New Questions People Are Asking About ERC
Thought Leadership by KBKG
Originally published 5/1/2023, updated 10/10/2023
On September 14th, 2023, the IRS took the significant step of suspending the acceptance of new ERC claims until at least December 31st, 2023. This was in response to mounting concerns about the integrity of the Employee Retention Credit (ERC or ERTC) program.
Many clients may inquire about the employee retention tax credit this season, even more now that the IRS has enacted the moratorium. Despite the IRS pause for fraud concerns, there is a large number of companies in the process of finalizing legitimate ERC claims, and still more that haven’t considered their ERC eligibility. This guide briefly details what timely questions or concerns your clients may ask about the ERTC tax credit.
What is the Latest News About the ERTC?
As a CPA, you play a vital role in helping clients navigate the changing ERC landscape. To support them, follow these steps:
- Stay informed: Check the IRS website and trusted sources regularly.
- Review and update records: Help clients maintain complete, accurate, and up-to-date records.
- Provide compliance assistance: Guide clients through new IRS procedures and documentation requirements.
- Offer audit support: Help clients during an IRS audit by representing them and ensuring that requested documentation is available.
The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in…. “The further we get from the pandemic, the further we see the good intentions of this important program abused. The continued aggressive marketing of these schemes is harming well-meaning businesses and delaying the payment of legitimate claims, which makes it harder to run the rest of the tax system. This harms all taxpayers, not just ERC applicants.
Danny Werfel, IRS Commissioner, Sep 14, 2023
Has Anyone Received ERC Refunds This Year?
In short, the answer is yes, people have received ERC refunds this year and continue to receive claims that were in-process when the moratorium took effect. At KBKG, we provide comprehensive support for your ERC claims. Here’s what you can expect from us:
1. Strict Adherence to IRS Rules:
We prioritize strict adherence to IRS rules and guidelines. We welcome increased IRS scrutiny as it helps eliminate questionable practices. Rest assured; we will produce claims that align with the IRS’s rigorous compliance criteria.
2. Helping Taxpayers Correct ERC Claims:
If you have previously filed claims with ERC providers known for taking aggressive or incorrect positions, we can assist you in bringing those claims into compliance.
3. Compliance Reviews:
We offer thorough compliance reviews for existing ERC claims, ensuring they meet all requirements.
4. Evaluation of Control Group Aggregation Rules:
One crucial aspect of determining eligibility is correctly applying control group ownership aggregation rules. We will assess whether these rules were applied accurately.
5. Identifying Compliance Red Flags:
Our expertise extends to recognizing compliance red flags, such as ambiguous shutdown orders or insufficient documentation.
At KBKG, our unwavering commitment to precise adherence to IRS regulations and diligent compliance reviews will give you a reason to be confident in your claims or to begin the process of correcting incorrect claims to avoid the stress of waiting for IRS questions for illegitimate claims.
What Disqualifies You From ERC?
The Employee Retention Credit (ERC) is a US tax credit program that encourages businesses to keep paying their employees during COVID-19. Some rules for the ERC changed from 2020 to 2021, but certain factors may prevent a business from claiming it.
1. If a business received a PPP loan, they were initially not allowed to claim the ERC for the same time period. However, the rules have since changed. Now, qualifying businesses can claim the ERC in 2020 and 2021, even if they received a PPP loan.
2. Governmental Entities: Federal, state, and local government entities are typically not eligible for the ERC.
3. Shutdown or Suspended Operations: If a business was not subject to a full or partial suspension of operations due to a government order related to COVID-19, it may not be eligible for the ERC unless it had a significant decline in gross receipts.
4. Significant Decline in Gross Receipts: A business must demonstrate a significant decline in gross receipts to qualify for the employee retention credit. The percentage of reduction required can vary depending on the period. You may not be eligible if your business did not experience a significant decline in gross receipts during the specified periods.
5. Large Employers: Some ERC rules differentiate between “large employers” (those with over a certain amount of average full-time employees in 2019) and “small employers” (those under the same threshold). Large employers may have more limited eligibility for the credit. The definition of “large employers” uses a 2019 average full-time employee count, and increased from 100 full-time employees for 2020 credits to 500 full-time employees for 2021 credits.
6. Affiliated Entities: Affiliated entities and control groups for tax purposes may have limitations on claiming the ERC. Eligibility must be determined on a combined basis, so it is important to consider ownership and other management factors if an owner is involved in more than one business.
What Are the Warning Signs of Misleading ERC Actors?
Anytime there are wildly aggressive suggestions that the IRS is giving away money to businesses affected by COVID shutdowns, it is most likely a dubious marketing tactic not to be trusted. The IRS has released several warnings this year about the ERC bad actors. The latest IRS warning is full of red flags that taxpayers must know. It’s critical to remember that businesses that improperly receive the Employee Retention Tax Credit will have to repay the credit with considerable interest and penalties.
From the IRS directly,
Warning Signs of Aggressive ERC Marketing
- Unsolicited calls or advertisements mentioning an “easy application process.”
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
- Preparers seeking anonymity by refusing to sign the ERC return being filed by the business as well as supplying their identifying information and a tax identification number. Similar to “ghost preparers,” this limits the risk to just the taxpayer claiming the credit.
- Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group’s tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
Leaving Out Key Details
The IRS highlights that ERTC third-party promoters regularly leave out key details about eligibility requirements. We stand behind all IRS guidelines and feel it necessary to share what the IRS is messaging.
- Leaving out key details. Third-party promoters of the ERC often don’t accurately explain eligibility requirements or how the credit is computed, and they do not share their workpapers with the businesses claiming the credit. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances.
- For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
- Also, the promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business’s federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.
Supply Chain Disruptions Do Not Qualify for the Credit
We wrote about Supply Chains in depth in two different blogs published in August, ERC Eligibility for Supply Chain Disruption and Supply Chain Disruption – How to Get Compliant for the ERC. According to the IRS, the only qualification where a supply chain disruption makes a business ERC-eligible is if, “Employers that experienced supply chain disruptions qualify for ERC only if they had to suspend their business operations because their suppliers were unable to provide critical goods or materials due to a government order that caused the supplier to suspend its operations.”
There are a limited number of examples that can qualify if a supplier was under a government ordered shutdown, but general supply chain disruptions and delays that most businesses experienced during 2020 and 2021 will not meet the qualifying threshold.
What Are Qualified Wages for the ERTC?
The Employee Retention Credit was part of the original Coronavirus Aid, Relief, and Economic Security Act of 2020. It was extended several times by additional laws passed in 2020 and 2021. The IRS offers a helpful comparison chart showing how the credit works for each year:
- Credits under the CARES Act cover March 13 to December 31, 2020.
- ERC claims under the Relief Act of 2021 cover January 1 through June 30, 2021.
- The American Rescue Plan and the Infrastructure Investment and Jobs Acts extended the 2021 eligibility period cutoff date to September 30, 2021.
- The IIJA extends the credit to “recovery startup businesses” that paid wages between July 1, 2021 and December 31, 2021.
Employers meeting these guidelines can claim this credit for wages paid during those years. Qualified wages are those subject to FICA taxes. Eligible employers with less than an average of 100 full-time employees in 2019 may take the credit for all employees paid wages in 2020. However, the IRS clarifies that “wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can’t be claimed for the ERC in any tax period.” It’s important to consider ERC and PPP interplay when determining the credit amounts per employee.
Do tips qualify for the employee retention credit? According to IRS Notice 2021-49, you can include tips — provided they meet the other qualified wage criteria.
How Does the IRS Determine Eligible Employers?
Employers may take the ERC if they meet specific guidelines. The IRS states that they must meet one of three distinct criteria:
- Sustained a “full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority“
- Impacted by “a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 20212021.“
- Qualified in the third or fourth quarters of 2021 as a “recovery startup business.”
Ineligible businesses that take ERTC tax credit may face significant consequences.
What is included as gross receipts for the gross receipts test?
Generally, any source of income will count towards gross receipts, and they must be measured on a calendar quarter basis and the same accounting basis as the tax return (e.g., cash, accrual, percent completion, etc.). These receipts are not reduced by cost of goods sold or other expenses.
For for-profit companies, this includes sales (net returns and allowances), income from investments, services, and from all incidental or outside sources.
For tax-exempt entities, gross receipts is the gross amount received by the organization from all sources without reduction for costs or expenses.
For aggregated groups (multiple companies under common control), the gross receipts test is determined based on the gross receipts of the entire group. It is essential to consider common ownership before considering a company’s eligibility.
How Do You Calculate Qualified Wages for the Employee Retention Credit?
You can easily calculate the ERC yourself. The IRS permits up to 50% of the qualified wages of an eligible employee during the calendar year, up to a maximum of $5,000 per employee in 2020.
You’ll use a different formula to calculate qualified wages for the Employee Retention Credit 2021. It’s 70% of qualified wages that you paid to an eligible employee, up to $10,000 qualified wages per quarter. Employers earning this credit may take up to $7,000 quarterly per employee.
Do Family Members of Owners Qualify for Employee Retention Credit?
Unfortunately, family members of majority owners do not qualify for the ERC. Family members include children, siblings, step-siblingsstepsiblings, parents, grandparents, step-parents, aunts, uncles, nieces, nephews, most in-laws, and individuals that live in the majority owner’s household.
Do S-Corp Owners and Shareholder Wages Qualify?
S-Corp owners may ask, “Do I qualify for the employee retention credit?” Unfortunately, wages paid to S-Corp majority owners do not qualify. The IRS defines a majority owner as someone who owns over 50% of a corporation’s value. Non-owner employees of an S-Corp can qualify.
Where Can You Get Trusted ERTC and Tax Information?
Certified public accountants turn to KBKG for critical information on ERTC and other complex tax issues. Need assistance? Request a proposal or call (877) 525-4462..
- Supply Chain Disruption – How to Get Compliant for the ERC
- Employee Retention Tax Credit – Benefit Estimate
- Where is My Employee Retention Credit Refund?
- KBKG Tax Insight: IRS warns Taxpayers of Improper Employee Retention Credit Claims and ERC Mills
- KBKG Tax Insight: IRS To Target Abusive ERTC Claims. Analysis of Government Shutdown & Supply Chain Rules
- It’s Not Too Late to Claim Employee Retention Tax Credits
- The Employee Retention Tax Credit (ERC): What Small Businesses Need to Know