By now, many business owners and C-suite executives have heard about the Employee Retention Credit (ERC). Released in March 2020, the ERC was created as part of the CARES Act in response to the economic impact of the pandemic. Ultimately, the program is meant to reward those who retained employees during 2020 and the first three quarters of 2021, despite experiencing a loss of revenue, a partial or total shutdown of their businesses due to the executive orders and governmental mandates enacted during the pandemic, or both.
Nonprofit organizations and small to medium-sized businesses who file for the Employee Retention Credit may be able to claim up to $5,000 in refundable tax credits for each W2 employee on their 2020 payroll and up to $21,000 in refundable tax credits for each W2 employee on their 2021 payroll.
In essence, the ERC acts as a cash rebate from the IRS via payroll tax credits—potentially providing much-needed funds to (i) alleviate the burden of lingering COVID-19-related problems, (ii) expand and upgrade operations and services, or (iii) provide employees with bonuses. Unlike the Payroll Protection Program (PPP), the ERC is not a loan, and there are no restrictions on how a business can use ERC funds.
As with most governmental programs, navigating the Employee Retention Credit can be confusing. Outlined below, we will discuss eligibility, common misconceptions, ERC scams, and extra protection for your ERC claim.
The top reasons that organizations have yet to apply for their ERC are:
They don’t think they qualify.
CPAs and payroll providers may be operating under the assumption that you don’t qualify for the ERC either because your organization did not see a decline in revenue or they lack a full understanding of the full or partial suspension of operations test. Regardless, they are under no obligation to check if there’s an opportunity for your business to receive this credit and may not believe it is worth the risk or additional effort to file.
They think it’s too late.
Contrary to popular belief, organizations still have time to claim the Employee Retention Credit. The program partially sunsets in April 2024 and ends in totality in April 2025.
They believe that because they received the PPP; they can’t claim the ERC.
Many businesses took SBA-backed loans through the Paycheck Protection Program (PPP), believing they couldn’t claim both the PPP and the ERC through the IRS—however, with some qualifications and exceptions, this is false. You can still claim ERC for a given quarter as long as you don’t use the same Qualified Wages to claim both PPP and ERC funds.
Here’s how to know whether you qualify.
There are two clear ways to know if you qualify for the ERC:
Using these tests, an ERC expert can determine which quarters you qualify for ERC funds.
The financial statement test is straightforward and objective.
This test is referred to as the “Substantial Decline in Gross Receipts” test or SDGR Test and compares quarterly gross receipts in 2020 and 2021 to the same quarterly period in 2019.
If you saw a gross receipts decline of 50% in 2020 or20% in 2021, you can qualify under this test for those quarters.
The business interruption test is a bit more complicated.
This method of qualification is a legal analysis and focuses on whether a more than nominal portion of your business was negatively impacted by executive orders or other mandates leading to a decline in ability to provide goods or services.
Therefore, even if revenue went up, it does not mean you didn’t have a business interruption.
For example, a restaurant might have seen increased revenue because of the increase in takeout orders when their dining rooms were closed. However, this still counts as a business interruption because a part of the business that accounted for more than 10% of their 2019 revenue (i.e., the in-dining room service) was restricted in its ability to provide goods or services by more than 10%.
Even with this understanding, the scenarios under which organizations qualify are varied and nuanced, so it’s important to find a qualified advisor, like Sagemont Tax, with the appropriate knowledge and experience to help you navigate your specific circumstances. This includes preparing a thorough eligibility report with the support of tax and legal experts prior to submitting your claim to the IRS.
Filing for the Employee Retention Credit can be a difficult process, and while a traditional CPA or payroll provider may be able to file your ERC claim, it is highly recommended to retain a knowledgeable third-party ERC advisory firm. Filing without a proper understanding of the complex ERC tax code brings unnecessary risks, including;
When looking for a qualified advisor, business owners should be vigilant of third-party companies posing as tax experts. These so-called “ERC mills” claim to help companies file for ERCs when they may not be qualified to do so. According to the IRS, “these third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business’ federal income tax return must be reduced by the amount of the credit.”
