What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC), in a nutshell, is a refundable tax credit specifically designed for businesses who retain their employees during times of financial strife. The driving force behind it was the recognition of the hardships many faced during unprecedented circumstances like the COVID-19 pandemic.
If we were to simplify it down to its core, it’s essentially a way for businesses to receive some form of financial relief by maintaining their workforce when they could otherwise be forced into layoffs or reductions. The ERTC provides incentives in the form of tax credits – amounts that are directly deducted from what they owe in federal taxes.
However, it’s essential to understand that this isn’t simply a case of keeping your employees and receiving a tax break. There are specific qualifications and calculations involved – factors such as significant decline in gross receipts or full or partial suspension due to government orders come into play.
Understanding these intricacies and how they apply to your unique situation is paramount, as you’re ultimately responsible for these tax credit claims. There might be many so-called “experts” out there offering advice on ERTC claims, but understanding the fundamentals yourself will enable you to make informed decisions about how best to navigate this process.
Whether you’ve been brushing up on your ERTC knowledge through Google searches or you’re a seasoned CPA looking for efficient ways to serve your clients ethically, always remember – knowledge is power when it comes to understanding and leveraging programs like the ERTC.
How Confident Are You In Your ERTC Eligibility?
Watch Our Video Explaining the Fraud We’ve Seen From National ERC Promoters
Who is eligible to claim Employee Retention Tax Credits?
Almost every type of business and non-profit organization in the US can claim the Employee Retention Credits as long as they had W-2 employees on payroll during the pandemic, and paid payroll taxes on those employees.
Furthermore, tribal governments and tribal entities that carry on a trade or business may be eligible for ERTC as long as they meet the other qualifying criteria. However, many tribal entities are comprised of and many different legal entities and the rules around aggregation for these entities is a bit more complex. We will discuss aggregation later.
What businesses are NOT eligible for Employee Retention Credits?
Federal, state and local governments and their instrumentalities (such as public schools) are not eligible for these credits. Additionally, religious organizations do not contribute payroll taxes for clergy, and so wages paid to clergy are also not eligible for these credits. However, wages paid to other employees of a religious organization are eligible.
Is a single-member LLC eligible for Employee Retention Credits?
A single-member LLC is certainly eligible for ERC. It doesn’t matter if the business is organized as an LLC, LLP, sole proprietorship or corporation. It also doesn’t matter whether the business pays its taxes as a disregarded entity (meaning the tax liability flows through to the owner’s personal tax returns, such as a partnership, S Corporation or sole proprietorship) or if the business pays taxes directly.
Are wages for the owner of an LLC eligible for Employee Retention Credits?
Any wages paid to a majority owner or any of their relatives working in the business are not eligible for ERTC’s. Even if the owner or relatives are W-2 employees and the company contributes to their payroll taxes, the IRS has specifically disallowed any credits for owners or their relatives.
In a practical sense, the IRS is not allowing the person with control over finances to manipulate wages to benefit themselves and their family at the expense of taxpayers. But more broadly speaking, this disallowance is because of other areas in the tax code have been written to disallow credits in this instance and the CARES Act referenced these other rules when defining the rules for ERTC.
Are wages for 50/50 partners eligible for Employee Retention Credits?
Yes. In the case of a 50/50 partner, since neither owner is a majority owner, their wages are eligible for ERTC and so are the wages of any relatives working as a W-2 employee.
Importantly, if a husband and wife are each 50% partners (and they jointly own 100%), the IRS considers the pair to share constructive ownership. Therefore, the married couple should each be considered to own 100% of the company.
When a husband and wife each own their own business, how does this affect their ERTC eligibility?
Because of the IRS rules around constructive ownership, each spouse inherits the same ownership percentage as the other spouse. Therefore, in this example, each spouse is considered to own 100% of both their business and their spouse’s business.
This is a tricky situation where aggregation must be considered, even though it may not appear that way at first.
If one spouse is a 50/50 partner in a business with an unrelated partner, and the other spouse owns 100% of their own business, this will avoid aggregation because neither of the spouses is a majority owner of both businesses.
How do I qualify for ERC?
To qualify for Employee Retention Credits you must first pass a test of employee headcount size.
