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Financing your business with an SBA loan can help you invest in the things you need to grow your revenue. However, in addition to your financial documents and business plan, some SBA loans come with insurance requirements. When your loan terms come with collateral obligations, that property also needs to be covered with a hazard insurance policy. 

Here's what to know about hazard insurance and when you need it.  

Hazard Insurance Explained

Hazard insurance is a type of business property insurance that covers damage caused by accidents or natural disasters. Your insurance policy will outline "covered events." These are the types of events that may occur and cause damage. When that happens, your hazard insurance kicks in and covers the damage (within the limits of your policy).

Most hazard insurance policies include the following covered events:

• Theft
• Vandalism
• Fire damage
• Some water damage (caused by things like burst pipes, but not natural flooding)
• Storm damage 

In addition to covering the building itself, hazard insurance also covers the property inside. This includes any damage caused to:

• Furniture
• Equipment
• Inventory
• Tools

Limitations Of Hazard Insurance

Hazard insurance policies don't give your business an automatic blank check when a covered event occurs. Each policy comes with a coverage limit for both the building and the property within. So it's important to get a policy large enough to cover a worst-case scenario, such as a total loss.

Your hazard insurance policy will also come with a deductible—the amount you're responsible to pay before your coverage kicks in.

SBA Hazard Insurance Requirements

The SBA hazard insurance requirement applies to property that is used as collateral. Most SBA loans, including 7(a) and 504 loans, require some type of collateral in order to be approved. 

Because it's used as collateral, the property must be properly insured. That way, if there's any damage done that's out of your control, the building can be repaired or replaced and still maintain its value.

Here's the breakdown on hazard insurance requirements for each type of SBA loan:

• SBA 7(a) loans - Hazard insurance is required for loans of $25,000 or more.
• SBA 504 loans - Usually the property being renovated or purchased is used as collateral.
• Microloans - Hazard insurance is not required, but flood insurance might be.
• Economic Injury Disaster Loans (EIDL) - Hazard insurance is required for loans of $25,000 or more.

Types Of Business Property Insurance

Not all insurance companies refer to property insurance as hazard insurance. Instead, they may call it commercial property insurance. Here are some options to explore as you look for coverage required by the SBA.

Commercial Property Insurance

Commercial property insurance is the same thing as hazard insurance. Any covered events provide reimbursement for building repairs, as well as damaged items within the building. With this type of insurance, you would need to file a claim for your business. Then an insurance adjuster would assess the damage and provide you with reimbursement accordingly.

Flood Insurance

Anytime your commercial property is located in a flood zone and used as SBA loan collateral, you'll need a flood insurance policy as well. That's because damage caused by flooding is not typically included in most hazard or property insurance policies. 

To see if you need flood insurance, first visit FEMA’s online flood map tool to see if your property's address is located in a flood zone and then check your need for insurance when you apply for an SBA loan. If you do, you will need to pay an extra premium, but it will be worth the investment, if you're in an area at risk of flooding. 

How To Get Business Hazard Insurance For An SBA Loan

If your commercial property isn't properly insured, you'll need to purchase a hazard policy as part of your SBA loan funding process.

Follow these steps to ensure you're in compliance with your loan terms:

1. Choose a licensed insurance agent - Even though licensed insurance agents typically receive a commission on your purchase, they are best equipped to help you find the right business coverage for your needs. Specifically seek out one who is experienced in meeting SBA loan requirements. 
2. Compare policies - With the help of your insurance agent, compare the terms of all of your hazard insurance policy offers. Compare premium costs and coverage to make sure you get the right balance between the two.
3. Name your lender as the loss payee - It's standard practice to name the SBA, your lender, or CDC as the loss payee on your hazard insurance policy. They have a vested interest in ensuring the property is repaired or replaced. In some instances, they may monitor how the insurance funds are used.
4. Maintain your hazard insurance policy - Keep up with your insurance premiums to stay in compliance with your SBA loan terms. You cannot cancel or reduce the insurance policy unless there is some justification that the insured assets have been reduced or depreciated.

Getting proper hazard insurance is just one step in obtaining an SBA loan. Lendio's team of experts can help you throughout the entire process. Apply for an SBA loan now!

We surveyed 350+ small business owners across the U.S. Here’s what they had to say.

KEY STATS

• 49% of small business owners believe it’s somewhat or much harder to achieve the dream of owning a small business than in the past.
• Those under the age of 45 skew slightly more optimistic with 46% stating owning a small business is slightly or much easier to achieve.
• Those over 45 skews more pessimistic; 58% believe it is slightly or much more difficult to reach that dream.
• Small business owners are primarily facing challenges related to the economy (23%), inflation (21%) and other financial concerns (14%).
• 66% of small business owners state having a financial safety net would have had the most impact on their ability to start a business, followed by access to capital at 53%. 
• 54% of SMB owners started their business with personal funds with another 12% relying on friends and family. 
• 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
• A small business has been in business about three years (a median of 40 months) when it is first funded by an outside lender and receives a median amount of $47,000.
• 56% of small businesses state that large corporations have a negative impact on growth opportunities for their business.

