AccuPay has been assisting our clients with various aspects of Employee Retention Tax Credits for over 2 years now. Our original role pertaining to ERC credits in early 2021 was to learn as much as possible about the ERC law, concepts and strategies for the purpose of educating our employer-clients about the Employee Retention Tax credit legislation. We researched the law, read all we could find about ERC tax credits from authors and the IRS and listened to many webinars from large ERC consulting firms on various aspects of the ERC credits. We then started writing PayDay’s to educate our clients and “friends of the firm,” and colleagues about ERC specifics and unusual aspects of the ERC credits. We originally planned on working with our clients’ CPA firms to file the IRS 941X returns based on their calculations of the credit amounts, and we continue to work with clients’ CPA firms. Then in the late Spring of 2021, we had a few clients whose accounting firms volunteered they were not subject matter experts on the ERC law, and we then started actually making the ERC calculations, determining ERC eligibility based on the 3 ERC eligibility tests, allocating payroll/wages between the PPP loan forgiveness and ERC tax credit buckets (can not use the same dollar of wages/medical costs for both programs simultaneously), talked with the IRS over a hundred times to monitor ERC claims, so forth and so on. We now feel that we are “subject matter experts” in the ERC tax credit legislation and as such have been reviewing our clients’ ERC “qualifiers,” making the ERC calculations to include PPP loan integration, preparing the amended 941X forms, filing them with the IRS and following up with the IRS to facilitate the processing and refunding out of ERC claims as needed. We do restrict our ERC project work to existing or new clients of AccuPay—so we are not promoting outside of our own client base.
STILL MANY EMPLOYERS WHO QUALIFY FOR EMPLOYEE RETENTION TAX CREDITS
I talk to employer-clients literally every week about whether they qualify for Employee Retention Tax Credits, as they have “heard about the credits” but have been uncertain about their eligibility for them. It is not uncommon that many of those employers actually do qualify for some ERC credit, based on our discussions about eligibility. The 2 primary “eligibility tests” are as follows (a 3rd one exists for new startup employers, which we will not discuss here):
- An employer will qualify for ERC tax credits IF they have experienced a “significant reduction” in their gross receipts (think top line sales, revenues, etc on your P&L) during at least one calendar quarter of 2020 or 2021 (ERC program ended on 9/30/21, so no need to review Q4 of 2021 receipts) as compared to pre-pandemic “same/comparable quarters” in 2019. This eligibility test does not even mention Covid, so a reduction in gross receipts unrelated to Covid actually would qualify. The percentage decrease needed for Q1-Q3 of 2020 is over 50% as compared to comparable quarters in 2019, whereas the percentage decrease in gross receipts needed for Q4 of 2020 or Q1-Q3 of 2021 is over 20% compared to the comparable quarter in year 2019. This test is rather “black and white”, brightlined, since it is based on “math” – OR –
- The other primary ERC eligibility test is IF an employer had normal operations “suspended, partially or totally” (another word would be operational restrictions) based on a US government order/mandate, then the employer would qualify for ERC tax credits during the time period of the “suspensions from normal operations.” An employer who was ordered by a government (state, county public health, city) to restrict their operations in some manner will generally qualify (If the suspension was more than “nominal” in amount—which the IRS later defined). The poster child for this suspension by government mandate/order is a restaurant who was ordered to close for inside dining for a period of time (assuming that inside dining generally constituted more than 10% (nominal) of it’s normal operations). The ERC timeframe for the credits is the beginning date of the government order through the date on which the govt order was lifted. Many employers had more than one type and timeframe of government ordered “suspensions” such as a hair salon which was originally ordered to shut down, then could be open at 50% capacity, then had to deep clean between each appointment, so forth and so on. An employer must “tie” their suspension to a government order restricting normal operations—-being open but demand did not exist since people were encouraged to stay at home does not constitute a “government ordered suspension” (it could result in a significant reduction in gross receipts due to people staying home, though). An employer whose commerce, meetings (churches/events) or travel(ordered to not fly which was significant to the employer) were “restricted” based on a government order/mandate qualifies for the ERC tax credits even if their gross receipts/sales/donations increased during the period of time suspended.
MORAL OF THIS STORY—-Every for profit and non-profit employer should verify whether they qualify for the ERC tax credit or not—-many still exist who qualify but have not claimed the ERC credits.