If you pass that test, you must then pass one of two criteria. One criteria is a calculation of your decline in revenue from before the pandemic. This test is objective. No judgment required. It is simply math.
The second criteria is subjective in nature and requires you to assess the impact of governmental orders on your business.
You must only pass one criteria, not both.
Am I an Eligible Employer for ERC?
Before considering the two criteria for qualification, you must first determine whether you are an Eligible Employer by calculating the average headcount of your full-time employees in 2019.
The exception to this would be any business that began operations after February 15, 2020, in which case you qualify for the ERC as a Recovery Startup Business and we will discuss that later.
If you averaged less than 101 full time W-2 employees in 2019, then you are an Eligible Employer in both 2020 and 2021. If you averaged between 101 and 500 full time W-2 employees in 2019, then you are an Eligible Employer for only 2021.
We calculate this “average headcount” by looking at the number of employees each month who provided more than 130 hours of service. You then average the number of full-time employees for each month across the entire year.
To be clear, these headcount thresholds define you as “Eligible”, but not necessarily “Qualifying”.
This headcount test is merely the first hurdle to overcome.
If you had more than 500 full time employees in 2019, then you will only be eligible if you paid employees to stay home and not work – and we are not covering those situations in this Guide.
Let’s be honest, if you had more than 500 full time employees in 2019 and you paid people to sit at home and not work, then you have likely already found an accounting professional to assist you with these claims.
Once you determined you are an Eligible Employer for either 2020 or 2021, now let’s determine when you qualify . . .
For what periods do I qualify for ERTC?
This first subjective criterion is a significant decline in gross receipts.
For whichever quarters you qualify based on this criteria, you will qualify for the entire quarter. Therefore, all wages paid during the qualifying quarter will be available for use in calculating the credits.
For 2020, a significant decline in gross receipts meant a drop of more than 50% in any quarter compared to the same quarter in 2019.
In contrast, for 2021, the threshold was reduced to just a 20% decline. And this decline in gross receipts did not have to be attributed to the pandemic. This is a purely mathematical test.
We have had clients who closed a location late in 2019 or early 2020, before the pandemic, and that closure meant they had a drop in revenue when comparing to the revenue in 2021.
What is the alternate quarter election for ERTC for 2021?
Alternatively, for 2021 there is added flexibility with an alternate quarter election.
If you had a decline of more than 20% in gross receipts in the immediately preceding quarter compared to the same quarter in 2019, this will also automatically qualify you.
We will take this example to the extreme and consider a business who was on the rebound late in 2020, but not quite yet back to their pre-pandemic revenue levels.
Let’s assume that in Q4 of 2020, you saw a revenue drop of 25% compared to Q4 of 2019. When deciding whether you qualify for ERC in Q1 of 2021, you can elect to consider that previous quarter, which in this case is Q4 of 2020.
Since Q4 of 2020 was down more than 20% compared to Q4 of 2019, you can claim qualification for Q1 of 2021 – even if Q1 of 2021 had revenue that met or exceeded the revenue in Q1 of 2019.
For businesses with inconsistent revenue, this alternate quarter election could prove to be a boon. We have seen clients who are down in Q4’20, up in Q1’21, down in Q2’21, and up again in Q3’21. Because of the alternate quarter election, they can qualify for ERC for all three quarters of 2021.
How does the IRS define gross receipts for purposes of the ERC?
The IRS defines gross receipts as all cash coming into your business, whether that is due to a sale of assets, normal operations, rent, dividends, interest or royalties.
For non-profit organizations, this could also include receipt of grants.
Also of note, the IRS requires that your reporting of gross receipts correspond with how you report receipts on your income taxes or other reporting requirements – meaning if you pay taxes on an accrual basis, then you need to consider the quarterly comparisons below using accrual accounting.
Can I still qualify if I did not have a significant decline in gross receipts?
Yes, you can also qualify for the Employee Retention Credits if your business experienced a full or partial suspension of operations.
Remember, your business was not required to suffer a significant decline in gross receipts and a suspension of operations – it is one or the other; either / or.
How does the Internal Revenue Service define a full or partial suspension of operations?
