The Employee Retention Tax Credit (“ERTC”) is still getting a lot of attention in the news media these days. Also, a number of companies are advertising on TV and the internet to say that you may still be able get claim the credit, even if you didn’t have a drop in revenues. Let me give you some thoughts on the current status of the ERTC. The ERTC is available for all 4 quarters of 2020 and the first 3 quarters of 2021. Eligibility can be happen in one of two ways.
Revenue Decrease
The first way is if there is a drop in revenues for the above 7 quarters mentioned above as compared to the corresponding quarters in 2019. For 2020, the revenue decrease criteria is 50% of the corresponding 2019 quarterly revenues. For 2021, it is a 20% decrease versus 2019. In addition, if you qualify for a particular quarter, you may qualify for a previous quarter even if that quarter itself doesn’t qualify. This is because of “lookback” provisions in the law. Bottom line – If you qualify under the revenue drop criteria, then it is a fairly easy process to file an amended payroll tax return (Form 941) to claim the credit, and we can help you with this.
Facts and Circumstances
I call the second way to claim the ERTC a “facts and circumstances” approach. If you did not have the revenue decreases as noted above, the second way to qualify is using this approach. If you can make the case that government mandates related to COVID had a detrimental effect on your business, then you may also qualify for the ERTC – – – things like disruptions because of COVID related supply chain issues or because the government made your employees stay home. This approach is somewhat nebulous because you have to build the case (e.g. in some type of report) outlining what the disruptions were and how they negatively affected your business. The report doesn’t have to be submitted to the IRS, but needs to be available if they request proof that you’re eligible for the credit.
There are some companies around who are helping build the case for the “facts and circumstances” approach. Our firm does not do this. If you’re interested in this approach, there are some companies we’re familiar with, or we’d be glad to help you evaluate any companies you might have been referred to. There’s obviously risk to this approach, but it’s legitimate as long as you can make the case that you’ve been harmed by government mandates.
While a third party company might help you build a “facts and circumstances” type case for the ERTC, the risk is all with you. Some of the reports we’ve seen to support this approach seem comprehensive and compelling. Others seem flimsy and may put you at significant risk for attack if you’re audited by the IRS. Many of these ERTC consultants say they provide “audit support”, but they don’t guarantee that you’ll win. Also, since the ERTC audit period is up to 5 years, you need to evaluate whether you think the company you used will be in business down the road.
Here is another significant risk. The wages used to claim the ERTC are not deductible for income tax purposes. The statute of limitations for income tax purposes is 3 years. What happens if the IRS audits your ERTC and disallows it 5 years from now? Not only would you have to pay back the ERTC (likely with interest and possible penalties), but then you would not be able to amend your income tax return to claim the wage deduction because it was beyond the 3 year statute of limitations. You could lose both the ERTC and the tax deduction in that situation.
If you have a case for the “facts and circumstances” approach, by all means evaluate the opportunity. However, be careful if it is something that seems too good to be true. As always, we’re available to talk through your specific ERTC situation and provide advice if requested.
