By now, we have been in contact with most/all of our business clients who have payroll regarding the Employee Retention Tax Credit (ERC). If we haven’t spoken to you directly, be assured that we have already started qualifying your company and will be contacting you shortly to let you know the results and plan if there is a next step.
Important items to be aware of:
Payroll of family members are not allowed in the ERC calculation. This includes spouses, children, parents, etc. Also, payroll that was allocated to your PPP loans is not eligible.
You have to pay income taxes on the amounts that you receive from the credit. The amounts you receive from the ERC are considered to be a refunded credit against payroll and payroll tax expenses that were deducted on your business and personal tax returns in 2020 and 2021. Therefore, the IRS requires your 2020 and/or 2021 business and personal tax returns to be amended. This will disallow the expenses reimbursed and create taxable income from which you must pay the applicable federal and state income taxes.
We are aware that most of the outside companies who are advertising preparation of the ERC have not given full disclosure on the amended returns and subsequent paying of income taxes. From the IRS:
IR-2022-183, October 19, 2022
WASHINGTON — The Internal Revenue Service today warned employers to be wary of third parties who are advising them to claim the Employee Retention Credit (ERC) when they may not qualify. Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit.
These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.
If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
**Please, if you are a business client of SKP Advisors and received the ERC from another company, let us know so that we can file the appropriate amendments.**
Is the ERC still worth it if we have to pay fees and taxes on the credit? Yes, very much so. You should plan on keeping 45-50% of the proceeds to help your business get through the COVID issues.
What is the chance of a subsequent audit by the IRS? These outside companies are sprouting out of nowhere and being extremely aggressive with what constitutes a COVID disruption in your business. When the ERC application process is over, most of these companies will disappear as quickly as they appeared so please be aware that if your ERC application does get audited by the IRS, there is a very good chance that the company will not be in existence to help defend your case.
From an article by Dean Zerbe on Forbes.com, ERC: Top Ten Mistakes of Business Owners:
The Tenth Mistake – Failure to Document – The Taxman Cometh
The ERC is a refundable tax credit – providing robust benefits. If you had to draw up a tax provision that makes the IRS lie awake at night – it would be a refundable tax credit involving real dollars. I am blinked at the number of businesses – and their tax advisors – I see who believe that they can just create their own simple form, check a few boxes and the IRS will whistle a happy tune. As my drill sergeant would say (often) – “You are doing it wrong.”
While the ERC is certainly a taxpayer-friendly relief provision – the IRS is not just giving dollars away (looking at taxpayer submissions both on the front-end and then auditing down the road). In talking with the former senior IRS officials I work closely with at alliantgroup, it is clear that the best practice is for business to provide contemporaneous documentation now – when first determining whether they qualify. To avoid headaches and heartaches down the road – businesses need to have counsel to properly and fully document and paper how the business qualifies for the ERC.
Business owners need to be eyes open as to whether their company qualifies for the ERC (and not miss out on this terrific tax incentive); and also eyes open on ensuring that their business crosses “t’s” and dot “i’s” to make sure that the IRS is in a happy place. Good opportunities.
A Few Basics of the ERC
What is the ERC?
ERC is a stimulus program designed to help those businesses that were able to retain their employees during the Covid-19 pandemic.
Established by the CARES Act, the ERC is a refundable tax credit – a grant, not a loan – that you can claim for your business. The ERC is available to both small- and mid-sized businesses. It is based on qualified wages and healthcare paid to employees.
- Up to $26,000 per employee
- Available for March 13 – December 31, 2020 and 3 quarters of 2021
- Qualify with decreased revenue or COVID event (government shutdown, etc.)
- No limit on funding
- ERC is a refundable tax credit
- PPP loans reduce wages eligible for credit.
How much money can you get back? You can claim up to $5,000 per employee for 2020. For 2021, the credit can be up to $7,000 per employee per quarter.
How do you know if your business is eligible? To qualify, your business must have been negatively impacted in either of the following ways:
- A government authority required partial or full shutdown of your business during 2020 or 2021. This includes your operations being limited by commerce, inability to travel or restrictions of group meetings.
- Gross receipt reduction criteria is different for 2020 and 2021, but is measured against the current quarter as compared to 2019 pre-COVID amounts.
- A business can be eligible for one quarter and not another.
Initially, under the CARES Act of 2020, businesses were not able to qualify for the ERC if they had already received a Paycheck Protection Program (PPP) loan. With new legislation in 2021, employers are now eligible for both programs.
SKP Advisors is ready and willing to help you maximize the benefits of the ERC. Contact us today.