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.
If you find yourself in immediate need of assistance, our ERC attorneys here at Brotman Law are ready to help with whatever ERC-related challenges you may face.
But if you just want to dig deeper for yourself, and gain a comprehensive understanding of the ERC in Arizona, this guide will serve as your go-to resource.
What is the ERC deduction in Arizona?
The ERC deduction in Arizona is a refundable tax credit that can offset up to 70% of eligible wages paid to employees by small and medium-sized businesses. This federal initiative aims to stimulate economic recovery by incentivizing businesses that have retained their workforce amidst the challenges of the COVID-19 pandemic.
For business owners in Arizona, this means potential tax savings of up to $7,000 per employee per quarter from March 13, 2020, through December 31, 2021. However, understanding and navigating the specifics of the ERC can be quite complex.
To help you navigate the what is ERC question, the key starting point is understanding if your business is eligible…
Eligibility for the Arizona ERC grant
Let's make one thing clear — not all small to medium-sized businesses will qualify for the Arizona EC grant.
There are 2 distinct requirements that must be met before being considered eligible for the program:
1. Substantial decline in gross receipts
First, the business must have suffered a “substantial decline” in gross receipts — either 20% or more in comparison to the same quarter of the prior year, or 50% or more compared to the average quarterly receipts over 2019 and 2020 combined.
2. Full, or partial suspension, of business operations
Businesses must also prove that there was a full, or partial, decline in their ability to operate due to government restrictions enforced at the time. For guidance on what qualifies as a “significant decline”, you can refer to our dedicated resource on ERC qualifications.
Only by proving both of these requirements can a business become eligible for ERC. As such, it's strongly recommended that you review the criteria before applying, as failure to meet either one means that your business won't be able to receive the incentive.
ERC Arizona calculation
Now that we've established eligibility, how do you do the ERC Arizona calculation?
To answer that, we’ll need to look at some additional qualifying factors:
- Evidence of effort on the part of the employer to overcome financial hurdles
- Number of employees who were kept on the payroll during the qualified period—must be fewer than 500 active employees.
- Evidence of qualified wages paid to employees during the period.
- Evidence of compliance to tax regulations: Any delay in filing taxes or discrepancies in the tax return could result in immediate disqualification from the ERC.
The good news is that eligible businesses can claim up to 70% of the first $10,000 in qualified wages per employee for 2021 ERC.
But note that for claims relating to 2020, the credit rate is lowered to 50%, along with a lower employee cap of 100 people.
Either way, the credit won't completely offset losses from difficult times, but it can help alleviate some of the burden so that your organization can continue to operate without too much strain.
Check out our complete ERC calculation guide for more details, examples and insights on how to maximize the credit you're eligible for.
Applying for the Arizona ERC deduction
Now for the main part — applying for the Arizona ERC deduction!
The first step for business owners interested in claiming the tax refund benefit is the Form 941. This tax document is used to report the employer’s federal income tax withholding, Social Security tax, and Medicare taxes for their employees.
Note that the figures on the Form 941 must accurately reflect the withholding for all employees during the calendar quarter and year. Any discrepancies may result in a delay or exclusion to ERC.
Once the Form 941 is completed, employers must then look at offsetting their share of Social Security taxes on wages paid to employees from March 13, 2020 to December 31, 2021. This is important since only qualifying wages can be refunded.
One good news is that for businesses that have higher ERC credit than the amount of social security taxes paid during the period, the excess can still be refunded as additional tax credit. That way, employers can maximize the ERC benefits they receive.
These are just a few examples of the nuances that business owners can expect to face when applying for this refundable tax credit. For a full picture of the requirements and guidelines, we recommend checking out our dedicated resource on the ERC application.
PPP & the Arizona employee retention credit subtraction
Regarding claiming ERC and PPP (Paycheck Protection Program) together, the good news is that you can indeed!
Employers who received a PPP loan under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), can still claim an employee retention credit subtraction for wages paid between the qualifying period. This wasn't the case previously as the initial ERC legislation did not provide a mechanism for businesses to take advantage of both.
