Employee Retention Credit (ERC) - The Good, The Bad and The Ugly!

The Employee Retention Credit (ERC) is a tax credit provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequent legislation to encourage employers to retain employees during economic disruptions caused by the COVID-19 pandemic. Currently the government has a put a pause on processing ERC submissions so that they can weed through the many bogus applications that were haphazardly submitted. They are, however, still accepting submissions for later processing. While the ERC has been a valuable tool for many businesses, and we certainly are a proponent of it there are certain pitfalls and challenges associated with its implementation that we feel those who are applicants should be aware of.  Knowledge is power and we present all that you should be aware of when planning to apply for the ERC tax credit.

The GOOD!

 1.     Cash Flow for your company. This may be the transfusion you need to stay afloat.  One company used ERC to get them out of Chapter 11 and on to a new beginning.

2.     Cash is king and even if you do not need the money for day-to-day operations, you may need it for other purposes.  We helped one company use these funds to set up a tax-free retirement program for some of their key people.

3.     Some companies qualify for ERC benefits who have previously been told by their advisers that they do not.  To really check it out  ask us for “ERC Refund Questionnaire” – a form that can  settle the issue for once and for all.  We will send it to you via email  upon request, and once returned, we will check it  out for your company.

4.     Many Charities can also qualify for ERC.  We mention this as some have told us that they were informed that non-profits were ineligible.    

 The BAD! Beware of the rules, keep detailed records. A qualified tax expert can help you get through these complexities and enjoy a successful submission.

 1.     Eligibility and compliance: Meeting the eligibility criteria for the ERC can be complex, and the rules have changed over time with various legislative updates. Complying with the evolving requirements can be challenging for businesses, and mistakes in eligibility determination can lead to penalties.

2.     Coordination with other relief programs: Businesses may be eligible for multiple COVID-19 relief programs, such as the Paycheck Protection Program (PPP) or the Shuttered Venue Operators Grant (SVOG). Deciding how to allocate resources and navigate the interaction of these programs can be complicated and require careful planning to maximize benefits.

3.     Calculation complexities: The ERC calculation is based on a percentage of qualified wages paid to eligible employees. Calculating the credit amount correctly can be intricate, and errors can lead to over- or under-claiming, which may result in penalties or missed opportunities.

4.     Record-keeping and documentation: To claim the ERC, businesses need to maintain detailed records and documentation related to qualified wages, financial impacts, and eligibility. Insufficient record-keeping can make it difficult to support a claim and could lead to disputes with tax authorities.

5.     Changing guidance and legislation: The ERC rules and guidance have evolved over time with changing legislation and IRS interpretations. Staying up to date with these changes and understanding how they affect your specific business can be challenging.

6.     Audit risk: Given the potential for significant tax savings through the ERC, businesses may be subject to scrutiny and audits by tax authorities. Being prepared for audits and ensuring compliance with the ERC rules is essential to avoid penalties and repayments.

7.     Timing issues: The ERC is a refundable tax credit, meaning businesses may receive it as a cash refund from the government. The timing of when these funds are received can impact cash flow and financial planning, especially if there are delays in processing claims.

8.     Benefit limitations: The ERC is subject to various limitations, such as the maximum credit amount per employee and per year. These limitations can impact the overall benefit a business can receive from the credit.

9.     Clawback provisions: In some cases, if an employer claims the ERC but later becomes ineligible, they may be required to repay the credit. Understanding the circumstances that trigger clawback provisions is essential. ( a Clawback occurs when money has to be paid back with penalties attached).

10.  Administrative burdens: Applying for and claiming the ERC can be administratively burdensome, requiring businesses to dedicate time and resources to navigate the process.

 The UGLY! – RED FLAGS to watch out for.

 1.     Companies that require an upfront fee to do your ERC calculations. Legitimate companies do not require upfront fees. If you do not qualify for the benefit, you have wasted your company’s money. We do not require any upfront fee.

2.     Companies that cleverly require an immediate payment for their services when they determine that you qualify for the benefit.  Here is an example of a modern-day financial disaster.  You find out that your company is qualified for a $200.00 ERC benefit. The company immediately bills you for their fee and you have yet to receive the check.  So where is the money coming from to pay for the service?  You may or may not have the money to pay the fee when due, although your contract says the money is due immediately. This is a big red flag. We are not paid until our client is paid.

3.     Once the benefit is determined, your 941’s have to be amended. Many companies tell you to have your tax professional do that as they do not do that function.  Guess what? Until those 941’s are amended and sent in, you will not get a check. What if your tax person says he is not doing the required amendments without having done the ERC calculations? And what if you continue to find that a problem with subsequent Tax professionals? Your company is not going to get a benefit. Solution – do not contract with an ERC company that does not also do the 941’s.  We do the 941’s for our clients.     

 To navigate these pitfalls and maximize the benefits of the Employee Retention Credit, businesses should consider seeking professional advice from tax experts or legal counsel, keeping detailed records, and staying informed about the latest guidance and changes to the program. Compliance and accuracy are crucial to avoid legal and financial issues associated with the ERC.

Your inquiries are welcome. Check us out at www.AffiliatedAdvisors.net  940-566-1313/1-866-846-7430.