ERC UPDATES

As a small business client of ours, we want to make you aware of a few key updates and developments on the Employee Retention Tax Credit (referred to as ERC or ERTC). Many of you have reached out as you are getting more phone calls and emails regarding this program.

As a reminder, ERC was a COVID induced stimulus program that, as the name implies, provided financial incentive to employers to retain (and continue to pay) employees during the pandemic.

How to Qualify for ERC

There are 3 different ways you may be eligible for ERC

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REVENUE DECLINE

The most common (and safest) way to qualify for ERC is to demonstrate a significant revenue decline due to COVID.

You have to meet the IRS revenue decline thresholds to qualify for this approach.

For 2020, your revenue in Q2, Q3 and/or Q4 had to be down 50% compared to the same quarter in 2019;

For 2021, your revenue in Q1, Q2 and/or Q3 had to be down 20% compared to the same quarter in 2019.

Note there are exceptions to these general guidelines but the key data point is the 50%/20% decline in revenue.

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GOVERNMENT ORDER SUSPENSION TEST

This is perhaps the most controversial, subjective and risky way to qualify for ERC. It is also the main area being exploited by what the IRS refers to as "ERC mills" where companies advertise help with qualification in this area.

Per the letter of the law,

an employer can be eligible for the ERC if it experiences a full or partial suspension or modification of operations due to COVID-19-related orders from an appropriate governmental authority.

Defining and proving both a) suspension/modification of operations and b) the government order(s) that caused those operational impacts is what can prove to be very subjective and open for interpretation.

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START-UP BUSINESS

If you started a business after Feb 15, 2020 (the date the IRS deems the pandemic to have started), you can qualify for a modified ERC even though you don't meet the revenue decline or government eligibility criteria.

The credit under this approach is only available for Q3 and Q4 2020.

What if you qualify and file for ERC?

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THE GOOD...

There is big money at stake here.
For 2020 you can get up to a $5,000 ERC for each employee for the year. The credit is 50% of the employees first $10,000 of qualifying wages in Q2 - Q4 with the credit capped at $5,000 per employee for all of 2020.
For 2021, you can get up to $7,000 ERC for each employee for each quarter. The credit is 70% of the employees first $10,000 of qualifying wages per quarter for Q1-Q3 with the credit capped at $7,000 per employee per quarter for Q1 - Q3).
As a result, in total you could qualify for up to $26,000 per employee ($5,000 max for 2020 and $21,000 max for 2021)
If you qualify as recovery startup, you are capped at $14,000 per employee (only Q3/Q4 apply at $7,000 each) and the total ERC for the qualifying business cannot be more than $50,000 for each quarter.

THE BAD...

Unlike PPP, the ERC benefit is taxable to you although it is done in an "awkward" way.
Although you do not need to claim the ERC as income in the year received, you do need to reduce the payroll wages you used to qualify for the ERC by the amount of ERC credit you received. The IRS refers to this as "expense disallowance".
Speaking of PPP, you cannot use the same payroll $'s you used to qualify for PPP forgiveness to also qualify for ERC. Simple example - if all of your Q3, 2020 payroll was claimed on your PPP forgiveness application (which was approved), you cannot claim ERC in that quarter.
Generally speaking, an owner cannot qualify their wages for ERC (the logic being you did not need an incentive to keep yourself employed...)
Given current IRS backlogs, the IRS is estimating ERC claims can take from 6-12 months to process depending on the application type and amount.

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THE UGLY...

The expense disallowance cannot be done in the year you actually receive the ERC funds - you must amend as appropriate the 2020 and/or 2021 tax returns to disallow the expense. For many, this will require an amended business AND personal tax return.
Since this adjustment means you underpaid 2020/2021 taxes, you will also be charged underpayment penalties and interest (although there is good chance the penalty can be waived).
The IRS normally has a 3 year window to audit you. However, the IRS has extended the audit window to 5 years to audit any activity related to ERC (and other COVID programs like PPP).
Be wary of the ERC mills - the IRS is concerned that these firms are charging exorbitant fees up front (15%- 30% success fee of the ERC received) and may not be around if and when the IRS audits ERC and potentially reduces or disallows the credit.

Why is there increased activity on ERC now?

The main reason you may be getting more phone calls and emails now is that eligible quarters for this program start to phase out in the coming months. In order to claim ERC, you need to file an amended 941 (referred to as a 941X). By law, you have 3 years from the time an original 941 is due to file an amended 941x for that quarter.. As a result, since the first eligible quarter for ERC was Q2, 2020 (which was originally due July 31, 2020), you have until July 31, 2023 to amend Q2 of 2020 and claim the ERC. For Q3, 2020, you will have up until October 31, 2023 to file and so on..

Bottom line, expect more phone calls and more aggressive tactics it the coming months...

What's next

If you have not applied for ERC - We can (and have) helped our clients file an ERC claim due to revenue decline or startup recovery conditions. We do not have the resources or expertise to file an ERC claim under the government order suspension test so we do not provide that service. We suggest you look into the offers you may be getting and at least listen to what they have to say but ask them the tough questions like

What specific government orders are they basing your claim on? Government orders can be specific to the state, city and/or county so make sure you know why they feel you qualified.
How long have they been in business and do they give you a good feel they will still be around 5 or more years down the road to assist you if audited by the IRS?
In the event the IRS does adjust/reduce your ERC claim, what provisions are there for a partial refund in the success fees you paid up front?

If you already applied for ERC but have not received the funds - Be patient. We can have you sign a Power of Attorney to allow us to call the IRS on your behalf but given other calls we have made on these the answer will likely be the same - you just have to wait.

If you already applied for ERC and have received the funds - Be prepared to share the details with us if we did not do the ERC application for you. We will need to file the amended 2020/2021 returns on your behalf and to do so will need the 941X amendment details.