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By Rick Meyer, CPA, and Frank Tirelli
In March 2021, Employee Retention Credit was extended through Dec. 31, 2021, and expanded, as part of the American Rescue Plan Act of 2021 (ARPA).
But many CPAs do not fully understand the nuances and complexities of this expanded law, and because of that, are not properly educating and helping their clients with this large, refundable credit.
So, what’s the misunderstanding about this credit? Let’s review.
The Employee Retention Credit is a tax credit first put in place last year as a temporary coronavirus relief provision to assist businesses in keeping employees on payroll. It has definitely helped, as businesses have received tens and hundreds of thousands of dollars in tax credits. This cash flow has provided a night-and-day difference for those companies struggling to keep employees on payroll and their doors open.
Still, we have seen many companies close their doors—perhaps because they didn't fully understand the credit.
The Top 10 Mistakes and Misunderstandings Surrounding the ERC
1. My client can’t claim ERC if they’ve already claimed PPP (Paycheck Protection Program) or received their PPP loans forgiven.
Now you can claim both. Congress, in the Consolidated Appropriations Act (CAA) of 2021, removed the limitation on only claiming one or the other. PPP will only account for 2.5 times your monthly payroll expenses and is meant to be spread out over six months. This leaves plenty of uncovered wage expenses for claiming ERC.
2. My client’s business did not have a drop in gross receipts of 50 percent or more.
The CAA has changed the qualifications so that a reduction of 20 percent now qualifies. But remember there is also another way to qualify for the ERC—if your business has been subject to a partial or full suspension due to a government order (see the next point).
3. My client’s business was not shut down during the pandemic.
Even a partial suspension order by the government (federal, state or local) of your client’s business could potentially qualify. For instance, a partial shutdown, a disruption in their business, inability to access equipment, having limited capacity, shutdowns of their supply chain or vendors, reduction in services offered, reduction of hours to accommodate sanitation, shut down of some locations and not others, and shutdowns of some members of a business are all scenarios that still potentially qualify for the ERC. The key considerations are: Due to the government ordered partial (or full) suspension is or was your client’s business not able to continue its activities in a comparable manner, and did that result in a more than nominal impact on their business operations? Remember, the partial or full suspension is an alternative way to qualify for the ERC, separate from the reduction in gross receipts test.
4. My client’s company was deemed an essential business, so they do not qualify because of business suspension.
Even if your client’s business is deemed essential, an impact or change in their business may still qualify them. For example, even if they were open, but their vendors were closed or they couldn’t go to their client’s job site, they may still qualify. Alternatively, if part of their business was considered non-essential and was impacted by a government-ordered suspension, they may also qualify. The scenarios discussed in Nov. 3 above could apply here as well.
5. My client’s company has grown during quarantine, so this isn’t something they should take.
Great news! If your client’s company has grown during quarantine, but experienced a full or partial suspension, there are expenses that may qualify.
6. Sales have rebounded for my client in Q1 of 2021, so they can’t qualify for this credit.
With the introduction of the CAA, you have the option to look at one quarter prior to determine qualification. This means we can determine eligibility based on lost revenue in 2020. Also, if your client was subject to a full or partial suspension, they may qualify regardless.
7. My client was in losses, or they do not have any tax liability.
This is a refundable credit. In practice, this means that any credit overage above tax liability is sent to the taxpayer/business owner as a refund.
8. My client’s company has grown to over 500 employees, so they are not eligible for the ERC.
The employee count restriction is based on full-time equivalent (FTE) employees, which is a more involved calculation than just counting everyone in the office. We helped a business with 640 employees and the FTE calculation put them at under 500. Furthermore, if your client paid any employees to NOT work, or to work less than the hours for which they were paid, then the employee count restriction would not apply for those employees.
9. My client is a charity and the ERC is only for businesses.
The ERC also may provide significant benefit to charities, including churches, nonprofit hospitals, museums, etc. Charities can be particularly good candidates for the ERC.
10. Failure to document.
There are still many tax advisers who think that they can just create their own simple form. They check a few boxes, give a few sentence explanation and expect the IRS to hand over thousands and thousands of dollars on a silver platter and then play audit lottery? Guess again. We’ve talked with former senior IRS officials and it is clear that the best practice is for businesses to provide contemporaneous documentation now, when first determining whether they qualify. To avoid headaches and heartaches down the road, they need to have counsel to properly and fully document how their business qualifies for the ERC.
Many companies are still struggling to stay open and there is so much business uncertainty due to COVID-19 and the variants. What affect will this have on your client’s business? Do they have enough cash to make it another month, quarter or year?
CPAs are qualified to educate and help their clients get a cash infusion and be that value-added, trusted professional who can give them a chance to survive. The ERC is a fantastic tax incentive that could make this happen.
Rick Meyer, CPA, MBA, MST is a member of the Illinois CPA Society and has served on various tax committees for more than 40 years. He is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives.
Frank Tirelli is vice chair of professional services at alliantgroup and advises the firm’s executive management team on strategic and client service initiatives.