The Good, the Bad and the Ugly with the Employee Retention Credit
The good news is that the Employee Retention Credit (ERC) remains available for employers to claim on amended payroll tax returns for qualifying periods, assuming that the businesses meet the eligibility criteria and paid eligible wages during those times. Depending on the year, the legislative construct allowed for employers who experienced a significant decline in gross receipts or who were subject to either a full or partial suspension by a government order to claim a credit on eligible wages up to a maximum amount of either $5,000 per employee in 2020 or $7,000 per employee per quarter for the first three quarters of 2021. This remains available to employers to claim by amending their payroll tax returns for three years after the original filing deadline. Because of this, employers can rest easy knowing that there is still time to amend those returns to capture the credit. In order to do so, key considerations MUST be made as part of the decision, and these considerations MUST be documented in order to protect and potentially defend the claim in the event of an IRS audit. Those considerations include, but are not limited to:
- The ability to prove that the employer experienced a significant decline in gross receipts or that they were subject to a full or partial suspension of operations.
- If under a full or partial suspension of operations, the IRS also requests:
- A copy of the governmental order which caused the full or partial suspension of operations defined by Notice 2021-20 and others; and
- Records used to determine whether the order had a more than nominal effect on the employer’s operations.
- Computation of the average number of full time employees in 2019. This will show whether the employer was a large employer that is subject to limitations of available wages.
- Credit computations including wage amounts and how qualified health plan expenses were computed.
- If a member of an aggregated group, computations and calculations that determined there was an aggregated group and how aggregation affected the determination and allocation of the ERC.
- If a Paycheck Protection Program (PPP) loan was received, calculations allocating wages to the PPP loan forgiveness and ERC.
The bad news with the ERC starts with the fact that there is still limited guidance on how a business can prove that it falls into the safe harbor of partial suspension of operations of at least 10%. The IRS is taking at least 9 to 12 months, or longer in some cases, to process amended 941X forms and to issue refunds. There seems to be no working around the fact that Federal income tax returns will need to be amended to add back the credit to the wage expense in the year the credit was generated, rather than in the year the credit was claimed and/or received. And lastly, although employers have three years to amend returns to claim the credit, the IRS has FIVE years to audit and potentially disallow the refund. At that time, if it is determined that the employer is ineligible for the credit, they will need to repay the credited amount, plus penalties and interest.
The “ugly” is with respect to the bad actors that appear to be plaguing the business incentives space. Many vendors are approaching organizations suggesting that the ERC represents “easy money” that “everyone is entitled to claim” without consideration for eligibility, an evaluation for wages paid as a large employer, or an acknowledgment of recent IRS Notices and Revenue Procedures. These actors may not have the ability to appear before the IRS, may not retain documentation to support the credit, and may not have prepared the credit while taking into account the risk of an uncertain tax position needing to be reported in the financial statements of an organization.
CLA’s national team of subject matter experts can assist your organization with the good, the bad and the ugly of the ERC. Schedule a consultation with Jennifer Rohen , our Business Incentives Consulting Practice Leader, today!
