The Employee Retention Credit, or ERC for short, is a refundable tax credit offered to businesses that retained and continued to pay their employees despite the severe impacts felt during the COVID-19 pandemic. The eligible time frame was from March 13, 2020, through December 31, 2021. The purpose of enacting the ERC was to provide businesses with financial assistance because they committed to maintaining their W-2 employee workforce during the pandemic.

To delve into eligibility further, the credit is available to all employers, and size is not a factor. The only exemptions are state and local governments and their entities, or small businesses that took out a PPP loan and reported wages as payroll costs for the loan forgiveness.

Three tests must be conducted for a business to qualify for the credit. A business must meet one or more of the following:

• The business was fully or partially suspended due to a government order.
• The business’s gross receipts were below a variable percentage dictated by the quarter the claim is being made for. For example, to claim the credit in 2020, the comparison is 50% of the gross receipts of the same quarter in 2019. To see this in motion, consider an example of ABC, Inc. The company had gross receipts of $200,000 in the 2nd quarter of 2019 but had $93,000 gross receipts for the 2nd quarter of 2020.
• Qualified as a recovery startup business for the third and fourth quarters of 2021.

To claim the credit, a business can either include the information on their original tax return if one still needs to be submitted or through filing an amended tax return. A business can work with their CPA or Accountant to claim the credit, though other options are available through third-party specialty companies. However, proceed with caution! Once the ERC was announced, hundreds of fly-by-night companies popped up, promising every employer the ERC whether they could qualify or not.

The best place to begin exploring the options of claiming the ERC is to speak with your CPA or Accountant. They can conduct an initial financial review to confirm or deny your business’s eligibility. If their office does not handle the ERC credit process, he/she can at least find a valid resource to provide this assistance. If, however, you are advised by your CPA or Accountant that your business does not qualify for the credit, do not pressure them to file the claim or go elsewhere to have it done. Your trusted tax professional will know more about your business’s financial condition than some fast-talking salesman on the other end of the phone located on the other side of the country.

The IRS has issued numerous warnings against the ERC schemes that have been uncovered since the credit became available. These schemes are being conducted by businesses that promote an exclusive service to assist businesses with claiming the ERC and make their money by charging a hefty up-front fee or a fee dependent on the amount of the refund received from an ERC claim. These companies will not fully disclose all the qualifications that must be met to claim the credit, nor will they compile a supporting documentation packet proving why the company qualifies to receive the credits. They will compile amended tax returns claiming the credit, get the payment they claim is owed to them for services rendered, and then wash their hands of any further obligations. Many companies that “popped up” initially to process the ERC credits under these schemes are already out of business.

What happens if you have fallen victim to a third-party company promoting ERC claims? If you hired a company to assist with claiming the ERC credit for you and that company either did not confirm your eligibility or computed the credit incorrectly at no fault to you, the IRS has a form that can be submitted to report the company for investigation. You can complete Form 14242, Report Suspected Abusive Tax Promotions or Preparers, and either fax it to the IRS at (877) 477-9135, or mail it to the following address:

Internal Revenue Service Lead Development Center

Stop MS5040

24000 Avila Road

Laguna Niguel, CA 92677-3405

If a business falsely claimed the ERC, what happens?

It is the government’s opinion that a business has to perform due diligence with all financial affairs. Therefore, the business is responsible for researching and confirming if it can qualify for the credit. As can be expected with any “freebie” the government offers, audits of the credits claimed are now occurring. If a business improperly claims the ERC, it will be required to repay the credit, along with penalties and interest.

What if a business has a tax debt with the IRS and their ERC claim is approved?

The business will not receive a refund until the tax debt is paid. For example, if a business has a tax debt of $50,000 with the IRS and an ERC claim was approved, resulting in a refund of $23,000, the $23,000 will be applied to the $50,000 balance. If the same business with a $50,000 tax debt has an ERC credit approved of $63,000, $50,000 will be applied to the tax debt, with the remaining amount being refunded to the business.

In closing, it is always wise to conduct your own research and seek reliable assistance when it comes to your business’s taxes. If you have any questions regarding an ERC claim made that you now question, reach out to the Golden Lion Tax Solutions team for help. We can assess the qualification and, if need be, correct the claim before more harm can be caused.

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