The IRS Plans on Targeting Abusive ERTC Claims
- Learn about misleading television promotions regarding the ERTC.
- Find information about the ERTC, a payroll tax credit.
- Learn about the ERTC’s applicable years.
- Learn about the qualifications for the ERTC.
- Find information about the 2 categories of eligible employers who qualify for the ERTC.
- Three cautions to keep in mind before you apply for the credit.
Have you seen those ads on television or received email solicitations promoting a large tax credit? The large tax credit they are referring to is the employee retention tax credit (ERTC). The ERTC is a government-sponsored program to keep workers employed during 2020 and 2021 because of the COVID pandemic. It provides refundable tax credits to employers that kept their workers on payroll during the COVID crisis. Unlike most tax credits, this is a credit against the employer's payroll taxes.
Even though this credit only applies for 2020 and part of 2021 for most businesses, if your business qualifies, and you haven’t already claimed the credit, it can still be claimed by amending the payroll tax returns for those years. But, you need to determine if you might qualify for the credit and avoid being misguided by the credit promoters. The following is Fiducial’s summary of the qualifications to claim the ERTC.
Qualifying for the ERTC
The ERTC is available to all employers regardless of size, including tax-exempt organizations, tribal businesses, and businesses in U.S. Territories. There are only two exceptions: State and local governments and their instrumentalities. Eligible employers may claim the credit for wages paid:
- March 13, 2020, through Sept. 30, 2021, and
- July 1, 2021, through December 31, 2021, for certain start-up companies
Eligible Employers fall into one of two categories:
- Business Operations Curtailed: Eligible employers are employers who were carrying on a trade or business during any quarter in 2020 or during the calendar quarter for which the credit is determined, for calendar quarters beginning after December 31, 2020, and for which the operation of that business is fully or partially suspended.
The operation may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can continue to operate but not at its normal capacity. Less clear is qualification based solely on supply chain interruptions, especially where there is a relatively small impact on gross receipts.
- Significant Decline in Gross Receipts: For 2020, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in 2019 are also eligible. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019. This cutoff of eligibility upon return to 80% of a comparable 2019 quarter’s gross receipts is removed for 2021.
For 2021, we define a significant decline as gross receipts being 80% or less than the gross receipts for the same calendar quarter in 2019 (i.e., there’s a 20% decline in gross receipts). The employer has the option to elect to satisfy the gross receipts test by using the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019. If an employer was not in existence as of the beginning of the same calendar quarter in calendar year 2019, substitute ‘2020’ for ‘2019’.
How much is the credit?
The ERTC is a refundable payroll tax credit. For 2020, it is 50% of qualified wages, up to a maximum wage of $10,000 per employee. Thus, the maximum credit for qualified wages paid for any employee for 2020 equals $5,000.
For 2021, the credit is 70% of qualified wages, up to a maximum wage of $10,000 per employee per quarter. Thus, the per-employee maximum credit is $7,000 for each quarter of quarters 1, 2, and 3 in 2021.
But the limitation is $50,000 each in quarters 3 and 4 of 2021 for a “recovery start-up business” – generally an employer that began a business after February 15, 2020, and had average annual gross receipts of less than $1 million for the 3-taxable year period ending with the taxable year which precedes the calendar quarter for which the credit is determined. The activity suspension and decline in gross receipts requirements don’t apply to these businesses.
Is your business eligible? Keep these things in mind
Think your business may be eligible for this credit? If you have not already claimed it, keep the following cautions in mind:
An employer who secured an SBA Paycheck Protection Program (PPP) loan cannot use the same wages for forgivable PPP loans and the employee retention credit. No double dipping.
No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the same employee.
Although many companies legitimately qualify for the ERTC, there is a substantial concern related to abuse and fraud, especially with companies that are relying on government shutdowns, and particularly supplier shutdowns without even coming close to the gross receipts reduction requirement, to justify their claims based on the business operations curtailed qualification.
Want to know if your business can legitimately qualify for the ERTC? If you are questioning your business’ eligibility to qualify for the ERTC, contact Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.
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