Tax credits ‘Save Money’, refundable credits are ‘Free Money’. What’s the difference?

Updated: Sep 8, 2021

Employers are able to qualify for a variety of tax credits for their business, a few of which are ‘refundable’ tax credits. So, what is the benefit of receiving these credits, and what makes the ‘refundable’ ones special.

Most Tax Credits ‘Save’ The Business Money

Typical employer tax credits offset Federal business taxes owed, such as Employer’s share of FICA taxes. Each quarter the business must deposit a certain amount for FICA taxes — tax credits allow them to offset the amount that must deposit, thus saving real dollars. In most cases, tax credits ‘save’ the business money but allowing them to offset tax dollars owed, as in this example.

The challenge with ‘saving’ money through traditional tax credits is that it may take multiple quarters for your tax expense to meet the amount of credits you have, in some cases causing the credits to expire. Further, there is no flexibility in how the credits are used — one purpose and one purpose only.

Refundable Tax Credits Give The Business ‘Free Money’

Refundable tax credits, on the other hand, allow employers and their owners to access ‘free money’ that they can choose to do what they desire. Refundable tax credits differ in that they are similar to the IRS saying ‘thank you for the actions you have already taken’ and thus there are no other responsibilities to fulfill with these credits. Refundable tax credits can be mailed to you as a check from the IRS, and the proceeds do not have to be used for any specific expense. The business owners can choose to distribute the proceeds to themselves if they so desire, or use the refund check received on any business expense.

Retroactively Apply For Refundable Tax Credits

The IRS recently announced two programs that retroactively allow for employers to receive refundable tax credits. The Employee Retention Credits and the Recovery Startup Business Tax Credits. Both programs are based on wages paid to employees while the business was impacted by covid19 through either a revenue reduction or government order that effected operations. Businesses can receive up to $19,000/employee through the 2nd quarter in 2021 through this retroactive refundable credit, the proceeds can be received as a refund check as mentioned above.

Businesses that meet either of these criteria should apply for this retroactive refundable credit:

  • 20% quarterly revenue reduction compared to the same quarter in 2019, or

  • Forced to limit part of operations, such as restaurants reducing indoor dining due to government order, or

  • Business started after February 15, 2020 and has less than $1m in revenue

The refund amount is determined based on qualified wages paid during the eligibility period. Kwantx can determine how much refundable credits the IRS owes you and file on your behalf. Apply here.