With a potential recession on the horizon, we know you want resources to help your business master the moment. We've put together our Agility & Excellence Resource Center to bring you strategies and solutions with a finger on the pulse of what's ahead.

High-stake business transactions require delicate maneuvering and strategic planning for a successful deal. One misstep can cause all your progress to become undone in the blink of an eye. If your transaction involves the Employee Retention Tax Credit (ERTC), accuracy and attention to detail are even more key — an aggressive or questionable claim may have a disastrous domino effect threatening the entire structure of the deal.

As companies buckle up to take advantage of this refundable payroll tax credit before it's too late, they must ensure they are receiving guidance from a reputable and experienced tax professional. Many businesses are claiming the ERTC without assessing their eligibility or properly substantiating their positions, which may be partly due to bad advice. The IRS recently warned employers to be wary of accepting guidance from third parties who may take an improper stance on taxpayer eligibility and computation of the credit.

Below, we will look at how a mishandled ERTC claim can affect mergers and acquisitions (M&A) and other notable business transactions.

Protecting Your M&A Deal

Understandably, sellers are motivated to file for their ERTC claims before closing a deal, so they can take advantage of the tax benefit while still controlling the business. On the other hand, buyers view these credit claims as potential exposure when entering transaction negotiations.

Buyer Considerations

If a buyer is acquiring equity in the target company, an erroneous ERTC claim will put them at risk since payroll taxes are an entity-level liability that the buyer assumes and a buyer's risk is not just the amount of the credit claim — it also includes penalties and interest that will accrue in the interim until the IRS recovers what it believes it is owed. Further, ERTC claims related to certain quarters carry a special extended five-year statute of limitations, resulting in an unusually long tail to this potential risk.

Buyers should conduct due diligence on any ERTC claim. If there is a concern, they should consider escrows or other holdback terms to ensure protection against the potential exposure for the entire statute of limitations.

Seller Considerations

If a buyer perceives an ERTC claim as risky, it can result in a trifecta of consequences for a seller. First, the buyer could require escrows or other holdbacks exceeding 100% of the credit claim, as noted above. Second, many third parties selling ERTC services will charge a significant fee for their efforts. And third, the seller is required to amend their income tax returns to reduce their payroll deductions equal to the credit claim, potentially resulting in an increased income tax burden.

Sellers should heed the IRS's advice and ensure they consult with reputable experts when evaluating their qualification for the ERTC and analyze how the credit claim may impact the dynamics of a potential transaction.

How an Improper ERTC Claim Affects Other Transactions

An incorrect ERTC filing can have far-reaching impacts beyond just M&A deals. Other business ventures can be disrupted, from going public to signing a lending agreement. While claiming the ERTC with an aggressive position — to secure the most money — may be tempting, it could have a much higher cost to your organization in the future.

Going Public

Going public can be an exhilarating experience for a company. However, an initial public offering (IPO) requires a rigorous and deep analysis of your organization's financial statements. If a questionable ERTC claim is discovered, potential investors may shy away from your company, and your organization could suffer reputational harm. It could also result in the IRS coming after you to get that money back.

If the questionable ERTC claim is overlooked and the IPO is successful, an organization can still face the consequences down the line. If the IRS determines an organization wasn't eligible and it demands its money back, share prices could drop, resulting in unhappy shareholders and legal consequences.

Lending Agreements

Lending agreements with a bank should not be taken lightly. Breaking a financial covenant tied to the agreement can have serious consequences. If it is determined during an audit that your organization has an improper ERTC claim, it will likely result in the financial benefits of the claim being de-recognized which could break one or more lending covenants. If that happens, you may need to explain the convenant violation with your lender in order to obtain a waiver or otherwise risk your debt to the lender becoming due immediately. Or, if you haven't signed a contract yet, the bank may refuse your loan.

Not-for-Profit Grants

Grant writers are responsible for reviewing financial statements to ensure that the funds they award are allocated correctly and without fraud. As such, if they see an ERTC claim in your financial information and it raises flags, they could become hesitant and reduce or withhold funding to your organization.

Next Steps

If your organization has a significant business transaction around the corner, you must seek ERTC guidance from a trusted and reliable source. At CBIZ, our ERTC professionals stand ready to assist your specific needs.

For more information on how to ensure and maintain a defensible stance, connect with our experts.

Copyright © 2023, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).