In March 2021, the Employee Retention Credit (ERC) was extended through Dec. 31, 2021, and expanded as part of the American Rescue Plan Act of 2021. But there are many nuances and complexities CPAs need to be aware of to fully educate their clients.
Here are 10 misunderstandings about the ERC to keep in mind:
- My client can’t claim ERC if they’ve already claimed Paycheck Protection Program (PPP) loans or gotten their PPP loans forgiven. Now you can claim both! Congress, in the Consolidated Appropriations Act (CAA) of 2021, removed the limitation on only claiming one or the other. PPP will only account for 2.5 times monthly payroll expenses and is meant to be spread out over six months. This leaves plenty of uncovered wage expenses for claiming the ERC.
- My client’s business did not have a drop in gross receipts of 50 percent or more. The CAA has changed the qualifications so that a reduction of 20 percent now qualifies. BUT remember there is also another way to qualify for the ERC — if a business has been subject to a partial or full suspension due to a government order... see the next point.
- My client’s business was not shut down during the pandemic. Even a partial suspension order by the government (federal, state or local) of a client’s business could potentially qualify. For instance, a partial shutdown; a disruption in their business; inability to access equipment; having limited capacity; shutdowns of their supply chain or vendors; reduction in services offered; reduction of hours to accommodate sanitation; shut down of some locations and not others; and shutdowns of some members of a business are all scenarios that still potentially qualify for the ERC. The key considerations are: due to the government-ordered partial (or full) suspension, is/was your client’s business not able to continue its activities in a comparable manner, and did that result in a more-than-nominal impact on their business operations? Remember, the partial or full suspension is an alternative way to qualify for the ERC, separate from the reduction in gross receipts test.
- My client’s company was deemed an essential business, so they do not qualify because of business suspension. Even if your client’s business is deemed essential, an impact or change in their business may still qualify them. For example, even if they were open but their vendors were closed down or they couldn’t go to their client’s job site, they may still qualify. Or, alternatively, if part of their business was considered non- essential and was impacted by a government-ordered suspension, they may also qualify. The scenarios discussed above in item 3 could apply here as well.
- My client’s company has grown during quarantine. The ERC isn’t something they should take. That’s great news! But even if your client’s company has grown during quarantine, there are expenses that may qualify if they experienced a full or partial suspension.
- Sales have rebounded for my client in Q1 of 2021; they cannot qualify for this credit. With the introduction of the CAA, you have the option to look at one quarter prior to determine qualification. This means we can determine eligibility based on lost revenue in 2020. Also, if your client was subject to a full or partial suspension, they may qualify regardless.
- My client was in losses, or they do not have any tax liability. This is a refundable credit. In practice, this means that any credit overage above tax liability is sent to the taxpayer/business owner as a refund.
- My client’s company has grown to more than 500 employees, so they are not eligible for the ERC. The employee count restriction is based on full-time equivalent (FTE) employees, which is a more involved calculation than just counting everyone in the office. We helped a business with 640 employees, and the FTE calculation put them at under 500. Furthermore, if your client paid any employees to NOT work, or to work less than the hours for which they were paid, then the employee count restriction would not apply for those employees.
- My client is a charity and the ERC is only for businesses. The ERC also may provide significant benefit to charities — churches, nonprofit hospitals, museums, etc. Charities can be particularly good candidates.
- We don’t need to document everything. There are still many tax advisors who think that they can just create their own simple form. They check a few boxes, provide a few sentence explanation and expect the IRS to hand over thousands and thousands of dollars on a silver platter and then play audit lottery? Guess again. To avoid headaches and heartaches down the road, clients need to properly and fully document how their business qualifies for the ERC.