If your business was required to limit its operations due to a governmental order, then your business would qualify for the time period that the governmental order was in effect and you were following those orders.
As an example, if your restaurant had to limit indoor dining capacity to 75% of capacity from April 1, 2020 until May 15, 2020, then for those 45 days, wages paid to your employees would be eligible for the Employee Retention Credits.
Indoor dining capacity of a restaurant is just one example. Other examples may include the government place a curfew on when you could be open, which was fewer hours than you were open pre-pandemic. Other examples could be if your business had to close its doors completely and your employees were required to work from home. However, telework does not automatically qualify your business; and in fact, the presumption by the IRS is that if you were able to telework, then you are not considered suspended.
Can essential businesses qualify even though they could remain open during Stay-at-Home orders?
In March 2021, the IRS published IRS Notice 2021-20 to clarify their position and provide more examples of a “full or partial suspension of operations”. This guidance included examples and FAQ’s to assist taxpayers with applying the legislation to their business as Congress intended.
Key language from that Notice said that an essential employer may qualify for ERTC if the employer had to modify its operations in order to comply with a governmental order, and those modifications resulted in a more than nominal impact on the business.
However, of import, each taxpayer’s situation is different, even when subject to the same governmental orders. Therefore, qualification for ERTC should be determined based on the facts and circumstances of each taxpayer.
One key benchmark we consider with our clients is assessing their ability to serve their customers at the same levels that they did pre-pandemic.
For example, if a medical office is unable to serve as many patients because governmental orders are limiting the turnover of patient rooms due to sanitization requirements, and that modification is effectively limiting their ability to serve 25-30% fewer patients, then these medical offices have a strong case that they were more than nominally impacted by those governmental orders.
What does the IRS mean when they say “more than nominal impact”?
Generally speaking, “more than nominal” is interpreted as 10%. However, the IRS does not qualify that with what the 10% is comparing.
10% of net profit? 10% of productivity? 10% of mental anguish?
To approach this determination in good faith, we suggest clients to consider the KPI’s (Key Performance Indicators) and how they were impacted by the required modifications.
The same metrics you use to run your daily operations, to make decisions about allocating resources, and to judge your financial performance for future investments are reasonable, numeric-based benchmarks that will support your case in the event of an audit.
Furthermore, the IRS says that only a more than nominal portion of your business must be impacted.
Therefore, if a division or segment of your business made up more than 10% of your total company revenue in 2019 (or more than 10% of your total company employee service hours), and that division or segment suffered a more than nominal impact due to governmental mandates . . . then the entire business is considered to be partially suspended.
Can you qualify for ERTC by having both a significant decline in gross receipts and suffering a suspension of operations?
Businesses often qualify based on both of the criteria even though only one criteria is necessary for qualification.
For example, businesses that suffered a significant decline in gross receipts often suffered that decline because governmental orders had a more than nominal impact on their business and partially suspended their operations.
Taking that one step further, it is common for many businesses to have been partially suspended earlier in the pandemic so they may have only qualified for a short period in 2020 when the pandemic first hit and state governments were scrambling to contain the outbreak.
But those same businesses still had a 20% decline in gross receipts in 2021 as compared to 2019, and so they will then qualify for quarters in 2021 due to the declines, although most governmental orders had been lifted.
What are the most common mistakes when determining ERC eligibility?
Oblivious to Aggregation Requirements
The lack of aggregation when determining eligibility is one of the most common (and most detrimental) mistakes that we see from clients who file their own ERC claims or work with their payroll company.
Aggregation is when more than one business is owned (or controlled) by the same person (or small group of people), which requires that all those businesses under shared ownership to be treated as a single employer.
The definitions of aggregation can become rather complex when considering companies who own other companies, wherein a parent company then might have multiple subsidiaries.
The easiest example is one we discussed earlier where one individual is the majority shareholder of two companies. In that case, the companies must be aggregated together and treated as a single employer.
When we combine that with constructive ownership for a married couple, a husband who owns one business and a wife that owns another business . . . constructively they each own 100% of each other’s businesses. Therefore, they should be treated as a single employer when determining eligibility.