However, this approach does require employers to exercise caution, as it could result in an unintended recapture of the PPP loan if certain conditions are met.
Nonprofits & the employee retention credit in Arizona
A common misconception about the ERC is that nonprofits are ineligible for the tax credit, which simply isn't true.
Nonprofits in Arizona are eligible to receive the ERC if they pass two distinct requirements:
- A government mandate test designed to determine the full impact of COVID-related restrictions on nonprofit's operations
- The gross receipts test, which is basically a threshold to help determine if the nonprofit has suffered economic hardship as a result of COVID-19. This test measures the decline in their gross receipts year over year.
If nonprofits pass both tests, they will become eligible for the Employee Retention Credit in Arizona retroactively back to March 13th, 2020.
The credit is no different from the credit extended to for-profit employers and can be used towards retaining employees through pay, benefits or other workplace expenses.
For nonprofits facing financial hardship, we’ve put together a comprehensive ERC for nonprofits guide.
Is the ERC taxable in Arizona?
No, the ERC isn’t taxable in Arizona. Business owners need not worry about incurring extra taxes when paying out wages using this tax credit. There's one caveat though — the ERC can influence other areas of taxation in the state, such as taxable profits and payroll deductions.
To cite one example, Arizona requires all businesses to pay the Transaction Privilege Tax (TPT). This is like a sales tax for services and goods that get sold within the state. When an employer pays out ERC wages, this affects their TPT rate due to the alteration in taxable profits.
For guidance on how the ERC can influence other areas of taxation, check out our dedicated “is ERC taxable income” guide, which covers these topics in-depth.
Better yet, talk to one of our brilliant tax attorneys at Brotman Law for a personalized assessment of your situation.
Audits & the employee retention tax credit in AZ
If there's one thing all businesses have in common, it's that they all dread IRS audits. For a business reeling from the effects of a global pandemic, an audit can be especially costly and time-consuming.
What's more is that this problem can actually stem from claiming and receiving the ERC.
Regardless, ERC audits can happen and it's up to businesses to ensure that they comply with IRS regulations to minimize their chances of being targeted.
The best way to do this is by ensuring you understand the ERC in its entirety and carefully documenting all aspects of the ERC process, making sure all appropriate documents are readily available should an audit occur.
Scams to be aware of
It goes without saying that anything that has to do with taxes and credit is a prime target for scams. The ERC is no exception, and the IRS has issued several warnings about phishing scams that try to use the ERC as an avenue of exploitation.
In most cases, these attacks involve emails or phone calls from scammers posing as an IRS representative who is offering support and assistance with filing for tax credits or refunds through the ERC.
They may also promise to provide more information about the program in exchange for personal data, such as Social Security numbers, credit card information, and bank account details.
Keep in mind that the IRS will never contact you with unsolicited emails or phone calls requesting personal information. If you receive any emails from an address that looks suspicious, be sure to verify the sender's identity before sharing anything.
For more tips on how to protect yourself from scammers, visit our page on employee retention credit scams, where our tax attorneys share everything they know about these scams and how to not be their next victim.
How Brotman Law can help you
As noble as its intentions are, the ERC is not a one-size-fits-all solution. As you've seen, it's more like a minefield where slight missteps can lead to, whether it be financial or time-wise.
At Brotman Law, our practice areas cover all aspects of the ERTC. We specialize on the matter and are here to help you successfully navigate the complex rules and regulations surrounding this refundable tax credit.
Our team understands how important it is for businesses like yours to access the funds you are entitled to under the official IRS guidance.
Whether it’s assistance with filing forms, complying with regulations, or negotiating repayment terms, our experienced ERC tax attorney team can help!
The employee retention credit serves as a vital financial buoy for small and medium-sized businesses in the Copper State amidst the tumultuous waves of the COVID-19 pandemic. The financial relief on the table will help businesses keep their employees on payroll and retain them even during these hard times.
However, to fully capitalize on this opportunity, a comprehensive understanding of its tax treatment, eligibility criteria, and required tax documents is necessary.
Let Brotman Law be your guiding light in navigating this maze of ERC nuances and complexities!
The US states we support through the ERC