The IRS warns businesses to beware of advertising schemes and direct solicitations that promise you payouts that seem too good to be true. The aggressive marketing techniques used by these groups are a red flag that the firm is likely untrustworthy.
Without the expertise needed to help you properly file for the Employee Retention Credit, these ERC mills often overinflate their client’s eligibility and lack the resources and knowledge to defend their clients in the event of an audit.
Some vendors claim their Errors and Omissions (E&O) coverage will cover clients for their financial losses related to their ERC claims and that this allows them to provide a 100% risk-free service. We believe this is misleading at best, as E&O coverage is exclusively intended to protect the service provider from liabilities arising from inaccurate or incomplete work product—not to insure a particular tax outcome for their clients.
Unlike ERC mills, expert ERC firms are led by CPAs and tax attorneys with extensive experience in the financial and legal tests related to the ERC. Such professionals will ensure that all eligibility criteria are met for each applicable period before submitting an ERC claim. They will also provide their clients with a detailed, CPA-certified, audit-ready report detailing their eligibility and wages claimed. Additionally, and perhaps just as important with the sensitivity around the ERC, they will regularly advise potential clients not to claim the credit when they do not have a clear path to eligibility.
Of course, even with an expert advisor, some businesses may still be wary of claiming the ERC. For example, we’ve found that nonprofit leaders are especially concerned due to the “zero risk” tolerance nature of charitable organizations and their boards. In other cases, businesses that did not experience a decline in revenue might also be hesitant to file for the ERC because of the complicated eligibility requirements. In both cases, employers should protect their ERC claim with either tax insurance or a financial guarantee.
In basic terms, these products ensure the financial outcome of an ERC claim if the IRS denies a claim or reverses an ERC claim under audit. These products can also be used to eliminate the risk of penalties or interest and typically must be accompanied by a third-party legal opinion to satisfy the underwriting requirements. It comes as no surprise that there are a very limited number of insurance and other financial companies that are offering these types of products. Additionally, the few providers who do exist will only work with businesses whose claims have been filed by a highly vetted group of tax and legal professionals.
We recommend that your organization find an ERC firm that will back your credit with either tax insurance or a guarantee that (i) protects against IRS rejection and audits, and (ii) reimburses the costs of IRS interest and penalties.
Sagemont Tax understands the risks organizations face. That’s why we offer our qualifying clients (e.g., nonprofits and tier 1 businesses in certain “affected” industries) financial protection for their claims as an add-on service.
This unique protection comes in the form of a financial guarantee or third-party insurance policy. Sagemont Tax is the ONLY professional service provider in the United States that has been approved to assist their clients with procuring insurance to reimburse the loss of ERC from a global A+ rated insurer as part of their comprehensive ERC service offering.
At Sagemont Tax, we have complete confidence in our work and stand behind you through the process. We also fully support you in the event of an audit.
If you were to get audited by the IRS, our team is well-versed in communicating with the IRS and will walk you through the entire process. Additionally, we provide you with the information you need to demonstrate that your credit is valid (according to the information provided to Sagemont Tax by your company).
Our CPAs personally sign your amended payroll tax returns.
Should the IRS assess an unfavorable “Adjustment Amount,” our Tax Refund Guarantee allows you to still receive and/or maintain your ERC.
The Adjustment Amount is any amount of any ERC applied for with Sagemont Tax’s assistance that has been denied or required to be returned to the IRS due to the IRS concluding that you were not an eligible employer for all or a portion of the ERC.
Here’s how it works.
If you’d like to learn more, please reach out to Sagemont Tax for a no-cost evaluation of your company’s ERC eligibility.
Sagemont Tax’s team of CPAs, lawyers, and payroll specialists combine their expertise to provide a uniquely holistic ERC service offering that ensures technical soundness that cannot be matched by traditional income tax CPAs. At Sagemont Tax, we’re committed to excellence, and our brand is quickly being recognized as one of the top Employee Retention Credit firms in the United States. To learn more about how we can help you calculate, document, and claim your ERC, contact us here or call 754-202-3055.