Beneficial and Detrimental Examples of Aggregation
Aggregating multiple businesses requires that you are taking a new look at full time headcount in 2019, significant declines in gross receipts and a more than nominal portion of the combined business being impacted by governmental orders.
An example of a client beneficially impacted was a gentlemen who owned a large construction company with 60 full time employees in 2019. The business flourished during the pandemic as the governmental orders had very little impact on their operations.
The same gentlemen also owned a restaurant with 15 full time employees in 2019. This restaurant was in Texas and suffered indoor dining restrictions due to Executive Orders until March 10, 2021.
The decline in gross receipts for the restaurant was offset by the increase in gross receipts at the construction company. However, because the indoor dining restrictions partially suspended operations of the restaurant, the entire aggregated group was partially suspended, including the construction company.
The Employee Retention Credits for the construction company were five times larger than the credits for the restaurant, despite the construction company not qualifying on its own.
This next aggregation example was detrimental to the client.
The husband solely owned a chain of 12 dental offices in Oklahoma. The wife owned a successful interior design firm that flourished during the pandemic after the initial wave of contagion subsided.
The husband’s dental offices in Oklahoma had a short two month period in 2020 when they could only perform emergency procedures, but his gross receipts still took a significant hit for most of 2020. His revenue finally recovered in Q1 of 2021.
The wife’s interior design firm also took a hit in Q2 and Q3 of 2020, but was back to pre-pandemic levels by Q4 of 2020.
When they came to us, this husband and wife team thought they should each qualify for three quarters in 2020. They had already worked with their payroll company to claim credits for Q2 of 2020, but they wanted our help claiming ERC for Q3 and Q4 2020 since we could better optimize the allocation of wages to both ERC and PPP. (We’ll cover more of that allocation process later.)
Unfortunately, the dental offices used Paychex and the interior design firm used ADP. Neither knew about the other, but the husband and wife team could attest to the fact that their revenues were down more than 50% in Q2 of 2020, and didn’t return to 80% of 2019 levels until Q4 of 2020.
By all accounts, they were correct and neither payroll company had any reason to not process these claims.
However, when considering headcount in 2019, the dental offices had 96 full time employees and the interior design firm had 8 full time employees.
The aggregated group now had 104 full time employees, thus only making them an Eligible Employer for 2021, and not 2020.
And to make matters worse, although one quarter of 2021 is worth more than all of 2020, they didn’t even qualify for one quarter of 2021.
Not only were we unable to prepare ERC claims for Q3 and Q4 of 2020, but we had to advise them to file new amended returns for Q2 of 2020, and to repay a bit more than $325,000 to the IRS that they had already received.
Avoid Big Aggregation Mistakes
Bottom line: If you or your spouse have ownership interest in more than one business, seek the assistance of a CPA who specializes in ERC to ensure you’ve determined eligibility properly.
Can you qualify for ERC due to supply chain disruption?
While you can qualify for ERC due to a supply chain disruption, the fact that you had a supply chain disruption does not automatically qualify you.
In fact, based on an internal IRS memo issued by the Chief Counsel’s Office in July 2023, there is an even higher presumption now that you probably do not qualify because of a supply chain disruption and this is an area the IRS auditors are particularly keen to expose.
Unfortunately, ERC promoters have used the “supply chain disruption” position as click-bait in their mass market TV ads, mailers and cold calls. It was an easy pitch because virtually every business in America has experienced supply chain disruptions since the pandemic began.
“Supply chain disruption” has never been its own criteria for qualifying, but rather it was part of the expansive definition of a “partial suspension of operations” defined in IRS Notice 2021-20.
Contextually, it was only one FAQ that was expanded and interpreted as liberally as possible for these ERC promoters to give it a life of its own.
As pointed out by the IRS recently, most supply chain issues were not caused by direct governmental orders, but rather the indirect effects of a national workforce paralyzed by fear of outbreak, kids home from school needing care, and safety protocols in the event of symptoms or close contact with those infected.
So then how does a business qualify for ERC based on supply chain disruptions?
For a business to qualify for ERC based on supply chain disruptions, the business must be unable to source critical goods or materials from their vendor because the vendor’s operations are suspended due to governmental orders. The business must also be unable to source the parts from an alternate supplier, and must not have a suitable replacement part to exchange for the part they cannot obtain.