Executive Summary

Lendio surveyed more than 350 small-and medium-sized business owners across the U.S. to gather insights about their ability to start and run a small business. The survey included measures of business owners’ most significant challenges, access to capital, impacts on growth, and their ultimate goals for starting a small business. 

The analysis finds a clear correlation between small business owners’ age and sentiment. Those over 45 are more pessimistic, seeing starting a business as more challenging to attain in the current environment. In contrast, those under 45 find it slightly easier to achieve. 

Inflation, economic distress, and labor force were the biggest challenges small business owners cite. 

 When asked how respondents funded their small businesses, 54% indicated personal funds, followed by bank loans. This survey, along with demographic indicators, can help identify and illuminate the experiences of current and future business owners spanning the different regions of the U.S. Overwhelmingly, responses have consistently shown that access to funding can make or break a company. 

“With every business success story comes the ability to have an impact on your community—a ripple effect. 2022 was a challenging year. As we think about the coming year, we’re in your corner, we’re excited to cheer you on, and to help you overcome some of the business challenges you’re facing. We’re optimistic for 2023. We look forward to working with you to get you access to the capital you need to grow your business best.”

Although 49% of respondents believe it’s somewhat or much harder to achieve the dream of owning a small business today than in the past, online loan marketplaces are making it much easier. Lendio is committed to helping entrepreneurs find the best funding options for their small businesses, so they feel supported and optimistic about starting their small businesses.

Key Recommendations*

Based on survey results, we recommend the following to support small business owners: 

1. Loan Access - The rise of online lenders and lending marketplaces has increased access to small business loans, but there is still work to be done to improve small business’s access to funding through automationand faster approvals.
2. Target Underserved Areas -  Lenders should target underserved areas where respondents believe starting a business is less attainable. Those areas tend to also feel greater negative impacts caused by inflation, increasing costs, and economic strains.
3. Educational Resources - Empowering small business owners through education and resources within their communities can be a major benefit to getting businesses off the ground.

Small Businesses Owners Face Challenges But Remain Optimistic

KEY STATS

• 49% of small business owners believe it’s somewhat or much harder to achieve the dream of owning a small business than in the past. 33% of SMB owners believe it is somewhat or much easier. 19% say it's about the same.
• 89% of small business owners believe it’s possible to attain the goal of owning your own business.

While 49% of small business owners believe it is somewhat or much harder to own a small business than it was in the past, 89% still believe it’s possible to reach that goal.

Entrepreneurs can face many challenges when starting a small business. There’s no one solution for all businesses. But making a plan, and accessing tools make it easier in today’s environment where small business owners are one-click-away from equipping themselves in advance. Some of the biggest obstacles to tackle for small business owners include the following:

1. Funding a business
2. Finding and keeping customers
3. Finding and keeping good employees

The Economy’s Effects On Small Businesses

KEY STATS

• Small business owners are primarily facing challenges related to the economy (23%), inflation (21%) and other financial concerns (14%).
• Hiring remains a primary challenge for 11% of small business owners.
• 56% of small business state that large corporations have a negative impact on growth opportunities for their business.

The economy is experiencing a slowdown, and the Federal Reserve continues to increase interest rates to tame inflation. Business owners are feeling the effects. In a recent World Economic Forum poll, nearly two-thirds of the economists believe there will be a 2023 recession. 

The post-pandemic environment has created many challenges, and small business owners still feel the ripple effects of COVID-19 protocols coupled with inflation. With inflation still at a 40-year high, we asked small business owners about their current biggest challenges. 

Small business owners are primarily facing challenges related to the economy, inflation and other financial concerns. Challenges related to Covid recovery and supply chain issues are less of an issue.

Creating An Environment Where Small Businesses Can Thrive

Location, taxes, and socioeconomic factors help to evaluate the best environment for a business which is why we asked respondents to select three choices that most affected their ability to start a business.

Access to capital and lower expenses are the key factors for creating an environment where entrepreneurs can start a business.

KEY STATS

• 66% of small business owners state having a financial safety net would have had the most impact on their ability to start a business, followed by access to capital at 53%. 
• Of the respondents, 52% state that living in an area with lower business costs and a lower cost of living would be helpful. 44% state lower taxes would have an impact. 

Funding Stats

Start-up funding for a small business can come from one or multiple resources. One of the most common ways entrepreneurs fund their businesses is through savings or friends and family. Alternatively, an infusion of cash from a small business loan may be the way to go. With no shortage of financing options, we asked survey participants how they first funded their businesses.   

KEY STATS

• 54% of SMB owners started their business with personal funds with another 12% relying on friends and family. 
• 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
• The average loan amount for a small business owner is $47,000.*
• A small business has a median of five employees when it is first funded by an outside lender.*
• A small business has been in business for about three years (a median of 40 months) when it is first funded by an outside lender.*

*Based on internal Lendio data of 300,000+ loans funded since 2013.

How Small Business Owners Define The American Dream

The original definition of the “American Dream” was based on the prospect of equality, justice, and democracy. As times have changed, so has the idea behind the dream.

The definition for most small business owners is relatively fluid. While traditional components, such as homeownership (46%) and starting a business (34%), are still identified as important, 67% identify freedom to live how you want to be the primary component of the American Dream.   

