Take Another Look at the Employee Retention Credit

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Take Another Look at the Employee Retention Credit

BrianMarron,CPA

One of the most valuable tax incentives to come out of the COVID-19 relief funding was the Employee Retention Credit (ERC). The ERC provided the needed funding to ensure those adversely impacted by the pandemic could continue to retain full-time employees. Unfortunately, like the Paycheck Protection Program (PPP), the ERC underwent several modifications. Not only did this include changes to eligibility criteria but also the formula for credit calculation. As a result, the credit came to a close three months earlier than expected when the Infrastructure Investment and Jobs Act was signed into law.

However, even though the program closed, it’s not too late for employers to file an amended return and claim the benefits. Whether due to confusion around initial eligibility, or the provision for supply chain disruptions, it’s a good idea to take another look at the ERC, the details of which we examine below.

ERC Timeline Employers that kept payroll for W2 employees during the pandemic may have been eligible for the ERC, a refundable credit against certain payroll taxes. Because it was a quarterly tax credit, employers could file for the credit throughout the year and get money back quicker than waiting for a refund from an annual tax return.

But becausefour different versions of the same credit changed eligibility and calculations between 2020 and 2021, many employers were confused about whether they qualified. If they weren’t sure, they didn’t file, potentially leaving money on the table.Here’s a quick summary of the major changes:

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The ERC was first introduced in March 2020 with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This iteration was effective between March 13, 2020, and December 31, 2020. It provided a 50% credit against the employer’s portion of Social Security taxes from an employee’s first $10,000 in qualified wages. The total maximum benefit was $5,000 per employee per year.

To qualify, employers must have been fully or partially closed due to a government order in any quarter or experienced at least a 50% decline in gross receipts compared to the same quarter in 2019. There were differences between small employers (less than 100 employees) and large employers (more than 100 employees).

The ERC was unavailable to certain types of not-for-profit entities and colleges or universities at that time. Also, the ERC was not available to employers that received PPP funds during that time.

January 1, 2021 –June 30, 2021 The ERC was extended for the first time in the Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act). It was expanded to 70% of an employee’s first $10,000 in wages each quarter for a maximum benefit of $28,000 annually. Employers need only prove a 20% decline in gross receiptsto qualify. The threshold for small and large employers also expanded from 100 to 500 employees; calculations for eligible wages differed depending on whether the number of full-time equivalent workers was under or above that number.

Eligibility was alsoexpanded to include certain tax-exempt employers classified under Section 501(a) and colleges or universities. The Relief Act also allowed employers to take advantage of the ERC even if they received PPP loans.

July 1, 2021 –September 30, 2021 Initially, the American Rescue Plan Act (ARPA) extended ERC through the end of 2021 for all employers, but the credit was retroactively terminated in the Infrastructure Investment and Jobs Act (IIJA).

For the third quarter of 2021, employers could still take a 70% credit against the first $10,000 in wages, except that the credit only offsets the employer’s share of Medicare taxes, not Social Security. The ARPA also expanded the credit for severely financially distressed employers, which were defined as having experienced a decline in gross receipts of at least 90% compared to the same quarter in 2019.

October 1, 2021 –December 31, 2021 The ERC was only available to recovery startup businesses in the fourth quarter. They were defined as a business that began operations on or after February 15, 2020, with average gross receipts of $1M or less. The limit was $50,000 per quarter.

If an employer may be eligible during one of these periods, it’s worth a second look from a qualified CPA. The calculations can be complicated, and it’s important to get the claim right or risk leaving money on the table.

Supply Chain Disruptions Another way to qualify for the ERC is through the supply chain provision. Most employers did experience a supply chain disruption during the pandemic, but the IRS threshold for what qualifies as an eligible disruption under ERC is a high bar to meet. Broad, indirect impacts won’t be enough.

To qualify, an employer’s full or partial suspension of operations must be directly traced to a specific government order that caused a supplier to suspend shipment. That’s not all. The employer must also

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satisfy all three preconditions listed below. • The supplier was unable to fulfill a shipment of necessary supplies. • The employer was unable to find an alternative supplier or materials. • The employer was negatively affected as a result.

Federal and state regulations and orders limiting travel, commerce, or group gatherings are acceptable, but they must be specific. For example:

The state imposed a 50-person maximum threshold for indoor gatherings, so the supplier could not operate at total capacity. Thus, it was unable to meet order deadlines. The employer could not source similar materials from another supplier and had to adjust output or change its processes. Or,

A federal order restricted the number of workers at an international port, which caused unexpected shipping delays. The employer could not fulfill customer orders and suffered a loss in revenue. However, a supplier’s inability to deliver an order because it experienced a labor shortage or unexpected increase in demand would not qualify.

Manufacturers are more likely to qualify for supply chain disruption than most employers, given the nature of the business. However, it’s not limited to any specific industry, and other restrictions are usually in place. Employers must look at the bigger picture and understand that the IRS carefully examines supply chain disruption claims, considering all facts and circumstances.

Correcting ERC Mistakes Since the ERC calculations and eligibility changed so much and the calculations are complex, it’s possible that a mistaken claim could have been made. In many cases, mistakes surrounding the ERC were by accident, though there are still cases of ERC fraud that the IRS is pursuing more aggressively.

The following are some of the mistakes that employers could have made in claiming false tax credits: • Claiming a credit against a manager’s wages • Claiming a credit against a family member who is also an employee • Sole proprietors claiming for themselves • Counting payments to independent contractors as eligible wages • Including wages before March 13, 2020 • Claiming ERC against wages that were already covered by PPP funds or the Work Opportunity Tax Credit

Employers that have questions about the accuracy or validity of a past ERC claim can request a second opinion. If a mistake is found, it can be corrected within three years. To fix a past claim –or submit a new one –employers would file an amended Form 941.

There is an interplay between the ERC and PPP forgiveness as well. You may have filed for an ERC refund without maximizing the ERC with the PPP forgiveness. Taking a second look at the ERC calculation and the PPP forgiveness can help ensure that both programs are maximized.

The Employee Retention Credit is a compelling tax incentive still available to eligible companies. Now is the time to explore this opportunity or take a second look to ensure potential savings are claimed. This is especially true if you filed a claim 9-12 months ago and have yet to receive feedback.

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Please contact us if you have questions about the material outlined, need a second opinion on your ERC claim, or need information about the services our Tax Group provides. We look forward to speaking with you soon.

MeettheAuthor Brian Marron, CPA, is a manager in the firm’s New Jersey office. He helps clients reduce their tax obligationbyplanningthroughthetaximplicationsofcomplex transactions.Briancanbe contacted at 732.341.3893 or brian.marron@mccarthy.cpa.

Brian Marron, CPA