The fact that prices increased many multiples and made it economically not profitable to source parts from other vendors is not a defense to this argument.
Additionally, vendors being unable to source materials or raw goods because of the backlog of imported goods at US ports does not constitute a disruption due to governmental order.
As noted by the IRS, ships were not stuck out at sea because a governmental order closed the ports. But rather, the shortage of truck drivers and longshoremen created the backlog. These workers were dealing with the same sickness, fear of sickness and children being home due to school closures that everyone else dealt with.
In the event of an IRS audit, the IRS auditor will expect that you can prove that the parts you were unable to procure:
resulted in a more than nominal impact to your business,
could not be sourced from an alternate supplier,
that your supplier had operations suspended due to governmental order; and,
which governmental orders and dates impacted your supplier.
How is the amount of ERTC calculated?
What makes the ERC calculation complex?
Beyond determining the qualifying dates, the explanation of the math above seems rather simple. But the devil is lurking in the details as we break down each part of this equation.
What are qualifying wages for the Employee Retention Credit?
Qualifying wages include the cash compensation paid to employees and group health insurance premiums paid during the qualifying period. This does not include any severance payments.
Naturally, this leads to our next question . . .
What is the qualifying period for the Employee Retention Tax Credit?
The qualifying period for ERTC are the exact dates that a business meets one of the two criterion for qualifying: either a significant decline in gross receipts or a full or partial suspension of operations.
More specifically, when defining the qualifying period, we are identifying specific dates.
If you are qualifying for a quarter due to a significant decline in gross receipts, then all wages + health insurance premiums paid for the entire quarter quarter will be included.
However, if you are qualifying due a full or partial suspension of operations, then you only qualify for those dates when the governmental order was in effect and when you were more than nominally impacted. Whenever either of those conditions is false, you are no longer in the qualified period.
Can you claim ERTC if you received PPP?
Yes. Receiving a Payroll Protection Program (PPP) Loan no longer precludes a taxpayer from also claiming ERC for qualifying wages.
When the CARES Act was first introduced, businesses had to choose one or the other.
Most small businesses chose PPP because the math worked out to be larger checks than ERC.
When did the rules for claiming ERC and PPP change?
When President Trump signed the Consolidated Appropriations Act in December 2020, this restriction was lifted and taxpayers who previously received PPP Loans could now also claim Employee Retention Credits if they were indeed Eligible Employers and met the qualifying criteria.
The only stipulation was the taxpayers could not “double-dip” the government funds.
Essentially, you could not pay wages with a PPP Loan . . .have that loan forgiven . . . and then earmark those same wages as qualifying wages for ERTC.
Common Mistakes When Coordinating PPP and ERTC
Proceeds from PPP loans had to be used for certain types of expenses, and a minimum of 60% of the loan had to be used for payroll.
Additionally, loan recipients had to expend these funds with 24 weeks. This was called the “Covered Period”.
In their authoritative guidance, the IRS says wages that were paid for with forgiven PPP loans cannot be claimed for ERTC.
Unfortunately, many payroll companies and CPA’s have misread the IRS guidance on coordinating PPP funds with ERTC qualifying wages.
We continue to see these other preparers blocking off all payroll dates during the 24 week Covered Period, and telling taxpayers they cannot claim ERTC for any wages paid during that time.
But that is simply not true.
If you paid $100,000 in payroll during the 24 week Covered Period, but your PPP Loan Forgiveness Application (Form 3508) noted that only $30,000 of wages was needed to fully utilize the loan and qualify for forgiveness . . . then you had $70,000 of wages still available as qualified wages for ERTC.
Tips for Getting the Most ERTC Refund Yourself
The single best method for maximizing your legal ERTC refunds is to optimize the allocation of wages to PPP and ERTC.
In the topic above we discussed mistakes that some CPA’s and payroll companies are making by disallowing qualifying wages for the entire PPP Covered Period.
But that is only the first step in what can potentially be an opportunity as large as your initial PPP loan amount.
