Employee Retention Credit Update issued by the IRS
August 9, 2023
On July 27, 2023 the IRS issued additional guidance on the Employee Retention Credit (ERC) including additional guidance on Eligibility Rules, Qualifying Orders, Claiming the Credit, ERC Scams, and Recordkeeping.
The following is information taken from https://www.irs.gov/coronavirus/frequently-asked-questions-about-the-employee-retention-credit#decline. Please follow the link for additional guidance.
While the eligibility rules have not changed, the IRS wanted to simplify what businesses and employees are or are not eligible to claim the ERC.
Not every business is eligible for the ERC. In order to qualify one of three criteria must be met.
- Experienced a significant decline in gross receipts during 2020 (50%) or a decline in gross receipts during the first three quarters of 2021 (20%), or
- Sustained a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
Not all taxpayers are eligible to claim the ERC. Below is a list of some common taxpayers that are not eligible to claim the ERC.
- Individual taxpayers who are not business owners
- People who do not have employees
- Household employers
- Employers that didn't pay wages to employees during the qualifying time periods
- Employers who experienced supply chain disruptions but did not experience a full or partial suspension of operations by a qualifying order
- Government agencies
In order to qualify based on a full or partial suspension of operation due to a government order the order must have come from one of the following and have been at the local, state, or federal level.
- An order from the city's mayor stating that all non-essential businesses must close for a specified time period;
- A state's emergency proclamation that residents must shelter in place for a specified period, except for essential workers;
- An order from a local official imposing a curfew on residents that impacts the operating hours of your trade or business for a specified time period;
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Recommendations, bulletins, or statements issued by a government authority are not a qualifying government order.
Below are some common situations that do not qualify as having a full or partial suspension of business.
- If all your employees were able to telework during the pandemic and your business continued to operate, your business wasn't suspended.
- If your customers were affected by a stay-at-home order, but no orders applied to your business operations, you weren't suspended.
- If you voluntarily closed your business or reduced hours of operation, you weren't ordered to suspend.
Supply chain issues are not enough by themselves to qualify as a full or partial suspension of business. However, if the supplier’s business was fully or partially suspended due to a government order, and your business could not operate without the supplier’s product and the following was met as well, then you may qualify as a full or partial suspension of business.
- The government order caused the supplier to suspend operations,
- You couldn't obtain the supplier's goods or materials elsewhere (regardless of cost), and
- It caused a full or partial suspension of your business operations.
Claiming the Credit
The IRS issued deadlines as to when a business needs to file for the Employee Retention Credit.
Generally, for 2020 tax periods, the deadline is April 15, 2024. For 2021 tax periods, the deadline is April 15, 2025.
Should there be a error in your credit, IRS reminds you that you must pay it back, possibly with penalties and interest.
Affects on income tax returns
You should reduce your wage deduction by the amount of the ERC in the tax year the wages were paid. If you already filed your return before claiming the ERC, you should amend your income tax return to reduce your wage deduction.
Warning signs of aggressive ERC marketing to watch out for:
- Unsolicited calls or advertisements mentioning an "easy application process," or offering a short eligibility checklist.
- Statements that the promoter or company can determine ERC eligibility within minutes.
- Large upfront fees to claim the credit.
- Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
- Preparers refusing to sign the ERC return being filed by the business, exposing just the taxpayer claiming the credit to risk.
- Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
- The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.
How to protect yourself from ERC Scammers
- Work with a trusted tax professional. Eligible employers who need help claiming the credit should work with a trusted tax professional; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.
- Request a detailed worksheet explaining ERC eligibility and the computations used to determine the ERC amount.
- Don't accept a generic document about a government order from a third party. If they say you qualify for ERC based on a government order, ask for a copy of the government order. Review it carefully to make sure it applied to your business or organization.
- Don't apply unless you believe you are legitimately qualified for this credit. Details about the credit are available on IRS.gov, and again a trusted tax professional – not someone promoting the credit – can provide critical professional advice on the ERC.
In general, you need to have the records you relied on to show:
- That your business operations were suspended, including the specific government order;
- You experienced the required decline in gross receipts;
- Which employees received qualified wages and in what amounts;
- That you paid qualified wages only to employees who were not providing services, if you are a large eligible employer;
- How you allocated qualified health plan expenses;
- Your relationship to other businesses or entities and how it affects your ERC claim (see aggregation rules in Notice 2021-20, Part III, Section B);
- Any completed Forms 7200 that you submitted to the IRS;
- Any completed federal employment and income tax returns related to your claim for ERC.
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