Is the promise of an Employee Retention Tax Credit refund too good to be true? It may be!
By Jessica A. Distel, CPA, MBA – Managing Director of Business Services and Development
Employers across the county continue to be flooded with solicitations in the form of emails, cold calls, and articles promising large Employee Retention Tax Credit (ERC) refunds. In News Release IR-2022-183, the IRS has warned employers to be cautious of third parties who may have taken an improper position on the employer’s eligibility for the tax credit and may be stating that the employer is entitled to a large refund when, in fact, they may not.
Qualifying for a 2020 ERC Refund
If your business is eligible for the Employee Retention Tax Credit, it is not too late to claim the refund. Under the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Consolidated Appropriations Act 2021 (CAA 2021), qualified employers can claim a credit of 50% on employee qualified wages paid from March 13, 2020, through December 31, 2020. To qualify for the 2020 tax year, the employer must have been in business during 2020 and the business either had to be fully or partially suspended due to governmental orders caused by the Coronavirus pandemic or had a reduction in gross receipts of at least 50% when comparing a quarter in 2020 to the same quarter in 2019. Employers who qualify can claim a credit of 50% of up to $10,000 of qualified wages paid per employee in 2020. This means an eligible employer could claim up to $5,000 per employee for the 2020 tax year.
Qualifying for a 2021 ERC Refund
The ERC was also extended into the 2021 tax year through the Taxpayer Certainty and Disaster Relief Act of 2020, the American Rescue Plan Act of 2021, and the Infrastructure Investment and Jobs Act. To qualify for the 2021 tax year, the business either had to be fully or partially suspended due to governmental orders caused by the Coronavirus pandemic or had a reduction in gross receipts of at least 20% when comparing first, second, or third quarter in 2021 to the same quarter in 2019. Employers who qualify can claim a credit of 70% of up to $10,000 of qualified wages paid per employee per quarter through September 30, 2021. This means an eligible employer could claim up to $7,000 per quarter per employee (or up to $21,000 for 2021 per employee). Employers that qualify for the ERC can claim the credit even if they received a PPP loan, so long as the ERC and PPP forgiveness are not claimed for the same wages.
Further Guidance from the IRS Regarding ERC Eligibility and Improper Claims
Seems pretty straight forward, right? Not exactly! The IRS released Notice 2021-20, a 102 page document that was intended to provide further guidance for the ERC eligibility, better define terms such as “governmental orders” and “full or partial suspension of trade or business operations,” and Q&As to review specific situations where facts and circumstances could reasonably conclude that a business was partially suspended and, hence, eligible for the ERC. It seems that it was Notice 2021-20 that led to many third parties taking overly aggressive and potentially inappropriate stances regarding a taxpayer’s eligibility.
In regard to improper ERC claims, the IRS has warned:
Businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit. 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. 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.
Contact Buckingham Advisors for More Information
As always, if you have questions regarding the ERC and if your business is eligible, please reach out to one of our team members in the Tax & Business Services Department at Buckingham Advisors. We will be happy to review your unique facts and circumstances.