If you choose to tackle this yourself, remember that dollars are fungible and PPP loan proceeds can be allocated to wages in whatever method you choose, as long as you do not exceed the thresholds established by the Small Business Administration.
For example, wages paid to relatives of majority owners are not eligible for ERTC, but they were eligible for PPP. Therefore, allocate as much of their wages as you can to PPP.
By the PPP rules, that means you could allocate as much as $46,150 of a relative’s wages to PPP if you elected to use a 24-week Covered Period. Of course, that is assuming they earned at least $46,150 in W-2 earnings during that period.
This was how much could be utilized for PPP Forgiveness, despite the original PPP Loan only requesting $20,833 based on that employee’s 2019 wages.
(This difference occurs because the PPP loan amount was based on 10 weeks of payroll in 2019, but forgiveness was then based on wages paid during a 24 week Covered Period.)
Another example is when we consider wages for individual employees who made over $10,000 (for all of 2020 or per quarter in 2021). Since only the first $10,000 can be qualifying wages for ERTC, all wages above $10,000 can be applied to PPP forgiveness.
For highly compensated individuals, this allows you to cover large chunks of PPP forgiveness within the upper boundary of $46,150 per individual.
Depending on how the math works, this could then mean that lower paid employees have all their wages available to ERTC and none is being applied to PPP forgiveness.
Our firm breaks down the “potentially” qualifying wages by employee and by day for the entire ERTC qualifying period and PPP Covered Period. This allows us to allocate wages by employee and by day with such precision that we know we have maximized their ERTC refunds without running afoul of the PPP Forgiveness rules.
If you are executing this yourself, I would highly suggest that you do the same thing.
Operating at this level of detail has the potential to recover as much as your entire PPP Loan amount; although, we typically it is not that large. And the financial impact is largest in 2021 because the $10,000 limitation on qualifying wages resets for each quarter in 2021.
When is the deadline to apply for ERC?
The deadline to retroactively apply for Employee Retention Credits is in April 2024 for claims related to 2020, and April 2025 for claims related to 2021.
Employee Retention Credits are claimed on the Form 941 Quarterly Payroll Tax Return. Since you have three years from the end of a reporting year to amend that return, you then have until 2024 and 2025 to file that amendment using a Form 941-X.
However, we are advising taxpayers to not wait until the last minute because Congress could pass legislation to close the program early.
Historically, we would have said this is highly unlikely and would require an act of Congress . . . and then in November 2021, Congress passed the Infrastructure Investment and Jobs Act and terminated the Employee Retention Credit program for the fourth quarter of 2021.
This was particularly surprising considering we were halfway through that quarter and businesses had already claimed credits and withheld payroll tax deposits because they knew they would qualify (because of the alternate quarter election . . . a 20% decline in Q3’21 vs Q3’19 meant they would automatically qualify for Q4’21).
Side Note: ERTC is still available in Q4’21 for Recovery Startup Businesses that we will cover later.
If you see anyone still talking about preparing your Form 7200 to claim your credits, run far and fast. This was a form used in 2020 and 2021 to request an advance of cash for these credits, but you still had to claim the credits themselves on a Form 941 or Form 941-X. We’ve seen preparers still talking about the Form 7200 and that is a sure sign that they are not truly an expert on this process.
How long does it take to get ERC refunds?
Most taxpayers see ERC refund checks in 6 to 9 months. However, this has been a constantly moving target since late 2021 and recent changes at the IRS may increase this turnaround time.
For the longest time, the IRS was holding large refund checks for a secondary review. Then in December of 2022, they finally released these checks and many taxpayers were seeing refund checks in as little as 16 weeks.
However, the IRS has recently changed their target processing timeline from 90 days to 180 days. This longer timeline will allow them to execute fraud prevention measures and identify potentially problematic filings prior to issuing checks.
Can new businesses that started in 2020 receive ERTC?
In one of the later iterations of the ERC program, the idea of a Recovery Startup Business was introduced.
If a business began operations after February 15, 2020, and averages less than $1 million of annual revenue over a three year startup period, then they automatically qualify for ERTC for the 3rd and 4th quarter of 2021.
The qualifying period is defined as all of Q3 and Q4 of 2021.
