IRS Plans On Targeting Abusive ERTC Claims
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 by providing 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 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. So that you can determine if you might qualify for the credit and avoid being misguided by the credit promoters, the following is a summary of the qualifications to claim the ERTC.
The credit 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. For eligible employers, the credit is available 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.
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, a significant decline is defined 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’.
The credit is a refundable payroll tax credit and for 2020 is 50% of qualified wages, up to a maximum wage of $10,000 per employee. Thus, $5,000 is the maximum credit for qualified wages paid for any employee for 2020.
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.
If you think your business may be eligible for this credit and it hasn’t already been claimed, keep the following cautions in mind:
Caution #1: An employer who secured an SBA Paycheck Protection Program (PPP) loan is prevented from using the same wages for forgivable PPP loans and the employee retention credit. No double dipping.
Caution #2: 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.
Caution #3: Although many companies legitimately qualify for the ERTC, there is substantial concern related to abuse and fraud, especially with companies that are relying on government shutdowns, and particularly supplier shutdowns, to justify their claims based on the business operations curtailed qualification.