Generational Differences

KEY STATS

• Those under the age of 45 report needing more money to start their business with 23% needing $100K-$250K while only 10% of those aged 45+ needed that amount.
• While both generations rely heavily on personal funds to start their businesses, those under the age of 45 have started to turn to alternative sources as well such as crowdfunding (6%) and online lenders (5%).

Millennials are a highly entrepreneurial group of business owners, with ages ranging from 27 to 42. In an environment with rising costs, layoffs, and the Great Resignation, we’ve seen a surge in startups. And according to Bloomberg, “creating successful companies is a young person’s game.” 

But being an entrepreneur is not just for the young at heart; it’s a dream for people of all ages, and where economic downturns have historically driven growth, the generations looking to start anew fund their businesses differently. 

At a certain age, owning a business can seem easy to give up on or unattainable. But entrepreneurship is a reality for both the young and old. The survey showed a distinct difference in sentiment between younger and older business owners, with older business owners feeling more pessimistic and younger business owners feeling more optimistic.

KEY STATS

• 46% of younger business owners (18-44) believe owning a small business is somewhat or much easier to achieve. 
• 58% of older business owners (45+) believe owning a small business is somewhat or much harder to achieve.
• Despite differing perceptions of challenges both generations agree it’s possible to attain the goal of owning your own business.

The survey also found generational differences in what helps or hinders a small business’s success and what those business owners value most in their life.

• While a large majority (71%) of SMB owners aged 18-44 believe large corporations have a negative impact on growth opportunities for their business, 57% of those 45 and above disagree, stating large corporations don’t have a negative impact on their business.

• While the generations agree that a financial safety net, access to capital and low costs are most critical to success, those 44 and younger place greater importance on access to educational resources and see cultural bias as a larger inhibitor. 

• Both generations agree that the freedom to live how you want is the most important component of the American dream. Perhaps unsurprisingly, those 45+ place greater importance on retirement (46%) while those under 45 place more importance on becoming wealthy (36%).

Gender Differences

The survey found relatively few differences between genders other than the amount of funding needed to first start the business.

• A significantly greater number of women (49%) needed less than $10,000 to start their business than men (36%).
• A significantly greater number of men (21%) needed $100K-$250K to start their business than women (12%).

Geographic Differences

There were few significant differences across regions. 

• The Middle Atlantic region (New York, New Jersey, Pennsylvania) had the most positive sentiment toward being able to start a business with 96% of respondents believing it’s possible.
• The East South Central region (Kentucky, Tennessee, Alabama, Mississippi) had the most negative sentiment, with 30% of respondents stating they didn’t believe it was possible to attain the goal of owning your own business. 

*Disclaimer: The information, methodologies, data and opinions contained or reflected in Lendio’s Small Business Owner Pulse Survey (the “Survey”) are proprietary of Lendio and is intended for informational purposes only. The Survey does not constitute business or legal advice, and is not a substitute for professional advice. The recommendations provided by Lendio are general industry recommendations, and are not a substitute for your business judgment. The Survey is based on responses to a survey provided by Lendio, but the opinions of those businesses may change over time. Thus, the Survey is not warranted as to its merchantability, completeness, accuracy or fitness for a particular purpose. The Survey is provided “as is” and reflects Lendio’s opinion at the date of their elaboration and publication. Lendio does not accept any liability for damage arising from the use of the Survey in any manner whatsoever. While every effort has been made to ensure that this Survey and the sources of information used herein are free of error, Lendio is not liable for the accuracy, currency and reliability of any information provided in the Survey.

The U.S. Small Business Administration (SBA) offers a variety of attractive loans to small businesses in the U.S. SBA Express loans are one popular loan option you might want to consider if you need no more than $500,000 in funding. Just like other SBA loans, Express loans offer low interest rates and flexible repayment terms that you may not find elsewhere. 

Compared to other SBA loans, however, these financing solutions come with much easier applications and faster approval times. Let’s take a closer look at what SBA Express loans are and how they work, so you can decide if they make sense for your unique situation.

What is an SBA Express loan?

An SBA Express loan is part of the SBA 7(a) loan program, which is the most popular SBA funding option. Upon approval from an SBA-approved lender, you can use the funds for a wide variety of business-related expenses, such as commercial real estate, equipment, working capital, debt refinancing, or business expansion. 

You can choose from the standard Express loan or Export Express loan and lock in up to $500,000 in funding. While repayment terms depend on loan type and purpose, they go up to seven years for lines of credit, 25 years for real estate loans, and five to 10 years for other loans. 

The lender, loan size, and your financial situation will dictate the interest rate you may receive, but SBA Express loans cap out at the prime rate plus 6.5% for loans of $50,000 or less and the prime rate plus 4.5% for loans greater than $50,000. The chart below outlines the key components of these loans.

Types of SBA Express loans.

There are two types of SBA Express loans, including standard Express loans and Export Express loans. Let’s dive deeper into the details of each one.

Standard SBA Express loans.

Standard SBA Express loans are designed for qualifying small businesses that operate in the U.S. or the U.S. territories. The SBA responds to applications for these types of loans within 36 hours. With a standard SBA Express loan, you can borrow up to $500,000 and enjoy an SBA guarantee of 50%. While interest rates max out at the prime rate plus 4.5%, they ultimately depend on your qualifications, lender, and loan amount.

