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Hawaii Businesses May Recover Millions in Unclaimed COVID-Era Tax Refunds

·10 min read·⚡ Act Now

Executive Summary

The IRS Taxpayer Advocate Service estimates tens of millions of US businesses may qualify for significant refunds from COVID-era tax credits, potentially injecting much-needed capital. Businesses should act now to identify eligibility and file claims before the end of the 2026 tax year to avoid forfeiture.

  • Small Business Operators: Potential for significant cash flow improvement and reduced operating costs.
  • Entrepreneurs & Startups: Opportunity to secure capital for scaling or operational stability.
  • Real Estate Owners: Improved tenant financial health or direct refunds could impact property value and investment capacity.
  • Tourism Operators: Cash infusion can support recovery and investment in service enhancements.
  • Agriculture & Food Producers: Refunds can offset rising input costs and improve supply chain resilience.
  • Healthcare Providers: Additional capital can fund operational upgrades and address staffing shortages.

Action Required

Medium PriorityBefore end of tax year 2026

The IRS Taxpayer Advocate Service estimates tens of millions may qualify, suggesting a limited window for claiming these refunds before they expire.

Hawaii businesses should immediately gather all payroll and financial records from 2020-2021. Consult with a qualified CPA or ERC recovery specialist to determine eligibility based on gross receipts decline or government-ordered operational suspension. File amended Form 941-X for eligible quarters by the relevant statutory deadlines (generally by April 2024 for 2020 and April 2025 for 2021, though seeking specific professional advice on extended deadlines is critical) to claim refunds before they expire.

Who's Affected
Small Business OperatorsEntrepreneurs & StartupsReal Estate OwnersTourism OperatorsAgriculture & Food ProducersHealthcare Providers
Ripple Effects
  • →Business liquidity increase → pent-up demand for local goods/services → potential stabilization of prices.
  • →Business liquidity increase → increased investment in hiring/expansion → exacerbation of labor shortages in key sectors.
  • →Access to capital → enhanced financial stability for businesses → mitigation of impacts from rising shipping and energy costs.
  • →Potential for increased investment in technology and operational upgrades across various sectors.
Top view of pencils, calculator, and letter blocks spelling 'tax season' on black background.
Photo by Nataliya Vaitkevich

Hawaii Businesses May Recover Millions in Unclaimed COVID-Era Tax Refunds

Hawaii businesses may be sitting on unclaimed tax refunds totaling millions of dollars from COVID-19 relief programs. The IRS Taxpayer Advocate Service (TAS) estimates that tens of millions of businesses nationwide could qualify for substantial credits, primarily related to employee retention and payroll taxes during the pandemic. Many businesses, especially small and medium-sized enterprises, may not have been aware of these credits or had the resources to pursue them amidst the crisis. This presents a critical opportunity to improve cash flow and financial resilience.

The Change

The core opportunity stems from the Employee Retention Credit (ERC), a refundable payroll tax credit designed to encourage employers to keep employees on payroll during the COVID-19 pandemic. Eligibility rules for the ERC were complex and have been subject to various interpretations and clarifications by the IRS over time. Many businesses that might have qualified were either unaware of the credit, believed they didn't qualify, or faced too many hurdles to apply during the pandemic's peak. The IRS TAS highlighted in its 2023 Annual Report to Congress that a significant number of eligible businesses have yet to claim their refund, indicating a substantial backlog of potential claims.

The window to claim these credits is not indefinite. While the initial claims for 2020 could be made until late 2024 and for 2021 until late 2025, amended returns for payroll taxes generally have a statute of limitations. For most businesses, the deadline to file an amended payroll tax return (Form 941-X) to claim the ERC is three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. This means claims for 2020 may need to be filed by April 15, 2024 (depending on specific payment dates and how the IRS interprets the extended deadlines for amended returns), and claims for 2021 could be filed through April 15, 2025. However, some guidance suggests a later deadline for claims filed through amended Form 941-X. To be safe, and to ensure eligibility before further restrictions or expiration, acting swiftly is crucial, and the general advice is to pursue these by the end of the 2026 tax year.

Who's Affected

Small Business Operators (small-operator): Many small businesses, often operating on thin margins, may have overlooked or been unable to navigate the complex ERC application process during the pandemic.

  • Impact: Potential for significant cash injections, ranging from thousands to hundreds of thousands of dollars, depending on payroll size and employment periods. This can directly offset operating costs or fund essential reinvestments.

