On September 14th, the IRS announced a processing moratorium on any new Employee Retention Tax Credit (ERTC) claims submitted through the end of the year. This comes after months of warnings about how aggressive promoters are convincing ineligible businesses to apply. Through a well spring of misinformation and high-pressure tactics, the number of claims from ineligible companies has skyrocketed. The freeze is needed to allow the IRS to implement stricter review procedures, develop resolution programs, and to inform the public about ERTC eligibility criteria and other information. The culmination of these changes is expected to discourage, limit, and curb the ineligible claims. As part of the process, the IRS recently launched a frequently asked questions page, where taxpayers can go to learn more about the program in addition to previously released guidance from Treasury notices 2021-20, 2021-23 and 2021-49. To help clients, prospects, and others, Tanner has provided a summary of the key details below.
Who can Claim the Employee Retention Tax Credit?
Despite what many ERC promoters and marketers claim, not every business is eligible for the ERTC. In fact, there are very specific criteria which must be satisfied to apply, including:
- Being subjected to a full or partial government ordered shutdown that limited commerce, travel, or group meetings due to COVID-19, during 2020 or the first three quarters of 2021.
- Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021.
- Qualified as a recovery start up business in the third or fourth quarter of 2021.
An employer must decide in each quarter if the company is considered an eligible employer. A government order that was active for Q1/Q2 2020 will not cause an employer to be eligible in Q3 2020 unless those orders were extended.
What is the Supply Chain Disruption Provision?
This is an aspect of the ERTC which many promoters misrepresent as “new” or “relaxed rules” that automatically qualify a taxpayer for the credit. Unfortunately, a generic supply chain issue alone does not ensure eligibility as detailed in IRS Advice Memorandum 2023-005.
It is a narrow and limited exception that allows employers that were not fully or partially suspended, but their suppliers were, to make a claim. However, it applies in very specific circumstances where the business could not continue operations without the supplier’s product and therefore had to suspend operations themselves. To claim a disruption the filer must show the following:
- The government order which caused the supplier to suspend operations.
- That the business could not obtain the supplier’s goods elsewhere (regardless of costs).
- It caused a full or partial suspension of the company’s operations.
It is important to be wary of anyone that asserts ERTC eligibility based on supply chain issues without seeking specific information about how the business was affected, determining the nominal impact of the suspension, supplier’s situation including the shutdown dates for the suppliers, and relevant documentation including the government orders the shut the supplier down. General transportation delays, higher costs, or using alternative suppliers alone will not rise to the level of a supply chain disruption due to a government order.
What are Qualified Wages?
Not all wages paid to employees can be classified as qualified as many promoters have suggested. Generally, qualified wages must be those that are subject to Social Security and Medicare taxes. In some cases, it may also include certain health care expenses paid for an employee’s benefit. In addition, since the ERTC changed between 2020 and 2021 there are different limits and rules which often vary by quarter.
The amount of qualified wages used to determine the credit amount will also depend on:
- The average number of workers employed in 2019.
- Whether employees provided services for the wages paid during the suspension of operations or quarter in which the decline in gross receipts occurred.
- Whether the wages were used to claim other credits (e.g. R&D, WOTC, Covid Sick-leave), and whether they were used as payroll costs for other federal COVID-19 incentive programs (e.g. PPP, SVOG, etc.).
What are the Recordkeeping Requirements?
The IRS stated that the following documentation will adequately substantiate eligibility for an ERC claim:
- Documentation to show how the employer determined it was an eligible employer that paid qualified wages, including:
- governmental order(s) to suspend the employer’s business operations;
- records the employer relied upon to determine whether more than a nominal portion of its operations were suspended due to a governmental order or whether a governmental order had more than a nominal effect on its business operations;
- records the employer used to determine it had experienced a significant decline in gross receipts;
- records of which employees received qualified wages and in what amounts; and
- in the case of a large eligible employer, work records and documentation showing that wages were paid for time an employee was not providing services.
- Documentation to show how the employer determined the amount of allocable qualified health plan expenses.
- Documentation related to the determination of whether the employer is a member of an aggregated group treated as a single employer for purposes of the employee retention credit and, if so, how the aggregation affects the determination and allocation of the credit.
- Copies of any completed Forms 7200, 941, or 941-X that the employer submitted to the IRS
What Happens with Improperly Claimed Credits?
This is an important question for businesses to consider as many promoters will assert there is nothing to lose by filing a claim. Unfortunately, this is simply not true. Those who file an improper claim will be required to pay back the full credit amount along with penalties and interest without regard to consulting fees paid. A business can find itself in a much worse cash position if it must back the credit than if it was never claimed in the first place.
Additionally, the law clearly states that wages related to the ERC claimed are non-deductible. Therefore, company effectively are taxed on the ERC claimed. If the statute of limitations related to the income tax return has already passed when the ERC audit concludes, the business may have paid additional income tax that they won’t be able to recover.
Contact Us
Utah businesses eligible for the Employee Retention Tax Credit should not be discouraged from applying. However, it is important to be aware of the program specifics and confirm eligibility with a qualified tax advisor. If you have questions about the information outlined above or would like a second review of your claim, Tanner can help. For additional information call 801-532-7444 or click here to contact us. We look forward to speaking with you soon.