SBA Export Express loans.

SBA Export Express loans differ from standard SBA Express loans in that they’re geared toward exporters. If you’re in search of funding to support export activities for your business, this option is worth exploring. The SBA will guarantee 75% of loans that are larger than $350,000 and 90% of loans that are less than $350,000. Approval times are also shortened as the SBA will respond to applications in no more than 24 hours.

How SBA Express loans work.

You can apply for an SBA Express loan through an SBA-approved lender, which may be a bank, credit union, or online lender. To do so, you’ll need to complete SBA Form 1919 and any other forms the financial institution requires. While down payment requirements vary, 10% is typical and startups may have to put more down. 

Also, if you opt for an Express loan of over $25,000, you will need to back your loan with collateral. If you choose an Export Express, you’ll need to adhere to the particular collateral requirements set forth by your lender. 

Even though each individual lender will make their own eligibility decisions, the SBA will respond to Express loan applications within 36 hours and Export Express loan applications within 24 hours. This is much faster than the five to 10 business days the SBA usually takes for other types of loans. Keep in mind that funding times are also lender-dependent, but are typically completed within 30 to 60 days.

How to take out an SBA Express loan.

If you’re interested in an SBA loan, follow these steps to get one.

1. Determine your borrowing needs: Since SBA Express loans cap out at $500,000, it’s important to figure out how much money you need. If you’d like to borrow more than $500,000, you may have to explore alternative financing solutions.
2. Verify your eligibility: Before you go ahead and apply for an SBA Express loan, make sure you meet all the criteria. Your business must be considered a small business by the SBA and have reasonable owner equity to invest. Plus you’ll need to prove that you’ve already invested financial resources toward the business. In addition, you’ll be required to meet the individual lender’s criteria, which may include a minimum credit score of 650, at least two years in business, and strong annual revenue. 
3. Choose a lender: Not all SBA lenders are created equal. That’s why you should shop around and find the ideal option for your unique situation. You can always use the SBA lender matching tool on the SBA website to help you out.
4. Fill out SBA Form 1919: Once you decide on a lender, complete SBA Form 1919. Be prepared to share information about who owns the business, what you intend to do with the funds, the number of employees you have, and whether you’ve received any SBA loans in the past. Double-check your work to avoid errors and inaccuracies, which may lead to delays with approval and funding. 
5. Submit documentation: Some lenders will ask you to provide certain supporting documents with your application. These may include business credit reports, financial statements, personal and business tax returns, and a business plan.
6. Wait for approval: As stated, the SBA will respond to standard Express loan applications within 36 hours and Export Express loan applications within 24 hours. Once the lender receives the green light from the SBA, it’s up to them to approve your application and distribute the funds. In most cases, however, you’ll be able to close on your loan within 30 to 60 days.

Pros and cons of SBA Express loans.

Like most business financing solutions, SBA Express loans come with benefits and drawbacks you should consider, including: 

Pros

• Fast turnaround times: If you’re in need of an SBA loan with quick approval and funding times, the SBA Express loan may be a good option. Depending on the type of loan you choose, the SBA may approve your application within 24 or 36 hours. This is quite fast when you consider that it typically takes them at least five to 10 business days to approve other types of loans.
• Flexibility with collateral: As long as your loan is less than $25,000, the SBA doesn’t require collateral. If you don’t want to put your personal or business assets on the line, you’re sure to appreciate this type of flexibility. 
• Easier application: Compared to other types of SBA loans, SBA Express loans have simpler applications. It won’t take you as long to apply for them, so you can expedite the process of securing funding.

Cons

• Smaller borrowing amounts: SBA Express loans cap out at $500,000. While this might seem like a lot of money, it might not be sufficient if you have plans to purchase expensive equipment or acquire a business. You might want to consider the traditional SBA 7(a ) program if you need to borrow more money. 
• Must meet certain qualifications: Unfortunately, SBA Express loans aren’t available to just anyone. To take advantage of them, you must meet stringent criteria set forth by the SBA and the lender you choose. 
• Lenders may take a while to distribute funds: Even though the SBA approves SBA Express loan applications quickly, it’s up to the individual lenders to provide funding. Depending on the lender you choose, you may still have to wait weeks or even months for the money.

Bottom line

If you’re in the market for an SBA loan, but want to skip the lengthy application and longer approval times of the traditional SBA 7(a) loan, the SBA Express loan should be on your radar. Before you sign on the dotted line, however, weigh the pros and cons to ensure you’re making the most informed decision. Learn more and apply for SBA loans.

According to the U.S. Small Business Administration (SBA), small businesses account for 99.7% of all businesses in the U.S. But what exactly is a small business? Below, we’ll dive deeper into the SBA’s definition of a small business, so you can determine whether you meet SBA loan requirements and qualify for certain benefits.

SBA small business definition.

The SBA’s definition of a small business varies by industry and is defined either by a business’s average annual receipts or by the number of employees.

The SBA’s set size standards for every industry are sorted by the North American Industry Classification System (NAICS). A NAICS code is a six-digit code number that helps companies explain what they do. 

