Employee Retention Tax Credit for Partnerships: A Comprehensive Guide
The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to help businesses that have been adversely affected by the COVID-19 pandemic. It was introduced by the CARES Act in March 2020 and has since undergone several changes. The ERTC is available to partnerships that have paid employees during the pandemic or that have experienced a significant decline in gross receipts. In this article, we will provide a comprehensive guide to the ERTC for partnerships, including what it is, how it works, and how your partnership can qualify for it.
To maximize your partnership's profitability, it is essential to take advantage of the ERTC. This tax credit can provide significant savings on payroll taxes and help your partnership weather the economic impact of the pandemic. In the following sections, we will explore the ERTC for partnerships in detail, including eligibility requirements, how to qualify, and how much your partnership can save.
What is the Employee Retention Tax Credit for Partnerships?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit that can provide eligible partnerships with a significant tax break on payroll taxes. The ERTC is available for wages paid to eligible employees from March 13, 2020, through December 31, 2021.
Eligibility Requirements for Partnerships
To be eligible for the ERTC, your partnership must meet one of the following criteria:
- The partnership experienced a significant decline in gross receipts.
- The partnership experienced a partial or full suspension of operations due to government orders.
- The partnership is a start-up business.
According to the Treasury Department, the ERTC is available to all eligible employers, including partnerships.
How ERTC Works for Partnerships
The ERTC is a tax credit that can be claimed on your partnership's employment tax return (Form 941). The credit is equal to 70% of eligible wages paid to each eligible employee, up to a maximum of $10,000 per employee per quarter. This means that your partnership can claim up to $7,000 in tax credits for each eligible employee per quarter.
As explained by the IRS, the ERTC can offset payroll tax liabilities and can even result in a refund to your partnership if the credit exceeds your payroll tax liability.
Maximum Credit for Partnerships
Partnerships can claim up to $28,000 in ERTC for each eligible employee for 2021. This is an increase from the previous maximum credit of $5,000 per employee for the entire year. Additionally, partnerships that started up after February 15, 2020, are eligible for up to $100,000 of credits on wages paid from July 1, 2021, through December 31, 2021.
According to KBKG loan can still claim the ERTC, but cannot claim the credit on wages paid with PPP loan proceeds.
How to Qualify for the Employee Retention Tax Credit for Partnerships
To qualify for the Employee Retention Tax Credit (ERTC), your partnership must meet certain eligibility requirements. In this section, we will explore these requirements in more detail and provide guidance on how to qualify for the credit.
Eligibility Requirements for Partnerships
As mentioned in the previous section, partnerships must meet one of the following criteria to be eligible for the ERTC:
- The partnership experienced a significant decline in gross receipts.
- The partnership experienced a partial or full suspension of operations due to government orders.
- The partnership is a start-up business.
According to PKF O'Connor Davies, a significant decline in gross receipts is defined as a decrease of 20% or more in gross receipts in any quarter of 2020 compared to the same quarter in 2019. For 2021, the decline must be 20% or more in gross receipts in any quarter compared to the same quarter in 2019 or the immediately preceding quarter.
Qualified Wages for Partnerships
Qualified wages for partnerships include wages that are paid to eligible employees during the period of eligibility. Qualified wages include both cash compensation and certain employer-provided benefits, such as employer-paid health plan expenses and contributions to HRA/FSA plans.
According to KBKG, qualified wages for partnerships are capped at $10,000 per employee per quarter. This means that the maximum credit per eligible employee per quarter is $7,000.
How to Claim the Employee Retention Tax Credit for Partnerships
To claim the ERTC, your partnership must file Form 941, Employer's Quarterly Federal Tax Return. According to the IRS, partnerships can reduce their employment tax deposits by the amount of the anticipated credit and can also request an advance of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
It is important to note that partnerships should be cautious of third-party advice when claiming the ERTC. According to the IRS, penalties may apply for claims related to the ERTC that are based on unreasonable positions or disregard of the facts or law.