BE CAREFUL WHO YOU CONSULT WITH ABOUT YOUR ERC TAX CREDIT ELIGIBILITY AND CALCULATIONS
The IRS actually issued a press release warning employers to be wary/cautious about the vendor/consultant whom they select for their ERC review since some/many are overly aggressive, particularly as to “partial suspensions” (which are not always black/white). I have actually spoken with some of the ERC consultants (the IRS refers to them as “ERC mills”) who essentially will qualify an employer who says they were “impacted by COVID”—everybody was impacted by COVID in some way!!. Remember that you must be able to produce the actual government orders/mandates which restricted/suspended your operations in more than a “nominal amount.” The IRS has indicated that switching from in office to remote work is not sufficient in and of itself—accounting firms/law firms, etc found it was not overly difficult to transition to remote work and Zoom calls in lieu of in person/in office work with clients—for the most part. I just today got an email from one of the very aggressive ERC firms which is telling me that over 90% of accounting firms qualify for ERC tax credits due to remote work and not being able to visit clients—show me an order which mandates firms to operate in that manner. Compare that with a law firm who customarily sent attorneys to court for litigation, and the courts were closed due to COVID and that would be worthy of discussion as to a “more than nominal suspension” of normal activities for possible ERC tax credits. BE VERY CAREFUL OF USING ERC FIRMS/OUTFITS WHICH HAVE POPPED UP DURING THE LAST 2 YEARS—-will they be around in 5 years since the ERC law does contain a 5 year statute of limitations for auditing ERC amended return claims (the normal statute of limitations for income tax purposes is 3 years, not the 5 years which the ERC law provided for IRS audits)
STRATEGIES TO OPTIMIZE YOUR ERC TAX CREDITS WHEN ALLOCATING WAGES/PAYROLL BETWEEN THE 2 COVID PROGRAMS
The exact same dollar of wages/payroll cannot be used for both ERC tax credits and also for PPP loan forgiveness—this is called “double dipping” and is not permitted. However, when you consider that an employer’s ERC tax credit timeframes and their PPP loan “covered periods” are rarely identical (I do not recall ever seeing the 2 timeframes to be identical), and that some payroll qualifies for PPP loan forgiveness but not ERC tax credits, opportunities exist to “fill up” the PPP buckets and the ERC buckets with payroll/wages which uniquely and only can be used in one of those buckets, but not both, opportunities exist to allocate sufficient payroll to the PPP loan forgiveness bucket in a manner which optimizes the wages remaining for ERC tax credits. Here are some basic examples of how to “allocate/sort” payroll/wages into the PPP and ERC buckets in a manner which maximizes the ERC tax credit while also meeting the payroll requirement for PPP loan forgiveness:
- Many ERC periods exist before or after the PPP loan covered period—-only consider those ERC only timeframes for PPP loans. On the contrary, some timeframes only exist for the PPP loan and not for ERC tax credits—use payroll in those PPP only timeframes to fill up the PPP bucket
- For a church, clergy/pastor wages qualify for the PPP loan but not for ERC tax credits (since they are not wages subject to FICA tax)—churches should allocate all pastor compensation to their PPP bucket
- Retirement plan funding is part of the “payroll cost” for PPP loan purposes, but does not qualify for ERC tax credits—put all retirement plan funding costs during the PPP loan period into the PPP bucket (means less other wages needed for PPP)
- A BIGGIE—For ERC tax credit purposes, FICA wages in excess of $10K (per year in 2020, per quarter in 2021) do not qualify for ERC tax credits-–just the first 10K of FICA wages qualifies for ERC credits. As such, consider allocating each employee’s wages in excess of 10K to the PPP loan bucket to fill it up, leaving the first 10K in the ERC bucket
- Wages paid to a “greater than 50% owner and their “relatives” are not permissable ERC wages—-allocate those employees’ wages (up to the owner PPP “caps”) to the PPP loan bucket during the PPP covered period
- If an employer reported PPP loan costs other than payroll for PPP loan forgiveness, make sure you allocate those costs to the PPP loan bucket, which reduces the amount of payroll required for PPP loan forgiveness. We have found that many employers had their PPP loans forgiven based on “payroll only”, which does mean the employer is “stuck” with using payroll only costs to forgive the PPP loan—a very common negative in ERC optimization strategy
- Remember that group medical, dental and vision pre and post tax contributions by employees, plus employer shares of those costs, qualify for ERC tax credit purposes. However, the combined total of an employee’s wages subject to FICA tax plus their medical/dental/vision insurance premiums cannot exceed the $10K cap for ERC tax credit purposes. Make sure you consider health insurance premiums for both ERC and PPP loan purposes
IRS AUDITS—HEARD THEY HAVE STARTED, EXPECT THEM TO ACCELERATE INTO FUTURE YEARS
I heard from a very large CPA/consulting firm (Withum), on a webinar, that they are already helping clients with ERC tax credit audits, based on audit letters received by employers from the IRS. We have yet to see them but fully expect to be involved in some (especially large ones, ones for relatively new employers, ones which seem disproportionate to the employer’s normal 941 filings). My understanding is that the IRS is allowing quite a bit of time for an employer to “prove” how they qualify and how they calculated their ERC tax credits, since they are complex as to both concepts and calculations, especially when PPP loans are also involved (almost always). Remember that the IRS has a 5 year time frame in which to audit ERC claims, which is 2 years longer than the typical 3 year statute of limitations for auditing income tax returns.
