We have talked in the past about the Employee Retention Credit (ERC). Now you can’t listen to the radio without hearing adds saying that employers can get a $26,000 credit per employee. These adds are generally coming from ERC mills, some of which are taking improper positions related to the credit.
AS A REFRESHER, LETS TALK ABOUT WHAT THE EMPLOYEE RETENTION CREDIT IS?
Good idea. The ERC was started back in March 2020 as a way for businesses affected by the pandemic to get a payroll tax credit for keeping employees on the payroll. The maximum credit for 2020 was $5,000 per employee for the year. But the maximum credit was increased for 2021 to $7,000 per employee and the credit was available for each quarter. So if the business qualified for 2020 and for all three quarters of 2021, the maximum credit could be as much as $26,000 per employee.
HOW DID THE COMPANY QUALIFY?
There were two ways to qualify. The first way to qualify was based on gross receipts per quarter. A company would take their quarterly gross receipts in 2020 and 2021 and compare those gross receipts to the same quarter in 2019 and if the gross receipts decreased, the company would qualify for that quarter. For 2020 the gross receipts had to have been reduced by 50% compared to the same 2019 quarter and in 2021 the gross receipts had to have been reduced by only 20% compared to the same quarter of 2019.
WHAT WAS THE SECOND WAY TO QUALIFY?
The second way to qualify if a company did not have a large enough decrease in gross receipts was if the company was affected by the pandemic. These parts of the rules were not defined very well and this is where the majority of the improper positions are being taken.
Some companies are taking the position that any supply chain, government orders or recommendations from health care officials are enough to justify taking the credit. The IRS has now come back to say many of those are not proper.
WHAT DID THE IRS SAY?
The IRS actually put out news release last month to be wary of third-party vendors who are taking improper positions and may be taking credits when the company does not actually qualify for it.
The IRS reminded businesses that to be eligible for the credit, they must have-
- Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority.
- Experienced a decline in gross receipts like we talked about earlier
- Qualified as a recovery startup business.
HAVE YOU NOTICED THE IRS ACTUALLY LOOKING CLOSER AT THE CREDIT?
Yes for sure. What we have seen is that any smaller credits are being processed within 5-8 months. But any larger credits are being heavily scrutinized and may take more than a year to process. In certain cases the IRS is even requesting additional information to make sure the credit it legitimate.
This is where it is important to talk to the accountant who knows your business and not one only coming in to calculate and prepare a one-time credit and then moving on to the next business.
Be sure to talk to one of our professionals if you have any questions regarding the employee retention credit.