If you don’t know what your NAICS code is, visit Census.gov/NAICS to explore your options. In the event you can’t find a perfect match, go with the closest option. Keep in mind that your NAICS code should describe the primary activity of your business or the one that produces the most revenue.

Here’s a look at several industries and the maximum average annual receipts (your gross income plus the “cost of goods sold,” based on your federal tax returns) or number of employees (the number of workers you hire each of the pay periods for the preceding completed 12 calendar months) that qualify them as a small business. 

Only one size standard applies per industry.

In addition to maximum average annual receipts and maximum number of employees, the SBA will consider whether your company is headquartered in the U.S. and whether it primarily operates in the U.S. It will also look into whether your company is a for-profit business and whether it’s independently owned and operated.

Do you qualify as a small business?

To find out if the SBA considers your company a small business, follow these steps.

1. Visit the SBA size standards table to locate your industry and NAICS code.
2. Look at the figure under average annual receipts or number of employees.
3. Do some math or research to determine if you meet the threshold for average annual receipts or number of employees. 

You can also go to the SBA size standards tool and plug in your NAICS code. The tool will then ask for your average number of employees or average annual receipts. Based on your answer, it will verify whether you meet the SBA’s criteria for a small business.

Benefits of being a small business.

If the SBA does count your company as a small business, you might be wondering how you can take advantage of this classification. Here are some ideas. 

SBA loans

There are a number of SBA loan programs that offer low rates and longer repayment terms you might not be able to find elsewhere. The 7(a) loan is the SBA’s most popular program and offers up to $5 million in capital for small business owners. Upon approval, you can use this capital to cover a variety of expenses, such as startup expenses, real estate, short- and long-term working capital, and equipment. 

Business development programs.

The SBA has Small Business Development Centers (SBDCs) throughout the U.S. to provide small businesses with counseling, training, and technical assistance. Another organization called SCORE also offers free mentorship and resources. You can utilize these development programs if you qualify as a small business.

Government contracts. 

The SBA works partners with federal agencies to award 23% of prime government contract dollars to qualifying small businesses. If you meet the SBA definition for small business, you can submit bids and take advantage of government contracts, which offer an additional, reliable stream of income. 

Research grants

The Small Business and Innovation Research research grants are designed to encourage small business owners to dive into technology and commercialization opportunities. While this is a highly competitive program, it also offers small businesses the chance to expand your technological investment and potentially profit from commercialization.

Tax incentives

As a small business, you can also save money with tax incentives. The Small Business Health Insurance Tax Credit, for example, gives eligible small business owners the chance to save up to 50% of employee health care costs, if they buy insurance from the Small Business Health Options Program (SHOP). Some cities, like Philadelphia, also award tax credits to entrepreneurs and small business owners.

Bottom line

If you believe you’re a small business owner, there’s a good chance the SBA does, as well. But your average annual receipts and number of employees may position you as a medium sized or larger business instead. That’s why it’s wise to do some research and determine where you stand. If the SBA does consider you as a small business, go ahead and take advantage of everything you can! See if you qualify and apply for an SBA loan.

The CARES Act included provisions for several financial relief programs to support businesses during the COVID-19 pandemic. One of them, the Employee Retention Credit (ERC), rewards those that continued paying wages despite experiencing decreased revenues or operational shutdowns.

Initially, many taxpayers eligible for the ERC were uncertain whether wages paid to owners employed by their businesses qualified for the payroll tax credit. The Internal Revenue Service (IRS) issued a notice that answers the question definitively, but it can be challenging to decipher.

Here’s a more readily digestible explanation of the guidance to help you understand whether your owner wages qualify for the ERC.

Do Owner Wages Qualify For the ERC?

You probably won’t be able to include owner wages in your calculations when claiming the ERC. The IRS doesn’t expressly forbid it, but its interpretation of familial attribution and constructive ownership rules render most majority owners ineligible. The reasoning behind its position is circuitous, but doesn’t leave room for interpretation.

Previously, the IRS confirmed in its ERC FAQs that wages paid to employees related to their employers aren’t eligible for the ERC. For the purposes of the credit, relatives are defined as the following:

• A child or a descendant of a child
• A brother, sister, stepbrother, or stepsister
• The father or mother, or an ancestor of either
• A stepfather or stepmother
• A niece or nephew
• An aunt or uncle
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

When the employer is a corporation, a related individual includes any person who has one of the relationships above with a majority owner. A majority owner is an individual who directly or indirectly owns at least 50% of the corporation’s stock.

However, the FAQs make no reference to wages paid to owners or their spouses, which led to the previously referenced confusion among taxpayers. To clarify its stance, the IRS issued Notice 2021-49.

Notice 2021-49 asserts that the constructive ownership rules for determining who is considered a majority owner of a corporation apply to the ERC. These rules state that an individual is considered to own, by extension, all stock their family members own. Family members include ancestors, siblings (whole or half), and lineal descendants.

Here’s where things get a little confusing. The notice then alleges that applying these rules to the ERC means that wages paid to majority owners with living siblings, ancestors, or lineal descendants don’t qualify for the tax credit.

