Employee Retention Credit: Warnings and Wisdom

  • Tax strategies
  • 11/29/2022

Key insights

  • There is still time for eligible employers to claim the ERC on the amended payroll returns for qualifying periods.
  • Review key considerations, and document your decision points to protect and defend your claim with the IRS.
  • If you're not eligible or have already received funds, other relevant opportunities are still available to your business

Looking to assess whether you qualified for or still could claim the ERC benefit?

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While almost all COVID relief programs have run their course, it’s worth your time to keep an eye on the employee retention credit (ERC) — whether you’ve already claimed the benefit, are considering it, or even brushed it off thinking it didn’t apply due to limited or evolving guidance.

Claiming the ERC

If you meet the eligibility criteria and paid eligible wages during qualifying periods, the ERC is still available to claim on an amended payroll tax return for three years after the original filing deadline.

This gift of time allows you to properly assess your eligibility to claim up to $5,000 per employee in 2020 or $7,000 per employee per quarter for the first three quarters of 2021.

Review key considerations, including, but not limited to, those below. Document your decision points to protect and, if necessary, defend your claim with the IRS.

  • Can you prove you experienced a significant decline in gross receipts or were subject to a full or partial suspension of operations?
  • If you were under a full or partial suspension of operations, can you point to the governmental order that triggered your suspension of operations, as well as produce records used to determine whether the order had a more than nominal effect on your operations?
  • Have you computed and documented your average number of full-time employees in 2019, in order to demonstrate whether you qualify as a large employer subject to limitations of available wages?
  • Do your credit computations include wage amounts and show how qualified health plan expenses were calculated?
  • If you are a member of an aggregated group, can you show how aggregation affected the eligibility for and distribution of the ERC?
  • If you received a Paycheck Protection Program (PPP) loan, have you analyzed your wage allocation across PPP loan forgiveness and ERC?

Some challenges remain:

  • There is limited guidance concerning the IRS safe harbor for qualification under a partial suspension of business operations.
  • It is taking 9 – 12 months or longer to process amended forms and issue refunds.
  • Federal income tax returns must be amended to add the credit amount back to the wage expense in the year the credit was generated, instead of the year the credit was claimed or received.
  • The IRS may audit your refund and potentially disallow it — if you are determined ineligible for the credit, you will have to repay it along with interest and possibly penalties.

Avoid bad actors

Be aware of bad actors. On October 19, 2022, the IRS warned taxpayers to be cautious of vendors approaching employers saying the ERC is “easy money” and “everyone is entitled to claim.” These vendors don’t always appear to properly factor eligibility, follow IRS Notices and Revenue Procedures, or calculate wages paid as a large employer.

In addition, these bad actors may fall short on key qualities to support you. For example, they may not be able to appear before the IRS, may not retain documentation supporting the credit, and may not account for the risk of an uncertain tax position requiring proper reporting in your financial statements.

Other opportunities are available

Many employers are wondering how they can still receive benefits in the current economic recovery period. While not all federal tax credit programs are as lucrative or refundable like the ERC, there are many impactful, long-term opportunities, including the Work Opportunity Tax Credit, Federal Empowerment Zone credits, and training programs for employers investing in their workforce.

Many states enhanced their state credits and available discretionary benefit programs. It is imperative employers meet with qualified advisors to understand these opportunities as well as the processes in place to capture them.

How we can help

It’s not too late to revisit your eligibility and file a claim or assess whether you are or were eligible for the ERC. CLA’s team understands the factors impacting eligibility for the credit and recognizes which wages can be used to accurately compute the credit.

We can fully document each step and provide a thorough narrative of your shutdown when needed. And, as we uncover further clarity on how ERC IRS audits are proceeding, we can help you understand the types of questions being asked and how to make wiser decisions on filing.

Additionally, we can work with you to identify other areas of savings and opportunities for your organization.

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