The 10 Biggest Myths about Employee Retention Credit for Manufacturers & Distributors
The Employee Retention Credit (ERC) is huge! In March 2021, this credit was extended through Dec. 31, 2021, and then expanded as part of the American Rescue Plan Act of 2021.
So, what are we misunderstanding about this credit? Let’s review.
The ERC is a tax credit first put in place last year as a temporary coronavirus relief provision to assist businesses in keeping employees on the payroll. It definitely helped. Tens of thousands of businesses have already received more than $1 billion in tax credits through the ERC just this year, according to the White House. This boatload of cash flow has provided a night-and-day difference for those companies struggling to keep employees on payroll and their doors open.
However, we’ve also seen many companies close their doors. I wonder, did we help them get the ERC and the maximum amount possible? Did we help them with the proper documentation to pass muster with the IRS? Were we there to help educate them about the new enhancements of the ERC?
Maybe not—and maybe that’s because of our own misunderstandings. Here are the top 10 misunderstandings and myths surrounding the ERC—and how to correct them.
Debunk the misunderstandings surrounding the Employee Retention Credit to help your business receive a much-needed cash infusion.
I can’t claim ERC if I’ve already claimed PPP (or gotten my PPP loans forgiven)
Now you can claim both! Congress, in the Consolidated Appropriations Act (CAA) of 2021, removed the limitation on only claiming one or the other. PPP will only account for 2.5 times your monthly payroll expenses and is meant to be spread out over 6 months. This leaves plenty of uncovered wage expenses for claiming ERC.
My business did not have a drop in gross receipts of 50% or more
The CAA has changed the qualifications so that a reduction of 20% now qualifies. BUT remember there is also another way to qualify for the ERC – if your business has been subject to a partial or full suspension due to a government order – see the next point
My business was not shut down during the pandemic
Even a partial suspension order by the government (federal, state or local) of your business could potentially qualify. For instance, a partial shutdown, a disruption in your business, inability to access equipment, having limited capacity, shutdowns of your supply chain or vendors, reduction in services offered, reduction of hours to accommodate sanitation, shut down of some locations and not others, and shutdowns of some members of a business are all scenarios that still potentially qualify for the ERC. The key considerations are – due to the government ordered partial (or full) suspension is/was your business not able to continue its activities in a comparable manner, and did that result in a more than nominal impact on business operations. Remember, the partial or full suspension is an alternative way to qualify for the ERC — separate from the reduction in gross receipts test.
My company was deemed an essential business, so I do not qualify because of business suspension
Even if your business is deemed essential, an impact or change in your business may still qualify you. For example, even if you were open but your vendors were closed down or you can’t go to a client’s job site, you may still qualify. Or alternatively, if part of your business was considered non-essential and was impacted by a government-ordered suspension – you may also qualify. The scenarios discussed above in Mistake 3 could apply here as well.
My company has grown during quarantine, this isn’t something I should take
Great news! If your company has grown during quarantine, but experienced a full or partial suspension, there are expenses that may qualify.
Sales have rebounded for us in Q1 of 2021, I can’t qualify for this credit
With the introduction of the CAA, you have the option to look at one quarter prior to determine qualification. This means we can determine eligibility based on lost revenue in 2020. Also, if you were subject to a full or partial suspension, you may qualify regardless.
We were in losses, or do not have any tax liability
This is a refundable credit. In practice, this means that any credit overage above tax liability is sent to the taxpayer/business owner as a refund.
My company has grown to over 500 employees, so we are not eligible for the ERC
The employee count restriction is based on full time equivalent (FTE) employees, which is a more involved calculation than just counting everyone in the office. We helped a business with 640 employees and the FTE calculation put them at under 500. Furthermore, if you paid any employees to NOT work, or to work less than the hours for which they were paid, then the employee count restriction would not apply for those employees.
I’m a charity and the ERC is only for businesses
The ERC also may provide significant benefit to charities – churches, nonprofit hospitals, museums, etc. Charities can be particularly good candidates for the ERC.
The IRS is too busy to properly check documents
There are still many tax advisors who think they can just create their own simple form. They check a few boxes, give a few sentences of explanation, and expect the IRS to hand over thousands of dollars. Guess again.
We’ve spoken with former senior IRS officials. It’s clear that the best practice is for businesses to provide contemporaneous documentation from counsel that will properly and fully document how they qualify for the ERC.
Let’s face it … many businesses are still struggling to stay open. There’s still so much economic uncertainty due to COVID-19 and its variants. What effect will this have on your client’s business? Do they have enough cash to make it another month, quarter, or year? You can ensure they do this by educating them about the ERC and helping them get the cash infusion they need. Let’s do our best to be that trusted strategic business advisor that gives them a chance to survive!
Top 10 Mistakes to Avoid Before Claiming the Employee Retention Credit
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