Here’s the logic: If you’re a majority owner, your siblings, ancestors, and lineal descendants are also considered majority owners. Because they’re considered a majority owner, you’re related to a majority owner. As an employee related to a majority owner, your wages aren’t eligible for the ERC, per the original exclusion in the FAQs.

Ultimately, you must have no living ancestors, siblings, or lineal descendants to claim the ERC for your wages as a majority owner. Alternatively, you can be a minority owner with less than 50% ownership in your corporation after taking the family attribution and constructive ownership rules into account.

Note: Since only corporations can pay wages to their owners, they’re the only employers relevant to this discussion. If your business operates under any other legal entity structure, then owner compensation is automatically disqualified from the ERC.

Examples of Owner Wages and the ERC

The rules regarding owner wages and their eligibility for the ERC can be frustratingly abstract. Let’s discuss some examples to help you understand whether you can claim the ERC for your owner wages.

Owner Wages Ineligible

Corporation A is an employer that can claim the ERC for qualified wages paid in 2020. During that period, it paid wages to John, who owns 60% of Corporation A’s stock. John has a wife named Susan and a daughter named Mary, both of whom also work for the company.

Because Mary is related to John, a majority owner, her wages don’t qualify for the ERC. In addition, as his family member, she’s also considered a majority owner. Because John is related to Mary, a majority owner, neither his nor his wife’s wages qualify for the ERC.

Owner Wages Eligible

Corporation B is an employer that can claim the ERC for qualified wages paid in 2021. During that period, it paid wages to Lisa, who owns 100% of Corporation B’s stock. Lisa has no living ancestors, siblings, or lineal descendants. Her husband, Chris, also works for Corporation B.

Lisa is a majority owner, but she has no relatives who meet the requirements to share her status by extension. As a result, qualified wages paid to her and her husband are eligible for the ERC if the amounts satisfy the other requirements to be treated as qualified wages..

Apply For the ERC

The ERC can be incredibly lucrative, with the potential to reduce your payroll tax liability by $26,000 for each employee retained through 2020 and 2021. The window to earn the credit is closed, but eligible businesses can still claim the credit retroactively. Even if your wages don’t qualify due to the owner exclusion, you may still be eligible for a credit if you had employees on the payroll during the pandemic.

The CARES Act established several financial relief programs to help businesses manage the economic fallout from COVID-19. Among them was the Employee Retention Credit (ERC), which rewards organizations for keeping employees on the payroll during the pandemic.

Unfortunately, accounting for the Employee Retention Credit can be challenging. Many companies will encounter timing issues, and there’s a lack of relevant guidance in the Generally Accepted Accounting Principles (GAAP).

Here’s what you need to know to record the ERC in your financial statements correctly, including how the credit works, how to claim it retroactively, and which accounting models may apply.

How Does The Employee Retention Credit Work?

The Employee Retention Credit is a refundable payroll tax credit. It reduces your business’ payroll tax expense directly, dollar-for-dollar. If the credit exceeds your liability, you get a refund. That makes it significantly more lucrative than a tax deduction, which only reduces your taxable income.

However, businesses must meet strict requirements to be eligible for the ERC. Generally, these include having a limited number of employees on the payroll and suffering a significant decline in revenue or a suspension of operations during the pandemic.

Established organizations that meet these requirements can receive up to $26,000 in payroll tax credits per employee retained through 2020 and the first three quarters of 2021, depending on the amount and timing of the qualified wages paid.

Companies that opened after February 15, 2020, may also claim the ERC via the provision for “recovery startup businesses” if they have annual gross receipts under $1 million and one or more W-2 employees, though the credit limits are different.

If you didn’t claim the ERC because you thought receiving a Paycheck Protection Program (PPP) loan disqualified you, note that the Consolidated Appropriations Act expanded ERC access to allow recipients of PPP loans that meet certain conditions.

Fortunately, though the window for earning the ERC is now closed, eligible businesses can still claim it by filing an adjusted payroll tax return, Form 941-X, for each qualifying quarter.

Generally, you must do so within three years of filing the original Form 941. However, Forms 941 for a calendar year are considered to be filed on April 15th of the following year if filed before that date.

It’s also highly recommended that you consult a tax professional to help you navigate the process, maximize your benefits, and organize your documentation in case of a future audit.

How To Record The Employee Retention Credit In Your Financial Statements

When you claim the ERC, you must update your financial statements to reflect the credit. Depending on your circumstances, there are three standards you can implement to follow GAAP accounting for the Employee Retention Credit. They include:

• International Accounting Standards (IAS) 20, Accounting for Government Grants
• Accounting Standard Codification (ASC) 958-605, Not-for-Profit Entities – Revenue Recognition
• ASC 450, Contingencies

All not-for-profit organizations must follow ASC 958, but businesses can generally choose from any of the three options. However, if you accounted for your PPP loans using IAS 20 or ASC 958, you should do the same for the payroll tax credit.

Now, let’s explore how each ERC accounting method works.

ERC Accounting Under IAS 20

When following IAS 20, you should recognize the ERC over the periods in which you recognize the expenses it's meant to offset. To do so, you must have “reasonable assurance” that you’ll receive the credit.

