Can a Company Still Claim the ERTC During Bankruptcy?

January 11, 2024
Dayes Law Firm

There’s no question that the COVID-19 pandemic made it tough for millions of businesses across the U.S. to keep their doors open while still paying salaries and other financial commitments. 

To provide a lifeline for struggling businesses, the CARES Act (Coronavirus Aid, Relief, and Economic Security) gave much-needed relief to businesses affected by the pandemic. Specifically, the Employee Retention Tax Credit (ERTC) allotted up to $26,000 per employee to companies that were committed to keeping workers on payroll. 

Despite the influx of billions of dollars in financial aid, many companies were unable to weather the pandemic storm. That begs the question of whether a business claiming ERTC during bankruptcy can still be eligible for the tax credit. 

This article provides some guidance about ERTC and bankruptcy. To get an answer that is specific to your business’s situation, please contact Dayes Law Firm for a free consultation. 

General Eligibility for the ERTC 

As a reminder, a business would have to meet either one of two eligibility requirements to claim ERTC funds: 

  1. Experience a significant decline in gross revenue during 2020 and 2021 compared to the same quarters in the 2019 fiscal year. The specifics are 50% or more in 2020 and at least 20% in 2021.
     
  2. Be subject to a full or partial suspension of operations due to a government order. The mandate could have come from the local, state, or federal government.

There is also the potential to be eligible for the credit as a recovery startup business (meaning you don’t have 2019 figures to compare revenue to). There are separate eligibility criteria for businesses in this category. 

Claiming the ERTC During Bankruptcy 

If you are filing for bankruptcy, what exactly happens to your credit? The short answer to claiming the Employee Retention Tax Credit in bankruptcy, is that it depends. 

Businesses filing for Chapter 11 bankruptcy intend to keep their organization as a going concern and merely restructure and reorganize. In this case, ERTC eligibility will likely be unaffected, and the tax credit can be used to pay to keep the workforce on the payroll. Depending on the type of debt you have, you may be required to use some or all of the ERTC to pay back creditors. 

A business filing for Chapter 7 bankruptcy plans to cease operations, and this could have an altogether different impact on ERTC funds. Specifically, you may be required to turn over all of the funds to creditors as part of your business liquidation. 

Even here, however, you may still be able to keep your tax refund under a wildcard exemption. Again, this may depend on where in the U.S. you are located and the specifics of your bankruptcy filing. 

Bankruptcy Proceedings and ERTC 

There are several ERTC considerations in bankruptcy, and each business has highly individualized circumstances. Because ERTC eligibility is based on past business activity, your actual eligibility is likely to be unaffected by bankruptcy unless you have already closed your doors and your business no longer exists. What is more likely is that you may have to put your tax refund toward paying creditors. 

However, this is not a universal rule, so be sure to speak with a tax professional or bankruptcy attorney about your options for managing ERTC during bankruptcy. 

Contact Dayes Law Firm to Discuss Claiming the Employee Retention Tax Credit 

Dayes Law Firm has helped businesses at all stages of financial health claim more than $250 million in ERTC funds to date. Our legal team can advise you on the bankruptcy impact on ERTC funds and advise you on appropriate next steps. For help filing for the ERTC during bankruptcy, contact Dayes Law Firm today for assistance at 866-567-4510.