Even though, as a state, South Dakota didn’t mandate businesses to shut down during the COVID-19 pandemic, small businesses, especially, have struggled to stay afloat in the aftermath.
Thankfully, the IRS rolled out the Employee Retention Credit (ERC), with businesses suffering a significant decline in gross receipts enabling them to apply for the credit.
This comprehensive South Dakota Employee Retention Credit guide breaks down all the essential aspects you need to understand.
If you’d prefer to get immediate help on your ERC situation, find out how our ERC attorneys can assist you.
Alternatively, keep reading to learn everything there is to know about the ERC in South Dakota.
What is the new Employee Retention Credit in South Dakota?
The new Employee Retention Credit in South Dakota is designed to offer financial assistance to businesses who suffered a substantial decline in gross receipts during COVID-19, covering 70% of salaries paid to employees between March 13, 2020, and December 31, 2021, with a limit of $7,000 for each employee every quarter.
Is your business eligible?
Employers, including tax-exempt organizations, can qualify for South Dakota ERC under two primary conditions:
- A substantial decrease in gross receipts, OR
- A full or partial suspension of business during any calendar quarter due to government orders limiting operations, such as restrictions on travel or public gatherings.
Even though South Dakota didn’t mandate shutdowns, at one point, 76% of businesses were reported to have been impacted by the virus.
If your business suffered a loss in revenue, it's essential to calculate your gross receipts to see if you meet the ERC qualifications.
Calculating the ERC in The Mount Rushmore State
In the ERC calculation, it's crucial to be precise to avoid any pitfalls. This is especially true considering the evolving regulations surrounding the ERC and different calculation practices for the years 2020 and 2021.
To be eligible for the 2021 ERC in South Dakota, a company must meet these criteria:
- Experienced economic hardship (check the eligibility criteria above)
- Employed fewer than 500 individuals
- Qualified wages that are eligible for the credit
- Timely submission of tax return
The qualifying wages are capped at $10,000 for each employee every quarter. The credit amount is then determined at 70% of these qualified wages.
Note that for the 2020 ERC, the criteria is the same, but the credit rate is 50% rather than 70%. Additionally, businesses that had a workforce of over 100 employees in 2020 are not eligible.
Making the application
The ERC application serves as the main platform where employers must itemize their employees' qualified wages plus health insurance costs for each quarter. This is primarily carried out through Form 941, starting from the second quarter onward.
The credit aims to offset the employer's share of Social Security tax. If there is an excess credit, it will be refunded under normal procedure.
PPP & the South Dakota Employee Retention Credit
The Consolidated Appropriations Act has revised the initial PPP loan terms. The IRS has followed suit by announcing that businesses can now deduct the cost of eligible expenditures that will likely lead to the forgiveness of a PPP loan.
The CARES Act has also been updated to clarify that businesses can benefit from loan forgiveness without affecting their tax deductions, attributes, or base increases. This amendment repealed earlier policy, which disallowed such deductions if they were tied to loan forgiveness.
What this means for South Dakota businesses is that it's now possible to benefit from both the ERC and PPP. However, there are certain complexities in the ERC calculation and claiming these benefits simultaneously.
Guidance for nonprofits
The ERC applies not only to small businesses but also to nonprofits, including religious groups. Understanding eligibility criteria and complying with the rules for these organizations can be complicated.
The ERC for nonprofits must satisfy specific conditions to qualify, such as the:
- Government directive test, and
- The gross income assessment
To claim the Employee Retention Credit in South Dakota, nonprofits must complete Form 941-X and report the amount on Form 990. The value of the credit is contingent on qualified wages and the number of employees.
Is the ERC taxable in South Dakota?
No, the ERC isn't taxable in South Dakota. To address the common question, "Is ERC taxable income?" it's important to note that ERC credits aren't categorized as taxable income, per se. However, they affect your payroll deductions, subsequently influencing your taxable revenue.
Understanding the interplay between the ERC and taxable income is crucial for accurately filling out pertinent tax documents like forms 1120-S and 1065.
In South Dakota, how significantly the ERC impacts your tax returns depends on:
- The credit amount you claim
- The payroll costs you deduct throughout the fiscal year
- Your specific business structure
The IRS has made it clear that an ERC audit can happen, but there are proactive measures you can adopt to sidestep such an audit. It's also crucial that your business is always prepared for IRS scrutiny.
We have a complete guide on navigating an ERC audit that we highly advise you to check out since it covers:
- Strategies for preventing an ERC audit
- Statute of limitations related to ERC audit
- Immediate steps to take once notified of an audit
Scams to be aware of
Unfortunately, Employee Retention Credit scams are on the rise, as swindlers employ a range of deceptive maneuvers to take advantage of the ERC program and dupe local businesses.
The IRS has disseminated alerts concerning these illicit activities, stressing the need for diligent tax adherence and skepticism when interacting with external parties.
While the ERC is an authentic, refundable tax benefit, business owners need to remain vigilant about the prevalent scams:
- Identity Fraud: These criminals may focus on South Dakota businesses that don't meet ERC eligibility, procure confidential data, and apply for credit using stolen identities.
- Unsolicited Calls: Fraudsters ring up employers to make baseless assertions about qualifying for the ERC, often bypassing federal conditions and imposing high fees for unneeded services—even if the business is eligible.
- Unlawful Collection: Scammers submit ERC applications on behalf of a company and then pocket a considerable share of the awarded credit.
To avoid such scams, only consult with reputable tax experts (like the team here at Brotman Law), verify your eligibility, maintain a direct dialogue with advisors, familiarize themselves with the ERC guidelines, and be wary of unasked-for advice or unbelievable guarantees.
By following these safety measures, businesses can deter fraudulent activities, uphold compliance, and shield themselves from becoming victims of scams.
How Brotman Law can help
If your business in South Dakota saw a drastic reduction in revenue, the ERC credit can provide financial support during these challenging times.
For specialized guidance on how these policies could directly affect your business, consult with an ERC tax attorney at Brotman Law Offices. We're here to assist you.
Without question, the Employee Retention Tax Credit (ERTC) offers invaluable financial support for South Dakota businesses and nonprofit organizations impacted by the COVID-19 crisis. Yet, the criteria for qualifying and the rules governing applicable wages are intricate and may differ based on the size of your operation.
It's also crucial to be vigilant about ongoing scams in South Dakota that exploit unsuspecting victims.
For these reasons, consulting a tax professional, like our experts at Brotman Law, is highly advised to confirm your eligibility, optimize the tax credit you receive, and protect yourself from falling prey to fraudulent schemes.
The US states we support through the ERC