WHAT IS THE DEADLINE FOR FILING AMENDED RETURNS TO CLAIM EMPLOYEE RETENTION TAX CREDITS?
I have heard 2 different deadlines, and after more research cannot find the exact deadline as provided by the IRS—so the deadlines revolve around instructions to IRS 941 forms and the “normal” 3 years from the due date of tax returns audit timeframe. Some authors claim that any amendment of a 2020 quarterly 941 payroll tax return can be filed up to April 15, 2024 and April 15, 2025 for all quarters in 2021 (based on instructions to 941X forms, which is not actually law). I am much more comfortable with the “normal” amended due dates for tax returns, “3 years from the due date of the actual return”—-with this more conservative approach, the first deadline for claiming an ERC tax credit is July 31, 2023, which is 3 years from the original due date of the Q2 2020 Form 941, which was July 31, 2020. With this more conservative approach, the due dates for each quarter after Q2 of 2020 is 3 months later than July 31, 2023 for Q2 of 2020, SO Q3 of 2020 would be due October 31, 2023 (3 months later than the July 31st deadline for Q2 of 2020). All quarterly ERC claims for 2021 quarters would be due in year 2024. AccuPay will use the more conservative “3 years from the due date of the return being amended” approach and will later determine if, indeed, the IRS will accept later deadlines based on the Form 941X instructions.
MAKE SURE YOU AMEND YOUR INCOME TAX RETURNS TO CLAIM THE ERC REFUND AND INTEREST INCOME ON THE REFUNDS AS TAXABLE INCOME
Unlike the PPP loans, the ERC tax credits do represent “taxable income” in the year to which the ERC tax credit/IRS refund pertains to—-So any ERC tax credit received in 2023 which pertains to a quarter in 2020 will require an amended tax return to claim the ERC tax credit as “net taxable income” in year 2020 (actually, the wage deduction is reduced by the amount of the ERC credit, which produces taxable income equal to the IRS ERC credit). IRS audits will definitely request copies of the amended tax returns. My understanding is that interest income is taxable in the year you receive the IRS checks, which are considered overpayments of tax in the quarter being amended, meaning the IRS pays interest income on the refunds. BOTTOM LINE ON THIS—TALK TO YOUR CPA/TAX ADVISORY FIRM AND, IDEALLY, PROVIDE THEM WITH COPIES OF YOUR ERC 941X CLAIMS AND ALSO ADVISE THEM OF THE AMOUNTS OF IRS CHECKS YOU RECEIVE, WITH INTEREST DETAILED OUT FOR THEM
HOW LONG DOES IT TAKE TO GET YOUR ERC TAX CREDITS?
ERC tax credits are sent in the form of checks, per quarter, with interest, to the address on your Form 941X form. After we check to ensure that the IRS has actually received the 941X form (which they will post to your IRS online account—we check them almost weekly, along with calls to the IRS to address gliches/hangups), it has recently been taking the IRS 4-5 months from receipt of the paper filed 941X forms to processing and mailing out. Once tax filing season is over, perhaps the timeframe will revert back to about 3 months, which it was late Fall. However, any single ERC claim/941X return which exceeds $200K will likely be routed to “IRS review” as a fraud prevention measure, and those larger ERC claims can take a year or more to process and refund out. We have encouraged some clients to reach out to Taxpayer Advocacy and complete their Form 911, which is asking TA, a government agency tasked with working matters out with the IRS, to intervene and move the ERC credit claim forward to refunding out. We have generally only recommended the use of TA once the ERC claim is ready to celebrate it’s first birthday with the IRS. We have seen clients with both above $200K per 941X claims and also below $200K, and the below $200K claims generally process out much more quickly than those above $200K—that has been our experience.
ONE FINAL ADMINISTRATIVE MATTER
Make sure the address you use on your IRS Form 941X is your current “mailable address”—-otherwise, your IRS checks will bounce back as “undeliverable” to the IRS and you can then expect another 30-45 days in which to call them to release your previously mailed ERC checks.
If you have any questions about any aspect of the Employee Retention Tax Credit, feel free to reach out to Larry Shaub at email@example.com. Larry has been leading AccuPay’s ERC services, be it educating a client about ERC concepts (no charge!) or actually doing the ERC work from “A to Z” for generally much less than others we have seen in the marketplace. We are happy to educate/answer questions from non-clients about the ERC program, but will only calculate, prepare, file and follow up with clients of AccuPay.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.