Employee Retention Credit – Too Good To Be True, or Am I Missing Out?

Unless you’ve been living in an isolated log cabin without cell phone service for the past few years, you’ve almost certainly heard of the Employee Retention Tax Credit (ERC) from commercials, colleagues or those vexatious email blasts. It’s almost impossible to listen to the radio or watch TV without hearing, “Did you know you may be eligible for up to $26,000 in payroll tax credits per employee?” One must wonder, like many things in life, is this too good to be true, or am I missing out?

Without getting too deep into the minutiae, a business can qualify for the ERC if it experienced a significant decline in revenue or suspension of operations due to a government shutdown, including supply chain disruptions due to the COVID-19 pandemic. The decline in revenue test is a strictly objective mathematical equation, whereas the suspension of operations qualification is quite the opposite.

Couldn’t one argue that almost all businesses were impacted by COVID-19 in some way, shape or form? That is exactly what some large firms specializing in tax credits are asserting. How can these firms get away with effectively stealing money from the Federal government?

The IRS even issued an article warning employers to be wary of tax credit firms advertising and soliciting schemes promising tax savings from the ERC that are too good to be true. They note that these firms often charge large upfront or contingent fees and then proceed to take improper positions related to taxpayer eligibility for the ERC. One of these improper positions is claiming that a business had partially suspended operations due to supply chain issues. They may argue that a business could not obtain the lumber it needed for its operations. Although this may be legitimate, given the circumstances, if a business’s revenue grew or did not experience a significant decline, one is hard-pressed to argue that the supply chain issue suspended operations, as clearly the business persevered through this time.

The IRS has also been clear that they have made it a priority to audit ERC claims. A specific issue related to the IRS audits is the discrepancy in the IRS statute of limitations for auditing ERC (five years) compared to the statute of limitations for amending business tax returns (three years). To avoid entities from obtaining a double benefit, the IRS requires that wage deductions are reduced in the year associated with the ERC claim. This means taxpayers claiming ERC for a 2020 period will need to amend the corresponding 2020 tax return (2021 tax return for 2021 ERC claims) to make this wage reduction adjustment and either adjust net operating loss (NOL) carryforwards or pay the additional tax resulting from this adjustment. Based on the current statutes, in the event of an IRS disallowance of an ERC claim in year four or five of the IRS audit statute, a taxpayer may not only have to pay back the credits but may have also lost the opportunity to amend 2020 and/or 2021 tax returns (with expired three-year statutes) to reclaim the lost wage deductions that resulted in NOL carryforward adjustments and/or additional tax paid.

With that said, businesses that can document their eligibility shouldn’t hesitate to file a claim for an ERC refund. For ERC claims stemming from the 2020 year, businesses have until April 15, 2024, to file a claim. The deadline for claims stemming from the 2021 year, is April 15, 2025, so there is still time. The credits are claimed on amended payroll tax returns, and claimants will be issued a check from the U.S. Department of the Treasury if their returns are accepted by the IRS.

Given the prevalence of foul play and abuse in this area, employers should do their due diligence in determining eligibility for the ERC and work with a trusted professional to do so.

Contributing author: Anthony J. Cerchia, CPA, is a tax manager at Dannible & McKee, LLP. Anthony has over six years of experience providing tax planning and ownership transition analysis to a wide range of clients, specifically within the construction, manufacturing, automotive, architecture and healthcare industries. For more information on this topic, you may contact Anthony at acerchia@dmcpas.com or (315) 472-9127.