Business Owners – if you’ve claimed the ERTC (or intend to), you’d better read this!

You’ve probably heard the ads, right? They’re almost impossible to ignore – “You’re entitled to $28,000 per employee! Claim your Employee Retention Tax Credit now!” Yes, tax credits of up to $28,000 per employee are legitimately available for businesses that qualify. Unfortunately, accurate credit determination is complicated, especially when PPP (Paycheck Protection Program) loan forgiveness calculations are required. Even worse, popup ERTC mills are producing deliverables that won't withstand the inevitable wave of IRS audits to follow. Not good.

To recap, the Employee Retention Tax Credit or ERTC is a refundable tax credit enacted in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is designed to help businesses that continued paying employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible taxpayers can claim the ERTC on an original or amended Employer’s Tax Return Form 941 for a period within those dates. (Generally, you must file an amended return within three years of the date you filed the original return or within two years after the date you paid the tax, whichever is later.)

The ERTC equals 50 percent of qualified wages paid (including allocable qualified health plan expenses) between March 13, 2020, and December 31, 2020. Additional legislation passed in December 2020 and March 2021 increased the credit to 70 percent of qualified wages paid between January 1, 2021, and December 31, 2021. Any salary or hourly compensation you paid to an unrelated employee during this period counts toward your eligible amount, regardless of whether they worked all or any part of the time.

To be eligible for the ERTC, employers must have:

·????????sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting 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 a decline in gross receipts during the first three quarters of 2021, or

·????????qualified as a recovery startup business for the third or fourth quarters of 2021.?

If you’re qualifying based on "business interruption testing," you must document how a specific government order restricted your business operations in a more than nominal way. You cannot simply use general "stay at home orders" since the Internal Revenue Service has indicated that a "reduced demand" for your goods or services is insufficient. You must also document the exact start and stop dates these orders applied since this will define your qualification period. Restaurants, gyms, and bars are obvious ERTC candidates since Executive Orders specifically restricted operations such as indoor dining/ activities, operating hours, and capacity limits.

To qualify under the ''gross receipts test", you must show at least a 50% decline in gross revenue from the comparable quarter in 2019 to 2020, or at least a 20% decline in gross revenue vs. the comparable quarter in 2019 to 2021.

Some promoters are touting ERTC qualification based on “supply chain disruption.” Generalized issues relating to obtaining supplies during the pandemic do NOT qualify. Your supplier must have been unable to make deliveries of critical goods due to a governmental order. You, as the employer, must have been unable to purchase critical goods from an alternative supplier. In addition, the consequences of your inability to purchase critical goods must have affected your business in more than a nominal fashion. And you’d better be able to document it all.

Further complicating matters are the rules pertaining to the ERTC and PPP Loans. Your business will generally still qualify for the ERTC even if you received PPP loans. However, you must not use the same wages for PPP Loan forgiveness and ERTC qualification. To maximize ERTC benefits if you received PPP loans, your preparer must allocate each paycheck to either PPP or ERTC. This is a labor-intensive but critical step. Many ERTC processors simply aggregate payroll data, leaving a significant amount of ERTC money on the table.

A report by the Treasury Inspector General for Tax Administration indicates that the IRS has “updated an identity theft fraud filter, previously implemented in September 2020, to identify during processing suspicious Forms 941 with employer tax credit claims meeting certain criteria. As of March 10, 2022, the IRS had identified 11,096 returns with more than $2 trillion in credits claimed. In addition, in April 2022, the IRS implemented new processes to identify potentially fraudulent claims by businesses with questionable characteristics.” With this much “free” Government money in play, some degree of fraud is inevitable. The IRS has indicated that 80% of those who apply for ERTC will likely be audited! ?

Knowing an audit is coming, what steps should you take to ensure that you are audit-proof?

1.?????Use an established CPA firm. Many newly minted ERTC "specialists" are pop-up LLCs. They are not CPAs; they use unlicensed practitioners and have never dealt with the IRS. Once the ERTC program ends, they probably won’t be around in 2-5 years, when an IRS audit will almost certainly occur.

2.?????Demand that the deliverables produced by your provider are IRS audit-ready. This would include paycheck-by-paycheck classification of all wage categories, substantiation of all ERTC calculations, and reconciliations to the penny.

3.?????Obtain guaranteed calculation of the “related party” attribution rules.

4.?????Owners with any interest in more than one business entity must disclose their interests to ensure strict compliance with aggregation rules.

5.?????Use a firm with PPP loan forgiveness expertise. It is impossible to amend a PPP loan forgiveness application, so a mistake here is costly. Improperly performed, you may permanently lose both PPP loan forgiveness and ERTC credits.

6.?????Find a firm with experience amending prior-filed ERTC applications. A firm with the proven ability to clean up the “mess” left by inexperienced pop-ups is far more likely to file your application correctly the first time.

7.?????Get a second opinion if you’ve already filed for the ERTC. IRS penalties are nothing to sneeze at.

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$28,000 per employee? Great! But ignore the hype, save yourself a tremendous headache, and use an established CPA firm with a demonstrated track record of doing it right.

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Mark Boehm, MBA - Managing Principal of Alpha Wealth, LLC, can be reached via email at [email protected] or via the contact form at alphawealthllc.com for more information.