Having reasonable assurance of an event means its occurrence is probable. In the case of receiving the ERC, you generally cross that threshold when your business meets the credit’s eligibility requirements and pays the necessary payroll costs.

IAS 20 lets you record the ERC on the income statement in two ways. You can show it as a separate credit, such as other income, or by netting it against the related payroll costs. In the latter case, you should include a disclosure explaining the presentation.

The other side of your journal entry to record the ERC would be a debit to reduce your payroll tax liability. If that reduces what you owe below zero, the excess amount shows on your balance sheet as a receivable.

ERC Accounting Under ASC 958

Under ASC 958, you must treat your ERC credit as a conditional contribution. That means you can recognize it on the income statement only once you’ve “substantially met” the conditions to earn it.

That’s a more difficult threshold to cross than IAS 20’s requirement of reasonable assurance, and some judgment is required to determine when you've reached it.

At the very least, you must meet the decline in revenue or suspension of service requirements and pay the eligible payroll costs. Preparing and filing the IRS forms to receive the credit may also be required, depending on whether you consider that to be “more than an administrative task.”

Not-for-profit organizations must record the ERC as revenue, while business entities can show it as either grant revenue or other income. However, neither entity type can net the credit against their qualifying costs.

Once again, the other side of the journal entry to record your ERC should be a payroll tax receivable or a debit to reduce your tax liability. Conversely, if you received an ERC advance before substantially meeting the conditions to earn it, you’d show a liability for any unearned portion until you clear the requirements.

ERC Accounting Under ASC 450

If your business accounts for the ERC using ASC 450, you’d treat the credit as a gain contingency. That involves recognizing it on the income statement only once you’ve resolved all uncertainties regarding receipt of the credit and the income becomes “realizable.”

That’s the most restrictive of the three ERC accounting approaches and generally requires deferring recognition of the credit until you’ve received your funds from the IRS or at least a formal letter approving your claim.

Either way, you should then record the credit as a separate account on your income statement like you would under ASC 958 rather than netting it with the related payroll expenses.

Apply For The ERC

The ERC can significantly reduce your payroll tax liability, with up to $26,000 in credits available per employee retained through 2020 and 2021. Even though the window for the ERC is closed, qualifying businesses can still claim the credit retroactively.

Because of the complexity of the ERC accounting rules, the repeated program revisions, and the timing complications, it’s essential that you consult a tax professional for assistance with claiming the credit.

In the meantime, apply for the ERC using our guided online application tool to determine whether you qualify.

After the start of the Covid-19 pandemic in March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provided numerous aid packages for both individuals and businesses. Part of the legislation was the Employee Retention Credit, which was designed to provide impacted businesses with a tax credit to help fund employee wages. Subsequent legislation extended this credit to 2021 as well.

In order to maximize your credit for both 2020 and 2021, it's important to fully understand (and document) your company's eligibility based on the ERC shutdown test. Here's everything you need to know in order to qualify.

Employee Retention Credit Eligibility Requirements

As a credit, the ERC directly reduces your business's tax obligation. You may be eligible for the credit due to either a full or partial suspension of your operations. Even essential businesses with impacted revenue may be eligible.

In order to increase your chances of getting approved based on basic IRS guidance, it's important to be as detailed as possible in your application. Learn the eligibility requirements, plus our best tips for submitting your application for the ERC.

General ERC Eligibility Requirements

The eligibility requirements for the ERCwere updated in 2021. 

2020 qualifications:

• Qualifying wages of up to 100 full-time employees
• A decrease in gross revenue of at least 50% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate 

2021 qualifications:

• Qualifying wages of up to 500 full-time employees
• A decrease in gross revenue of at least 20% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate

ERC Government Shutdown Tests

So, how do you determine if your business experienced a full or partial suspension due to a government order? In general terms, a suspension constitutes a government order having an impact on operations in either hours or service capacity. If a business faced a direct order to fully suspend their business, then they qualify under the ERC. If a business or portion of a business was deemed essential but were limited in hours and service capacity, they may still qualify as a partial suspension. This ERC shutdown test may seem straightforward at first, but there are a lot of murky areas that have been addressed by the IRS. 

Your business was essential but supplier shutdowns impacted operations. Even if your business was considered essential throughout the pandemic and wasn't subject to shutdown orders, you may still have experienced a shutdown if your suppliers were unable to make deliveries of critical goods or materials due to a governmental order that caused the supplier to suspend its operations. Documenting these negative setbacks that hurt your revenue could help qualify as a partial suspension.

Your business was required to reduce operating hours due to a governmental order.  The ERC partial suspension test acknowledges that some businesses may have scaled back on hours or the scale of operations in part rather than in full due to a governmental order. An example would be a business where part of the staff was able to work remotely, but other operations required in-person work and was shut down. 

Alternatively, a dine-in restaurant that switched to carry out and delivery during the pandemic would  be considered a partial shutdown since their operations were reduced but not completely stopped. 

Your business operated in multiple jurisdictions with varying degrees of shutdowns based on location. According to the IRS, this would still be considered a partial shutdown. It's important to note all states and locales in which you operated, since some may have had stricter shutdown rules than others.

