Read this if your company is eligible for the Employee Retention Credit (ERC).
The IRS and tax professionals continue to see third parties aggressively promoting ERC schemes on radio and online. The fees charged by most, if not all, of these third parties are a percentage of the ERC they feel the employer is eligible to claim. The percentage can be as low as 4-5% and as high as 20-25%, depending upon the value of the ERC to be claimed. This seems to provide these third parties with an incentive to determine if the employer is eligible for the ERC for the maximum period possible and to increase revenue it receives—even if the underlying facts may not support such a claim. We have talked with more than one employer that has been skeptical of the claims calculated by the third-party vendor. Additionally, the third parties may not inform taxpayers that wage deductions claimed on business' federal income tax returns must be reduced by the amount of the credit.
Most recent IRS warning
The IRS has issued a couple of warnings regarding these ERC schemes. The most recent warning issued on March 7 cautions that businesses should be skeptical of advertised schemes and direct solicitations promising tax savings that appear to be too good to be true. Taxpayers are always responsible for the information reported on their tax returns, and improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest. From the IRS:
"While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits," said Acting IRS Commissioner Doug O'Donnell. "Anyone who is considering claiming this credit needs to carefully review the guidelines. If the tax professional they're using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice. The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this."
ERC background
For background, the ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-19-related governmental orders or that experienced a significant reduction in gross receipts. The gross receipts test is the easiest way to document if an employer qualifies for the ERC. However, it may be difficult to meet the significant reduction threshold, especially for 2020, even when there has been a reduction in gross receipts.
On the other hand, the full or partial shutdown rules are driven by the relevant facts and require government orders to be in place limiting an employer’s ability to operate. This is the area where most third-party vendors are being extremely aggressive, if not fraudulent, in their analysis. The same third-party vendors are using OSHA and CDC guidance as the relevant government orders when, in fact, they should not be considered government orders on their own.
ERC amounts, eligibility, and limits
The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020 and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021).
For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.
There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness and certain other tax credits that will need to be considered.
IRS audits have begun
The IRS has started to audit ERC claims. We do know what the IRS expects to see when it audits an ERC claim. It is still unclear which industries or companies the IRS may target as part of its audit enforcement. It is also unclear how much the IRS may push back on ERC claims when the support for eligibility (e.g., government orders) is lacking.
Please feel free to contact Bill Enck, Kristin Courtemanche, or your BerryDunn adviser if you have any questions or would like more information.