How to Calculate the Employee Retention Tax Credit for Partnerships
Calculating the Employee Retention Tax Credit (ERTC) for partnerships can be complicated. In this section, we will break down the calculation process into simple steps to help you understand how the credit is calculated.
Step 1: Determine Eligibility
As discussed in section 3, partnerships must meet certain eligibility requirements to qualify for the ERTC. Once you have determined that your partnership is eligible for the credit, you can move on to step 2.
Step 2: Identify Eligible Employees and Wages
To calculate the ERTC, you will need to identify which employees and wages are eligible for the credit. Eligible employees are those who were employed by your partnership during the period of eligibility and received qualified wages.
Qualified wages include both cash compensation and certain employer-provided benefits, such as employer-paid health plan expenses and contributions to HRA/FSA plans. According to PKF O'Connor Davies, qualified wages for partnerships are capped at $10,000 per employee per quarter.
Step 3: Calculate the Credit
The ERTC is equal to 70% of eligible wages paid to each eligible employee, up to a maximum of $10,000 per employee per quarter. This means that your partnership can claim up to $7,000 in tax credits for each eligible employee per quarter.
To calculate the credit for each eligible employee, multiply their eligible wages by 70%. For example, if an eligible employee received $10,000 in qualified wages during a quarter, the credit for that employee would be $7,000.
Step 4: Calculate the Total Credit
To calculate the total ERTC for your partnership, add up the credits for each eligible employee. For example, if your partnership has three eligible employees and each received $10,000 in qualified wages during a quarter, the total credit for that quarter would be $21,000 ($7,000 per employee).
Step 5: Claim the Credit
To claim the ERTC, your partnership must file Form 941, Employer's Quarterly Federal Tax Return. According to the IRS, partnerships can reduce their employment tax deposits by the amount of the anticipated credit and can also request an advance of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
It is important to note that the IRS has five years to audit ERTC claims after filing. Therefore, it is important to keep accurate records and documentation to support your partnership's claim for the credit.
How to Maximize the Employee Retention Tax Credit for Partnerships
The Employee Retention Tax Credit (ERTC) can provide eligible partnerships with a significant tax break on payroll taxes. In this section, we will explore ways to maximize the ERTC for your partnership.
1. Claim the ERTC for All Eligible Employees
To maximize the ERTC, your partnership should claim the credit for all eligible employees. Eligible employees are those who were employed by your partnership during the period of eligibility and received qualified wages.
According to KBKG, partnerships can claim up to $7,000 in tax credits for each eligible employee per quarter. Therefore, it is important to identify all eligible employees and claim the credit for each of them.
2. Keep Accurate Records and Documentation
To ensure that your partnership maximizes the ERTC, it is important to keep accurate records and documentation to support your claim for the credit. According to the IRS, the agency has five years to audit ERTC claims after filing. Therefore, partnerships should keep detailed records of eligible employees, qualified wages, and any other documentation that supports their claim for the credit.
3. Coordinate with Payroll Providers
Coordinating with your payroll provider can help maximize the ERTC for your partnership. According to Stent, many payroll providers have implemented ERTC tracking and calculation tools to help their clients claim the credit. Therefore, it is important to work with your payroll provider to ensure that you are fully utilizing these tools to maximize the credit.
4. Consider Retroactive Claims
Partnerships that did not claim the ERTC for previous quarters may be able to do so retroactively. According to PKF O'Connor Davies, partnerships can file an amended Form 941-X to claim the credit for previous quarters. Therefore, it is important to review your partnership's eligibility for the credit for previous quarters and consider filing retroactive claims if eligible.
5. Seek Professional Guidance
Maximizing the ERTC for your partnership can be complicated. Therefore, it is important to seek professional guidance from a qualified tax professional. A tax professional can help you identify all eligible employees and wages, coordinate with your payroll provider, and ensure that you are fully utilizing all available tools and resources to maximize the credit.
