Maintain a Defensible Stance for Your ERTC Claim To Avoid IRS Pitfalls

Maintain a Defensible Stance for Your ERTC Claim To Avoid IRS Pitfalls

Maintaining a strong workforce is essential for any business. The Employee Retention Tax Credit (ERTC) can help offset labor costs companies incurred while struggling to keep business running during the COVID-19 outbreak. However, due to more than two years of changes and updates, ERTC eligibility requirements and tax credit calculations are complex. Inaccurate filings — or taking a risky stance — can lead to severe consequences from the IRS.

Working with a reputable accounting firm that can expertly guide you through the process is essential to ensure your ERTC filing is accurate and defensible in an IRS audit. The right partner will have experience navigating ERTC rules and regulations, and they'll be able to help you take full advantage of the available tax benefits. With their help, you can rest assured your business complies with the law and that you're getting the most out of the ERTC program.

The ERTC in a Nutshell

The ERTC was introduced as part of the CARES Act in March 2020 to help businesses retain their employees during the COVID-19 pandemic. Initially, businesses that received a loan forgiven under the paycheck protection program (PPP) were prohibited from claiming the ERTC. However, this prohibition was later lifted, and ERTC claims skyrocketed. The ERTC is now one of the most popular tax credits claimed by businesses affected by COVID-19.

The ERTC is a payroll tax credit, based on quarterly wages paid during 2020 and 2021. Eligibility is determined in two ways:

  • A decline in gross receipts: Using 2019 quarterly gross receipts as a benchmark, businesses must show a significant decline of 50% or more for any quarter of 2020 comparable quarters, and 20% or more for 2021 comparable quarters. There are several safe harbors and alternate reference periods that can be considered for these comparisons.
  • A full or partial suspension: If a business does not qualify for one or more quarters based on the gross receipts test, it must show its business operations were affected by a full or partial suspension of operations attributable to COVID-19 related orders issued by the federal, state or local governments.

For potentially eligible companies, it's crucial to consider the many questions and scenarios that can come into play when it comes to ERTC eligibility. Making the wrong decisions could have severe consequences down the line. The ERTC is a complex program with lots of potential pitfalls, but with proper guidance, businesses can apply the ERTC rules, using the credit to their advantage.

Issues Your Organization May Face During an IRS Audit

Because there are many gray areas and complexities in determining ERTC eligibility, your organization must understand the risks. Let's look at some areas the IRS may examine during its ERTC audits.

PPP Loans

If your organization received a PPP loan which was forgiven by the U.S. Small Business Administration, it can't use wages paid with the forgiven PPP loan proceeds when claiming the ERTC. Working with a trusted tax advisor who can analyze your payroll data and identify your PPP loan covered periods is essential to seeing where your organization qualifies and helps you optimize the ERTC credit for your company.

Shutdowns or Suspension of Operations

Some organizations may have more obvious suspension-of-operations proof than others: for example, a movie theater or restaurant that was shut down entirely during a high lockdown period, or a business subject to specific shutdown orders by a state or local authority. However, the ERTC partial shutdown requirement is a more broad area. If your organization partially shut down, having to modify its operations to abide by government mandated restrictions, you might be eligible for the tax credit in the case that business capabilities were limited.

To determine eligibility, you must analyze how government orders affected your business and determine if you were, in fact, partially shut down and whether it significantly impacted your business. For example, if your storefront typically has 30 customers inside it at a given time, but you had to limit occupancy to ten customers, is that enough of an impediment to operations to say you were partially shut down? Or, if you're a manufacturing company that had to shut down a factory line for disinfecting periodically, does that qualify?

Up- and downstream implications can present qualifying impediments as well. For instance, if one of your suppliers was shut down by government orders — but your company was not — and it suspended your operations, you may qualify.

Your tax advisor must look at the following areas:

  • Where is your business located, and what are the details of the government orders that affected your business?
  • What part or parts of your operations constitute “more than nominal” portions of operations?
  • What social distancing rules limited your number of customers, to what extent, and for what periods?

Income Tax

Wages used to calculate the ERTC are not deductible for income tax purposes. So, as payroll tax returns need to be amended to receive the credit, your company’s income tax returns may need to be amended to add back the previously deducted wages .

Working With a Trusted Accounting Firm

When determining ERTC eligibility and filing a claim, your organization should work with a reputable accounting firm to create a defensible stance. Ideally, you should have a trusted advisor who understands your business and financial background, and who can conduct a holistic and detailed analysis of your business operations, COVID-19 impacts and government regulations through a singular lens.

A trustworthy advisor will take the time to carefully examine the disclosures you should provide to the IRS and the records you should retain to support your ERTC claim in order to avoid IRS penalties. As part of this process, your advisor will ensure you have the correct supporting documentation, such as government orders, income tax returns, employee time sheets, staffing numbers, sales records, etc.

When working with a tax advisor to help you with your ERTC process, ask yourself the following questions:

  • Are there any related parties that need to be considered in the ERTC eligibility determinations?
  • Are they taking my PPP loan forgiveness into account?
  • Are they properly accounting for gross receipts reductions to determine ERTC eligibility?
  • Are they identifying and applying appropriate government orders to determine full or partial suspension of operations eligibility?
  • Are they excluding ineligible shareholders or business owners from the ERTC calculation?
  • Are they charging a contingency fee? Contingency fee arrangements can give rise to conflicts of interest between a company and its service provider and may increase the company’s tax risks.

The advisor you choose to guide you through this journey may impact whether you lose your credit and become penalized in an IRS audit.

Next Steps

A defensible stance for your ERTC claim is vital before the IRS comes knocking on your door. At CBIZ, our tax team holds extensive experience with the ERTC program and can help your organization navigate the complex rules and regulations associated with it. We work with organizations to assess their specific situations and create customized plans that optimize the credit.

Contact us today to learn more about how we can assist you with the ERTC.

Copyright © 2022, 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).

Maintain a Defensible Stance for Your ERTC Claim To Avoid IRS Pitfalls eligibility requirements and tax credit calculations are complex. Learn how to overcome issues your org may face when taking advantage of ERTC.2022-10-10T17:00:00-05:00

ERTC eligibility requirements and tax credit calculations are complex. Learn how to overcome issues your org may face when taking advantage of ERTC.

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