As businesses navigate the economic aftermath of the COVID-19 pandemic, many are seeking relief through programs like the Employee Retention Credit (ERC). However, the complexity of the ERC program, combined with misinformation from certain promoters, has led to potential erroneous claims. In this guide, we outline the warning signs identified by the IRS and offer guidance on rectifying incorrect claims to avoid future complications.
First, what is the Employee Retention Credit?
The Employee Retention Credit (ERC) – sometimes referred to as the Employee Retention Tax Credit or ERTC – is a quarterly tax credit available to certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. This credit is applied against the employer’s share of certain payroll taxes, including social security taxes.
The ERC is unique in that it is a refundable tax credit, meaning it not only reduces tax liability but can also result in a tax refund if the credit amount exceeds the tax owed. Designed to alleviate financial burdens caused by the pandemic, the ERC aims to provide much-needed relief to businesses facing economic challenges.
How does it work?
For 2020, the ERC is 50% of the wages paid up to $10,000 per employee, i.e., up to $5,000 per employee per quarter for wages paid between March 12, 2020, and December 31, 2020, maximum $20,000 per employee for 2020.
The ERC has also further been made available for all four quarters of 2021, up to $7,000 per quarter, 70% of the first $10,000 of wages paid per employee. Also, the level of qualifying business disruption has been reduced so that a 20% decline in gross receipts during a single quarter will make a business eligible, for a maximum yearly benefit of $28,000 per employee.
What are the warning signs the IRS has seen?
Too many quarters being claimed: Some promoters have encouraged businesses to claim the ERC for all quarters, regardless of eligibility. It's essential for businesses to carefully review their eligibility for each quarter and ensure compliance with the ERC guidelines.
Government orders that don’t qualify: Misinformation surrounding government orders has led some businesses to believe they qualify for the ERC based solely on the existence of any government order in their area. However, specific criteria must be met, including the suspension of operations due to a government order related to the COVID-19 pandemic.
Too many employees and incorrect calculations: Claiming the ERC for all wages paid to every employee without proper calculation can lead to overclaiming. Employers must adhere to the ERC guidelines regarding qualified wages, dollar limits, and varying credit amounts for different tax periods.
Business citing supply chain issues: Qualifying for the ERC based on supply chain disruptions alone is rare. Employers must ensure that their supplier’s government order meets the necessary requirements outlined by the IRS.
Business claiming ERC for too much of a tax period: Claiming the ERC for the entire calendar quarter when only a portion of the quarter was affected by a government order is incorrect. Employers should review their claims to avoid overstating qualifying wages.
Business didn’t pay wages or didn’t exist during the eligibility period: Employers can only claim the ERC for periods when they paid wages to employees. Claims made for periods before the existence of the business or when no wages were paid will likely be disallowed by the IRS.
Promoter assurances of no risk: Businesses should be cautious of promoters who guarantee no risk in claiming the ERC. Incorrect claims can lead to repayment requirements, penalties, interest, audits, and additional expenses for resolving the claim.
How to resolve incorrect ERC claims?
Voluntary Disclosure Program: The special program runs through March 22, 2024, and allows eligible participants to repay their incorrect ERC, minus 20%. Businesses that are not eligible for ERC but have received it – as a check that’s been cashed or deposited, or in the form of a credit applied to a tax period – may be able to participate in this program.
Withdraw the claim: The withdrawal option lets certain employers withdraw their ERC submission and avoid future repayment, interest, and penalties. Businesses can use this option if they haven’t received the payment, or they've received a check but haven’t deposited or cashed it. By withdrawing the claim, if a taxpayer’s withdrawal request is accepted, the IRS will treat the claim as though it was never filed. They should not cash or deposit their check. They can withdraw the claim, return the check and avoid penalties and interest. +
Resources and Tools:
The IRS provides various resources to help businesses understand ERC eligibility, including frequently asked questions on ERC, an interactive ERC Eligibility Checklist that tax professionals and taxpayers can use to check potential eligibility for ERC, and a printable guide.
Should you require further guidance or assistance in navigating the Employee Retention Credit (ERC) or rectifying any incorrect claims, don't hesitate to reach out to Ascend Finance. We are available to provide consultation and support to ensure compliance with ERC guidelines and mitigate any potential IRS complications. Contact us today for expert assistance tailored to your business needs.
Here are a few high-level eligibility highlights I summarized to help you understand this further:
The ERC is available to eligible employers that paid qualified wages to some or all employees between March 12, 2020, and January 1, 2022.
Eligibility criteria vary depending on the period, including full or partial suspension of operations due to government orders, decline in gross receipts, or qualification as a recovery startup business.
To see whether your business is eligible for the ERC, start by determining whether:
The business was fully or partially shut down due to a governmental order during any part of 2020, or
The business’s gross receipts in any quarter of 2020 declined 50% or more relative to the same quarter of 2019. If the answer to either question is YES, and the business had 100 or fewer employees, then any wages paid to any employee while the business was fully or partially shut down or during a quarter that it had a 50% decline in gross receipts may count towards the $10,000 per employee amount.
You may be able to claim the ERC even if you received a PPP loan.
In conclusion, while the ERC provides much-needed relief for businesses, it's crucial to ensure compliance with eligibility criteria and avoid erroneous claims. By being aware of these warning signs and utilizing available resources, businesses can rectify any incorrect claims and mitigate potential IRS complications. However, if you are an eligible business, do not hesitate or miss the opportunity to claim this generous credit, you deserve it. The deadline to claim ERC for 2020 is April 15 of 2024. Only six weeks left, so hurry up!
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