The Employee Retention Credit is a refundable tax credit available to small business owners who kept employees on their payroll during the COVID-19 pandemic. Business owners may use this credit however they wish, from hiring more employees to paying off debts.
Many businesses and nonprofits wonder if they can claim the ERTC if they were the recipient of a grant. Below, you can learn more about the ERTC vs. state and local grants to find out whether you qualify for the credit.
Grants for Which Businesses Cannot Claim the ERTC
First, let’s go over a few grants for which your business cannot claim the ERTC. The IRS explicitly says that you cannot claim the ERTC for wages paid with any of these grants:
- Paycheck Protection Program
- Restaurant Revitalization Fund
- Shuttered Venue Operators Grants
In short, if your business used any of these federal grants to pay employee wages, you cannot claim the ERTC for those wages.
The ERTC vs. State and Local Grants
When it comes to ERTC vs. state and local grants, the IRS does not have any direct prohibitions against claiming the ERTC for a state or local grant. That means if you used state or local grant funds to pay employees during the pandemic, you may be able to claim the ERTC for those wages paid.
What About Other Federal Grants?
As mentioned above, the IRS doesn’t restrict businesses from claiming the ERTC except for the PPP, SVOG, and RRF grants. However, before you rush off to claim the credit on your tax return, it’s smart to consider whether you should actually do so.
Claiming the credit for wages paid with a grant may or may not make sense for your business. Here’s how to decide whether you should claim the ERTC for wages charged to your grant.
- Was your grant valid for a set period or based on certain milestones, and the grant has already covered all your expenses? If so, it’s not a good idea to claim the ERTC because you’d simply be replacing one federal source of funds with another. In the long run, it may actually be detrimental to take the ERTC because replacing the grant with the ERTC could lead to lower grant amounts later on.
- Is it possible to file for an extension on the grant period or utilize a carryover provision, which would allow you to use the grant funds later on? If this applies to you, it makes sense to claim the credit. Doing so would allow you to use the ERTC to cover your current expenses and your grant funds to pay for other expenses in the future.
- Does your business have more allowable expenses than the grant will cover? In this case, you could claim the ERTC to pay for those expenses.
How to Claim the ERTC
Is your business eligible for the ERTC? To qualify, you must meet at least one of these requirements:
- A government order forced you to close down, either partially or fully.
- You had a major drop in gross receipts (at least a 50% decline for 2020 or a 20% decline for 2021)
If you think you’re eligible, you can claim the credit by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Now that you’ve learned about the ERTC vs. state and local grants, our team at Dayes Law Firm welcomes you to reach out with any other questions you may have about this credit. We can help you know whether you’re eligible so you can submit your claim to the IRS.
Call us at (866) 257-1223 for your free consultation.