit amount surpasses the social security taxes, the excess can be refunded through standard procedures (e.g., Form 941-X). This guarantees you receive the full benefit of the ERC, no matter your social security tax obligations.
PPP & the Alabama employee retention credit subtraction
The IRS has announced that eligible expenses—the types that could lead to the forgiveness of Paycheck Protection Program (PPP) loans—are now allowed for deductions on tax payments. This significant development is part of the provisions in the Consolidated Appropriations Act.
Simultaneously, the CARES Act has introduced an important change concerning loan forgiveness. The new policies include ensuring no refusal of eligible deductions and basis increase, as well as preventing reductions in tax attributes.
This shift in policy means that it is now possible to leverage the benefits of both the Alabama Employee Retention Credit subtraction and PPP.
However, this blend of ERC and PPP benefits comes with its own unique challenges. To successfully navigate the intricacies of this dual benefit, it's essential to arm yourself with accurate, up-to-date information.
Our comprehensive ERC PPP guide is designed to provide this critical information, guiding you through these changes and helping you make the right decision for your business.
Nonprofits & the employee retention credit in Alabama
For a nonprofit to be eligible for the Employee Retention Credit in Alabama, a nonprofit has to successfully meet the same two prerequisites as regular businesses:
- Government mandate test, and
- Gross receipts test
Navigating the ERC for nonprofits can be tricky. It demands precision, meticulous attention to detail, and diligent record-keeping.
An exhaustive paper trail is instrumental for a successful application, and it begins with the accurate filing of Form 941-X for the relevant quarter. This tax document should reflect the qualifying amount specified in a nonprofit's Form 990.
Is the Alabama ERC taxable?
No, the Alabama ERC is not taxable by the state of Alabama. The IRS views the money received from the ERC as a credit, not income, meaning it is not subject to taxation. However, that credit can impact your taxes on payroll deductions and taxable profits.
For example, let's say that a business has overlooked subtracting the amount of ERC credit received from their net income before determining taxable profits. In this case, the amount of tax due would be higher than it should be.
The same goes for payroll deductions, where certain deductions are based on income. If the amount of ERC credit received is not taken into consideration, too much will be deducted from payroll, resulting in a smaller paycheck than what should have been received.
Ultimately, if you are in receipt of an ERC and need help determining how it can affect your taxes, then you can refer to our is ERC taxable income guide. There, you'll find all the details you need to properly calculate taxes owed following an ERC and understand how it may impact your tax return.
Navigating ERC Alabama audits from the IRS
Navigating the complexities of ERC Alabama audits can be daunting and is a situation no one wishes to find themselves in.
However, with adequate preparation and thorough understanding of the IRS regulations, you can significantly reduce the risk of an unexpected audit.
Firstly, it's crucial to understand the IRS's timeline for conducting an ERC audit. Also known as the “statute of limitations”, knowing this limitation can empower your organization with a sense of control over the situation, providing you with a clearer perspective of what to expect.
Right now, the IRS has 3 years from the date the tax return was filed or the due date of the return, whichever is later, to carry out an audit.
Of course, there’s more nuance to this, but what you really need to do to avoid an audit is a detailed, structured approach to your ERC documentation and record-keeping.
Make sure that the job descriptions of the employees being claimed qualify for ERC eligibility, as well as having specific evidence that each employee meets the criteria.
Preparation is key! By ensuring you are compliant with IRS regulations, and having all the necessary documentation in order, you can protect yourself from unnecessary audit risks.
But if an audit does occur, it is important to remain calm and contact a specialized tax professional for assistance as soon as possible, like the team here at Brotman Law!
Scams to be aware of
While the ERTC is a valuable tool for businesses in challenging times, it's essential to remain alert to the various scams that have emerged around it:
- Upfront payments: If someone approaches you asking for upfront payment to process your ERC, be aware that this is not IRS protocol.
- Unsolicited calls: Be wary of unsolicited calls from supposed "experts" promising substantial ERC benefits. Legitimate tax attorneys won't operate in this manner, and it's recommended that you end such calls immediately.
- Personal information: Never provide personal or financial information outside of the official ERC application process unless you’ve already engaged with a trusted ERC attorney
If you're uncertain or have doubts about any communication relating to the ERC, it's best to consult the official IRS website or contact a professional tax attorney.
By being informed and vigilant, you can protect yourself from falling victim to employee retention credit scams.
How Brotman Law can help you
At Brotman Law, we understand the intricate maze that the ERC can appear to be. With the labyrinth of rules and regulations, it's easy to find yourself lost.
But remember, you don't have to traverse this journey alone.
We aren’t just an ERC tax attorney — we recognize the significance of being well-informed and compliant with the new tax credit for the prosperity of your business. Our mission extends beyond tax services to delivering peace of mind by unraveling the complexities of the ERC. That way, our clients can focus on running their business.
If that's something that appeals to you, we'd love to hear about your business and the challenges it's facing. Call us today and let's make the ERC work for you!
The ERC is a beacon of hope for small and medium-sized businesses grappling with the economic fallout of the COVID-19 pandemic.
Understanding the nuances of Alabama's tax treatment of the ERC, however, can be a complex undertaking. The eligibility criteria and calculation is a dynamic process, influenced by various factors, including the size of the business, the amount of wages paid, and the degree to which the business operations were impacted by the pandemic.
We are steadfastly committed to helping you make sense of the ERC landscape, ensuring you seize every opportunity this tax credit presents, and ultimately, steering your business towards a path of recovery and growth.
The US states we support through the ERC