Potential Pitfalls to Avoid When Claiming the Employee Retention Tax Credit for Partnerships
While the Employee Retention Tax Credit (ERTC) can provide significant tax savings for eligible partnerships, there are potential pitfalls to avoid when claiming the credit. In this section, we will explore some of the common pitfalls and how to avoid them.
1. Failing to Meet Eligibility Requirements
One of the most common pitfalls when claiming the ERTC is failing to meet the eligibility requirements. As discussed in section 3, partnerships must meet certain criteria to be eligible for the credit. Failing to meet these requirements can result in the denial of your partnership's claim for the credit.
To avoid this pitfall, it is important to carefully review the eligibility requirements and ensure that your partnership meets the criteria before claiming the credit.
2. Failing to Identify All Eligible Employees and Wages
Another common pitfall when claiming the ERTC is failing to identify all eligible employees and wages. Eligible employees are those who were employed by your partnership during the period of eligibility and received qualified wages.
To avoid this pitfall, it is important to carefully review your partnership's payroll records and identify all eligible employees and wages.
3. Failing to Keep Accurate Records and Documentation
As discussed in section 5, keeping accurate records and documentation is crucial when claiming the ERTC. Failing to keep detailed records of eligible employees, qualified wages, and other documentation to support your claim for the credit can result in the denial of your partnership's claim.
To avoid this pitfall, it is important to keep accurate records and documentation and to work with a qualified tax professional to ensure that your partnership's claim is fully supported.
4. Failing to Coordinate with Payroll Providers
As discussed in section 5, coordinating with your payroll provider can help maximize the ERTC for your partnership. Failing to coordinate with your payroll provider can result in missed opportunities to claim the credit.
To avoid this pitfall, it is important to work closely with your payroll provider and ensure that you are fully utilizing all available tools and resources to maximize the credit.
5. Failing to Seek Professional Guidance
Finally, one of the biggest pitfalls when claiming the ERTC is failing to seek professional guidance. Claiming the credit can be complicated, and failing to seek guidance from a qualified tax professional can result in missed opportunities to claim the credit or even in the denial of your partnership's claim.
To avoid this pitfall, it is important to work with a qualified tax professional who can help you navigate the complexities of the ERTC and ensure that your partnership's claim is fully supported.
Wrapping Up
The Employee Retention Tax Credit (ERTC) can be a valuable tax break for eligible partnerships. By taking advantage of the credit and avoiding potential pitfalls, your partnership can maximize its tax savings and improve its financial outlook.
In this article, we have explored the basics of the ERTC for partnerships, including eligibility requirements and how to calculate the credit. We have also discussed ways to maximize the credit and avoid common pitfalls.
We hope that this article has been informative and helpful in understanding the ERTC for partnerships. Be sure to check out our other great content for more information on tax credits and other financial topics.
Remember, claiming the ERTC can be complicated. If you have any questions or concerns about claiming the credit for your partnership, be sure to consult with a qualified tax professional.
Questions & Answers
Who is eligible for the Employee Retention Tax Credit for partnerships?
Partnerships that experienced a full or partial shutdown due to COVID-19 or had a significant decline in gross receipts are eligible.
What is the maximum tax credit a partnership can receive for the ERTC?
According to KBKG, partnerships can claim up to $7,000 in tax credits per eligible employee per quarter.
How can a partnership claim the Employee Retention Tax Credit?
Eligible partnerships can claim the credit on their employment tax returns or by filing Form 7200 in advance.
What if a partnership already received a PPP loan, can they still claim the ERTC?
Yes, according to KBKG, partnerships that received PPP loans are still eligible for the ERTC on qualified wages.
How can a partnership retroactively claim the Employee Retention Tax Credit?
Partnerships can file an amended Form 941-X to claim the credit for previous quarters, as discussed by PKF O'Connor Davies.
What are some potential pitfalls to avoid when claiming the ERTC for partnerships?
Common pitfalls include failing to meet eligibility requirements, failing to identify all eligible employees and wages, failing to keep accurate records and documentation, failing to coordinate with payroll providers, and failing to seek professional guidance.
