The employee retention credit (“ERC”) program continues to be a hot topic for businesses today. This incentive was first made available in 2020 as part of the COVID relief packages aimed to aid both for profit and non-profit businesses that struggled through the pandemic. For many employers this credit program has been more robust than the infamous Payroll Protection Plan (“PPP”) loan programs that caught so much attention in the media.
Two Eligibility Tests
Employee retention credits are available to employers that meet one of two eligibility tests. It is important to distinguish that employers merely need to meet one of these tests, they do not need to meet both. Employers can switch back and forth between each test to qualify for the period the credits are available.
The first eligibility test requires an employer to demonstrate a “significant decline in revenue”. This test changed between 2020 and 2021 with the initial test requiring at least a 50% decline in revenue for any quarter of 2020 compared to the same quarter of 2019. Federal legislation revised this test after 2020 allowing employers to qualify to claim these credits if a 20% or greater decline in revenue occurred when comparing any calendar quarter in 2021 to the same calendar quarter of 2019.
The second test allows employers to qualify to claim these credits if a full or partial suspension of operations occurred to a COVID-related government mandate. A full suspension of operations is pretty easy to navigate, right? If your business was completely shut down due to one of these mandates your business likely qualifies. It is the partial suspension of operations test that we have found a great number of opportunities through for many of our clients. The partial suspension test allows an employer to claim these credits if a portion of the company’s operations were suspended due to a government mandate. Companies affected by social distancing, reduced capacity, group gathering limitations, reduced operating hours and travel restrictions may be eligible under this test. Government mandates enforcing cleaning, disinfecting, sanitization and COVID testing may also allow an employer to qualify under this test. The “litmus test” here is whether or not the part of the business which was suspended due to a government mandate made up more than a nominal portion of total operations.
Benefit to Using a Certified Public Accounting Firm
As many fly-by-night credit consultants are pouring resources into marketing and direct solicitations related to ERC consulting services, it’s important to distinguish the difference between an established CPA firm and a credit consultant. The credit consultants, or “ERC Mills”, are usually not registered with the IRS as paid tax preparers and are unwilling to sign the amended payroll tax returns filed to claim these credits as paid tax preparers. It is not uncommon for ERC mills to charge contingent fees based on the size of the credit claimed. Licensed CPA firms, or registered paid tax preparers, on the other hand, are precluded from charging contingent fees that are based on the size of a refund claimed on a return prepared. As you might expect, there is an incentive to advise an employer to claim a credit that is perhaps larger than what an employer qualifies in a contingent fee arrangement, which is why professional standards governing CPAs and paid tax preparers do not allow this. We have worked with a number of clients to amend outlandish claims resulting from engagements with such ERC mills. Be aware of aggressive marketing and solicitation efforts in this area.
How to Move Forward
While this program is available for qualified wages paid during periods beginning March 23, 2020 and ending September 30, 2021 the credits can still be claimed through amended payroll tax returns up through the expiration of the statute of limitations. The statute for 2020 credit claims expires April 15, 2024 and the statute for 2021 credit claims expires April 15, 2025. While there is still time to claim credits through this program we do not recommend waiting. If your organization has not claimed the credits, please visit our Employee Retention Credit page, here to schedule a time today for a consultation to review eligibility.