As a small business owner during the COVID-19 pandemic, there are many facets and complexities involved in operating your business. Your business may have taken a financial hit.
Despite experiencing economic hardships, your employee’s well-being is your number one priority. During challenging times, some of your employees may need to stay out of work to take care of their loved ones. However, you still need to keep the business going and retain your employees.
IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19) is the form that allows you to request an advance payment of the tax credits for qualified sick and qualified family leave wages, and the employee retention credit that you claim in your federal tax returns. Rejection of your request due to an error in Form 7200 is the last thing we want you to worry about.
We have put together a checklist of the common mistakes made during the preparation, filling of the form, and the post-filing stages of IRS Form 7200, this way you can easily avoid them.
Ignoring Employment Tax Deposits
File Form 7200only if you can’t reduce your employment tax deposits to fully account for the credits that you expect to claim on your employment tax return for the applicable quarter.
Reducing Tax Deposits & Requesting Advance Payment for the same Credits
Don’t reduce your employment tax deposits and request advanced credits for the same expected credits.
Retention Credits for Unqualified Entities
Employee Retention Credit is not applicable for government entities, including state and local governments and their instrumentalities, as well as small businesses that have taken business loans.
Request Advance Payments for Self-Employed Individuals
You can’t request an advance payment of the credit for sick and family leave for self-employed individuals.
Qualified Wages for Retention Credit paid prior to April 2020
You will notice that Form 7200 only shows Quarters 2 through 4 under Applicable Calendar Quarter. You are likely to ignore these as you don’t find Q1 in the form. Qualified wages for Retention Credit paid between March 13, 2020, and March 31, 2020, is to be applicable under Q2 (April, May, June).
FILLING THE FORM
Pay attention to the common mistakes mentioned in this section, especially if you are paper filing Form 7200.
Remember, these errors can’t be caught if you paper file. However, using the services of software providers such as TaxBandits to file Form 7200 can validate these errors. It prompts you for any incorrect or missing information before you file. This way, the chances of your request being rejected by the IRS are minimal.
Missing or Inaccurate Employer Identification Number (EIN)
The EIN should be exact and can’t be left blank on Form 7200.
Choosing the Wrong Applicable Calendar Quarter
Only one box should be checked for the correct quarter under the Applicable Calendar Quarter.
Choosing the Incorrect Employment Tax Return form you file
Only one box for the employer’s Employment Tax Return is to be checked in Line A; Part I.
Not Indicating that you are a New Business
Check either Yes or No, in Line B; Part I on whether the business started on or after January 1, 2020.
Not Using Actual Dollar Amounts in Part II
Part II should be completed using dollar amounts, not the number of eligible employees. All lines in Part II should be completed with an actual dollar amount.
Mistakes in the Math for Computational Fields in Part II
Double-check if you have computed the numbers correctly for the below lines. Working with numbers can be tricky.
Line 4, Part II: Add lines 1, 2, and 3
Line 7, Part II: Add lines 5 and 6
Line 8, Part II: Advance requested. Subtract line 7 from line 4. If zero or less, don’t file this form.
Not Keeping Track of Previous Filing Numbers
Part II of Form 7200, is where the Credits and Advance Requested is calculated. It is important you keep track of Total Advanced Credits and Federal Employment Tax Deposits reduced from previous filings of this form for the quarter as the accrual numbers are to be entered.
A Missing Signature
Sign the form. Unsigned forms will be automatically rejected. If it is filed by a paid preparer, the preparer must sign the form. With TaxBandits, you can easily e-sign your form. We won’t let you forget!
Ignoring reconciliation with Employment Tax Return
You will need to reconcile your advanced credits and reduced deposits on your employment tax return. If your business files Form 941, Employer’s QUARTERLY Federal Tax Return, you must account for the advanced credits requested through Form(s) 7200 for that quarter.
It is worth noting that TaxBandits maintains the records of the forms filed with them. The data is stored securely in the cloud and can be retrieved anytime, anywhere.
Check out the FAQ from the IRS about COVID-19-related tax credits for required paid leave and other common Form 7200 errors.