Qualifying wages are defined in the same way as other ERC claimants, and the credit amount is 70% of those qualifying wages with the cap of $10,000 of qualifying wages per employee per quarter.
Almost everything is exactly the same as the normal ERC calculations, except the credits for each quarter are capped at a total of $50,000.
And of minor note, Line 31b needs to be checked on Form 941-X or else the IRS will reject your claim as a Recovery Startup Business.
Biggest Mistakes to Avoid When Claiming ERTC
Understanding How You Qualify for ERC
In the event of an IRS audit, the agent has an expectation that the taxpayer was involved in claiming this credit.
While you hopefully engaged a tax professional to assist you, knowing “why” you qualified is important to the IRS agent. This is especially important since determining eligibility is such a nuanced area and there is an abundance of ERC promoters who have been overpromising to their clients that they qualify.
These promoters have been reckless in their advice and hide behind their fine print saying “We do not provide legal or tax advice.”
In the eyes of the IRS, the taxpayer is always responsible and so if you have not been schooled on your qualification criteria by your tax professional, you should challenge them now.
If they say you are qualifying due to a full or partial suspension of operations, just remember the questions you will have to answer are:
What governmental orders required you to modify your operations?
How did those modifications result in a more than nominal impact to your business?
For what dates were those orders effective and cause the more than nominal impact to your business?
Not Applying Aggregation Rules for ERC
Too many businesses fail to consider aggregation.
It could help you.
Or it could hurt you.
But either way, it is not an option to be had.
You cannot elect to aggregate or not.
You are required to aggregate, and this is one of the areas highlighted when the IRS sends their audit requests.
Not Coordinating PPP Forgiveness with ERTC Qualifying Wages
There’s two ways this can go poorly for you:
You block out too many wages for PPP and deny yourself qualifying wages for ERTC that you could be eligible for, or;
You fail to account for forgiven PPP funds at all, incorrectly claim credits against disallowed wages resulting in an accuracy penalty from the IRS in the event of an audit.
Either way, you are ultimately costing yourself more money, time and stress . . . so just take the time to be meticulous and precise in coordinating PPP funds and ERTC qualifying wages.
Not Documenting Your Position Upfront for an ERC Audit
In the event of an IRS audit, the IRS expects that you understood the position you were taking and the refund claims you were making prior to filing the Form 941-X to claim the credits.
If there is any subjective interpretation of your eligibility, documenting your position upfront is evidence that you made a good faith effort to understand the legislation and honestly apply the legislation to the facts and circumstances of your situation.
This is why a Circular 230 Legal Opinion from a tax professional can be critical to particularly complex or nuanced cases requiring a great degree of subjectivity.
Since tax professionals have the experience of interpreting and applying the law to the facts and circumstances of unique cases, their professional experience allows them to assign a degree of comfort to their opinion.
In order for a tax preparer to assist a taxpayer in claiming the ERC, the tax preparer must be of the opinion that the taxpayer has a reasonable basis to take the position that they have. For this purpose, “reasonable basis” means that the tax preparer believes the taxpayer has at least a 20% chance of winning an audit with the IRS.
However, if a taxpayer is found to be unable to support their position with the IRS, they will likely be assessed penalties . . . and accuracy and underpayment penalties for payroll taxes add up quickly.
If a tax preparer is able to reach an opinion that the taxpayer has at least a 40% chance to win an audit against the IRS, then this is called “substantial authority”.
When a tax professional can provide a level of assurance to substantial authority, this can help the taxpayer to avoid penalties in the event that they lose an IRS audit. Essentially, the taxpayer had reasonable cause to believe the position they took because they relied upon the expertise of a tax professional who executed a level of work required to support the substantial authority opinion.
Taxpayers must be vigilant when they engage a tax professional to assist with their ERC claims because the ERC promoters who are advertising “audit-proof” documentation will not help in defending the subjective positions on eligibility. Instead, their audit support begins and ends with the calculation of qualifying wages and preparation of credits on the Form 941-X’s.
Has the IRS stopped processing new ERTC claims? (updated Sept 15, 2023)
No, the IRS has only paused processing new claims but the ERTC program has not ended.