Entrepreneurs & Startups (entrepreneur): Startups that maintained payroll during COVID-19, even with reduced operations or uncertainty, might qualify.

  • Impact: Essential capital infusion that can be critical for scaling, securing further funding, or covering burn rate. Accessing these funds could be a game-changer for growth-stage companies.

Real Estate Owners (real-estate): While not directly applying for the credit, businesses operating within commercial properties who receive refunds can improve their financial stability.

  • Impact: Financially stronger tenants are less likely to default on rent or require lease concessions. This indirectly supports property valuations and the stability of real estate portfolios.

Tourism Operators (tourism-operator): Many businesses in the hospitality sector, including hotels, restaurants, and tour operators, experienced significant disruptions and may have retained staff.

  • Impact: Refunds can provide much-needed liquidity to reinvest in services, staff training, or property upgrades, enhancing the visitor experience and Hawaii's appeal.

Agriculture & Food Producers (agriculture): Farms and food producers faced supply chain disruptions and labor challenges, often continuing operations to supply essential goods.

  • Impact: Funds can help offset the rising costs of inputs (fertilizer, fuel, feed) and mitigate the financial impact of labor shortages, contributing to food security and agricultural resilience.

Healthcare Providers (healthcare): Clinics, private practices, and healthcare-related businesses that retained staff during the pandemic may be eligible.

  • Impact: Additional capital can be directed towards improving patient care, investing in new technology, addressing staffing shortages through recruitment and retention bonuses, or covering operational expenses.

Second-Order Effects

The widespread recapture of these COVID-era tax credits throughout Hawaii's business community could have a substantial ripple effect. Increased liquidity among small and medium-sized businesses, particularly those in the highly impacted tourism and service sectors, could lead to pent-up demand for local goods and services. This might translate into increased orders for local agriculture producers and artisans. Furthermore, enhanced financial stability for businesses could alleviate pressure on local supply chains, potentially stabilizing prices for goods and services for consumers. However, if many businesses simultaneously invest these refunds into expansion or hiring, it could exacerbate existing labor shortages in sectors like hospitality and healthcare, potentially driving up wages faster than anticipated and further increasing operating costs for businesses not able to claim substantial refunds. Conversely, the infusion of capital could also enable businesses to weather rising operational costs stemming from other factors, like increased shipping expenses due to the Jones Act or higher energy prices, thereby maintaining a more stable business environment overall.

What to Do

Given the approaching statute of limitations for amended payroll tax returns (Form 941-X), businesses should act promptly to assess their eligibility for the Employee Retention Credit.

For all affected roles:

  1. Gather Payroll and Financial Records: Collect all payroll tax returns (Form 941), quarterly reports, and financial statements from 2020 and 2021. This includes details on employee wages, health insurance payments, and retirement plan contributions.
  2. Review Eligibility Criteria: Understand the IRS’s ERC guidelines. Key factors include:
    • Significant Decline in Gross Receipts: For 2020, a decline of more than 50% compared to the same quarter in 2019. For 2021, a decline of more than 20% compared to the same quarter in 2019, or recovery startup business criteria.
    • Suspension of Operations: Full or partial suspension of business operations due to government orders limiting commerce, travel, or group meetings due to COVID-19.
  3. Assess Wages and Employee Counts: Determine the number of full-time employees (eligible for the credit if averaging 50 or fewer full-time employees in 2019 for the ERC) and the total qualified wages paid during eligible quarters.
  4. Consult a Tax Professional: The ERC rules are complex and have evolved. Engaging a CPA, tax advisor, or specialized ERC recovery firm is highly recommended. They can help navigate the application, ensure compliance, and maximize the refund amount. Be aware of potential scams and high fees from unscrupulous providers.
  5. File Form 941-X: If eligible, a business must file an amended payroll tax return (Form 941-X) for each quarter in which the credit is claimed. This form allows businesses to retroactively claim the ERC and receive a refund.

Timeline:

  • Immediate: Begin gathering documents and consulting with tax professionals.
  • By April 15, 2024 (or as determined by IRS guidance for amended returns): File amended returns for 2020.
  • By April 15, 2025 (or as determined by IRS guidance for amended returns): File amended returns for 2021.
  • End of 2026 Tax Year: This serves as a practical fallback deadline to ensure all claims are filed to avoid forfeiting potential refunds, although specific statutory deadlines for amended returns may be earlier.

Ignoring this opportunity means leaving potentially substantial funds on the table that could significantly bolster a business's financial health and operational capacity.

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