The Employee Retention Credit (ERC) was established as a temporary coronavirus relief measure to assist businesses in retaining employees. Since then, the ERC has been significantly expanded – and, in the most recent relief bill headed to President Biden for signature, the ERC has been extended through the end of 2021. This is excellent news for employers and employees alike.
Congress has provided billions of dollars in tax relief to businesses that retain employees through the ERC. ERC tax credits can help businesses that can’t afford to pay their employees and keep their doors open. We’ve seen businesses get tens of thousands and hundreds of thousands of dollars in tax credits (a significant benefit for employees and their families who keep getting paid). Far too many business owners make incorrect assumptions about whether their business qualifies for the ERC and how to properly document their eligibility for the ERC in order to pass muster with the IRS.
Top Ten Employee Retention Credit Mistakes and their solutions are listed below
1. I am not eligible to claim ERC if I have previously claimed PPP (or gotten my PPP loans forgiven)
You can now claim both! Congress eliminated the restriction on claiming only one or the other in the Consolidated Appropriations Act (CAA) of 2021. PPP costs 2.5 times your monthly payroll expenses and is intended to be spread over six months. This leaves a significant amount of unclaimed wage expenses for ERC purposes.
2. My business did not experience a 50% or greater decline in gross receipts.
The CAA has changed the criteria so that a 20% reduction now qualifies. BUT keep in mind that there is another way to qualify for the ERC – if your business has been suspended in whole or in part as a result of a government order – see the next point.
3. During the pandemic, my business was not shut down.
Even a partial suspension of your business by the government (federal, state, or local) may qualify. For example, a partial shutdown, a disruption to your business, inability to access equipment, limited capacity, shutdowns of your supply chain or vendors, reductions in services offered, hours reduced to accommodate sanitation, shutting down some locations but not others, and shutting down some members of a business are all scenarios that may still qualify for the ERC. The critical questions are: was your business unable to continue operations in a comparable manner as a result of the government-ordered partial (or complete) suspension, and did this result in a negative impact on business operations? Bear in mind that the partial or complete suspension is a separate method of qualifying for the ERC from the reduction in gross receipts test.
4. Because my business was deemed essential, I am ineligible due to its suspension.
Even if your business is deemed essential, you may still qualify if there is an impact or change in your business. For instance, if your business was open but your vendors were closed or you were unable to visit a client’s job site, you may still qualify. Alternatively, you may qualify if a portion of your business was deemed non-essential and was impacted by a government-ordered suspension. The scenarios discussed in Mistake 3 may also apply here.
5. My business has grown during quarantine; this is not a risk I should take.
Fantastic news! If your business expanded during quarantine but was suspended entirely or partially, certain expenses may qualify.
6. Because our sales have increased in Q1 of 2021, I am ineligible for this credit.
With the advent of the CAA, you now have the option of determining qualification based on one-quarter prior. This means that we can assess eligibility based on revenue lost in 2020. Additionally, if you were suspended in whole or in part, you may qualify regardless.
7. We incurred losses or have no tax liability
This is a credit that is refundable. In practice, this means that any credit balance that exceeds the taxpayer’s tax liability is refunded to the taxpayer/business owner.
8. Because my business has grown to over 500 employees, I am no longer eligible for the ERC.
The restriction on employee count is based on full-time equivalent (FTE) employees, a more complicated calculation than simply counting everyone in the office. We assisted a business with 640 employees that had an FTE calculation of less than 500. Additionally, if you compensated any employees to work less than the hours for which they were compensated, the employee count restriction does not apply to those employees.
9. I am a charitable organization, and the ERC is only for businesses.
Additionally, the ERC may benefit charities – churches, non-profit hospitals, and museums, for example. Charities are frequently excellent candidates for the ERC.
10. Failure to Document – Here Comes the Taxman
The ERC is a refundable tax credit that comes with a slew of benefits. If you had to come up with a tax provision that would keep the IRS awake at night, it would be a refundable tax credit based on actual dollars. I am taken aback by the number of businesses – and their tax advisors – that believe they can simply create their own simple form, check a few boxes, and the IRS will sing a happy tune. As my drill sergeant frequently stated – “You are doing it incorrectly.”
While the ERC is unquestionably a taxpayer-friendly provision – the IRS is not simply handing out money (looking at taxpayer submissions both on the front-end and then auditing down the road). To avoid future headaches and heartaches, businesses should retain counsel too properly and completely document and paper how they qualify for the ERC.
Business owners must keep an eye out to determine whether their company qualifies for the ERC (and thus avoid missing out on this fantastic tax incentive); Excellent opportunities.