Yesterday the IRS announced a moratorium on processing all new ERTC claims until at least January 2024. The moratorium was announced yesterday but we don’t know the precise cut-off time.
(Are they using a postmark date of 9/14 or only files that were stamped as received by 9/14?)
Either way, at this point, it is obvious that the IRS has to get their arms around this.
Let me be clear, the IRS has not ended this program early.
And we continue urging eligible taxpayers to get their Form 941-X’s filed with the IRS.
You want to be first in line when they do resume processing Form 941-X’s received after 9/14/23.
While I’m obviously disappointed for the prolonged wait on your refunds, as a taxpayer I am glad to see the IRS is finally taking all these scammy ERTC promoters to task and protecting legitimate ERTC claimants.
The level of fraud in this space is outrageous and they should have taken these steps last year.
If you are working with our Firm, I am happy to walk through how you qualified.
I’ve been the most conservative ERC practitioner in the country (losing partnerships because I denied too many clients eligibility), and you deserve to feel 100% confident about your decision to claim these credits. I wouldn’t sign my name as a Paid Preparer if I wasn’t confident.
Can you get an ERC Eligibility Review from a CPA who is an ERC expert?
Absolutely! Our Founder and Chief Compliance Officer, Jace Campbell, CPA, can review your eligibility criteria and provide you comfort that you have a legitimate ERC claim. Or unfortunately, provide you insight as to why you may not qualify and what you should do next to protect yourself.
Every taxpayer deserves to sleep easy at night knowing they were legitimate in their ERC claims.
Many of these ERC promoters told you that CPA’s were “unable” to apply the subjective criteria for limited commerce and that we were denying eligibility because we didn’t understand.
While that may certainly be the case with some CPA’s who never focused on Employee Retention Credits and wanted to avoid giving advice that created liability, that is not true of every CPA.
In fact, Mr. Campbell has personally signed over 9,000 amended payroll tax returns, for clients from all industries and qualifying under both sets of criteria.
However, Mr. Campbell has also denied eligibility to thousands of prospective clients who did not have a legitimate case and only approached our firm because ERC promoters on TV were telling everyone they qualified if they were at all impacted by the pandemic, even if only a supply chain disruption.
For the last two years, Mr. Campbell has been the “bad guy” denying clients ERC who don’t qualify.
But if you are one of his thousands of clients that did qualify, he is certainly the “good guy” who helps you to sleep easy at night knowing your claims are legitimate and supportable in the event of an audit.
Two New IRS Programs to Pay Back Your ERTC
Fraud has become so prevalent that the IRS is launching two new programs to allow taxpayers to voluntarily pay back their ERTC refunds without penalty, or withdraw their claims before receiving illegitimate refunds.
If you have any questions about your qualifying criteria, please let me know. I am happy to walk through how you qualified. I’ve been the most conservative practitioner in the country (losing partnerships because I denied too many clients eligibility), and you deserve to feel 100% confident about your decision to claim these credits. I wouldn’t sign my name as a Paid Preparer if I wasn’t confident.
However, I am sure you have friends and peers who signed with an ERC promoter (like Innovation Refunds, BottomLine Concepts, Synergi Partners, ERC Specialists, or Mr. Wonderful’s WonderTrust) and they may be very worried right now.
Unfortunately, for many of their clients, this “Pay-Back Your ERTC” program may be a lifeline for hundreds of thousands of small businesses who have been duped by “ERC experts” who told them they qualify without anything substantive to back up those claims.
No one wants to hear that they are not legitimately eligible and would fail an IRS audit. However, given the ramped up audit efforts of the IRS to uncover these bad actors, I think most business owners would prefer to play by the rules and give money back to the taxpayers to avoid penalties and interest.
(Fun side story: We secret-shopped a large ERC company you see on TV and they told us we qualified for $1.2m with zero governmental orders and an increase in revenue simply because we said “We had trouble hiring employees because of unemployment benefits.” What?!?”)
Don’t wait to become a statistic on the IRS’s scorecard for “Funds Recovered from Pandemic Relief”.
And if necessary, get your fees back from the ERC promoters who duped you into illegal refunds to line their own pocketbooks.