Shutdown Impact

Once you’ve determined if you experienced a full or partial shutdown, the IRS wants you to prove you were affected greater than 10%. Here’s how that works. 

The Size Test

The size test for ERC qualification means that more than a nominal portion of your operations were suspended because of the government order, you can qualify for the tax credit. This is measured by either a reduction greater 10% of the total gross receipts or a greater than 10% reduction in the total employee service hours for the specific quarter measured year over year. 

The Effect Test

Another way you can qualify after a partial or full shutdown is the effect test. To meet the effect test, the IRS has said that you either have to demonstrate that the suspended portion of your business made up a greater than 10% portion of total operations, or that modifications made to the business due to governmental orders resulted in a greater than 10% impact to your ability to provide goods or services to your customers. For example, a restaurant had to limit occupancy to 50% due to a governmental order and could only seat guests in every other booth. Or, a dance studio had to cut group lessons and only offer one-on-one classes due to a governmental order. In each of these scenarios, the business would pass the effect test.

Best Practices to Demonstrate ERC Shutdown Eligibility

It's not too late for eligible businesses to apply for the Employee Retention Credit. To claim the 2020 credit, the application must be submitted by April 15, 2024. The deadline for the 2021 credit is April 15, 2025. IRS form 941-X is required to claim eligible employee wages.

However, the IRS has left quite a lot of gray area in terms of guidelines for the ERC shutdown test and has also noted that it doesn't plan to issue any further guidance. So it's important to be as thorough as possible when applying for the credit in order to maximize your tax savings. 

Lendio can help you apply for this tax credit. Here are some of the things to include in your application. 

• Revenue activities: Explain your business operations and how you typically bring in revenue. 
• Changes in income-producing strategies: Include details on how you adjusted your operations throughout the pandemic in order to continue bringing in cash flow.
• Total revenue: Analyze exactly how much your revenue fell between 2019 and 2020 on a quarterly basis. 
• Operating locations: Be specific with all the different states and jurisdictions in which you operated.
• Employee working hours: Talk about any changes in employee scheduling and number of hours of work that had to be adjusted in order to comply with social distancing best practices.
• Sales metrics: Give color to exactly how your business sales were impacted. Perhaps your foot traffic significantly dropped or you had difficulty closing sales over video or phone compared to in-person meetings. 
• Vendor disruptions: Even essential businesses experienced disruptions, particularly from other vendors who may not have continued smooth operations. List out vendor names, dates, and specific challenges and setbacks your business experiences because of third parties.

While the government passed multiple COVID relief packages for small businesses, including the CARES Act, the quick action often left questions about eligibility requirements. For restaurant owners, many wondered whether tips are included in the Employee Retention Credit. To address this valid concern, the IRS released guidance on when tips are considered qualified wages for the ERC, which also applies to businesses that have already filed for the ERC. 

Here's everything you need to know about counting tips as qualified wages for this important tax credit.

What Businesses Qualify For the Employee Retention Credit?

Before jumping into whether tips count as wages, make sure your business is eligible for the Employee Retention Credit. The food and hospitality industries were among the most impacted by the pandemic. Many restaurants and other related small businesses that survived and have employees who receive tips as income are likely eligible to meet these requirements.

2020 qualifications:

• Qualifying wages of up to 100 full-time employees
• A decrease in gross revenue of at least 50% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate 

2021 qualifications:

• Qualifying wages of up to 500 full-time employees
• A decrease in gross revenue of at least 20% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate

Businesses impacted by the pandemic may qualify under either full or partial suspension of operations. For instance, restaurants that switched from sit-down service to curbside pickup would qualify under a partial suspension. And if your business had locations in multiple jurisdictions, you could still apply based on the government restrictions experienced in some states, even if other states in which you operated were more relaxed.

Are tips qualified wages for the employee retention credit?

In most cases, tips do count as qualified wages, with just a minor exception. Notice 2021-49 from the IRS clarified that tips are included as qualified wages eligible for the employee retention credit as long as they exceed $20 in one calendar month. Under the IRS definition, tips can include cash or any other form of payment. So for each month an employee earned $20 or more in tips, that money can be included in their qualified wages to help qualify for an additional amount from the Employee Retention Credit.

What about the FICA tip credit?

Another clarification from the IRS confirmed that small businesses claiming tips as qualified wages are also eligible to claim the same wages for the FICA tip credit. This credit is available via IRS Form 8846. It allows food industry businesses to receive a tax credit on the social security and Medicare taxes paid on any tip income that's over the federal minimum wage. Your business can still claim the Employee Retention Credit while simultaneously claiming the FICA tip credit as well.

What if your restaurant already applied for ERC?

Even if your small business already applied for the Employee Retention Credit without including eligible tip wages, it's not too late to take advantage of this update. You can resubmit Form 941-X as an amendment to your previous tax filing for eligible years.

Note that the application deadlines for the ERC are April 15, 2024 for the 2020 tax year and April 15, 2025 for the 2021 tax year.

Lendio's tax partners have the necessary expertise to make sure you maximize this tax credit opportunity. Our platform integrates with your HR and payroll systems so you can avoid manually gathering and entering relevant documentation.