Dealing with the operational fallout from a global pandemic has been a nightmare for businesses across the country. The next headache will be slogging through data and documentation to support COVID-19 tax credit filings, compounded by the fact that those credits are both new and complicated to claim. Even if you have in-house tax experts, tackling claims like the Employee Retention Credit (ERC) is something you may want to think twice about doing alone. Just consider these nightmare situations:
One great ERC candidate reached out to us and mentioned that they were busy with some new key hires. They asked if we could circle back up in a couple of months regarding the ERC. Separately, they mentioned that they had been working on their Paycheck Protection Program (PPP) loan forgiveness application. They inquired about the ERC qualified wage impact of COVID-19 bonuses paid for idle time. They were deciding whether they should include this amount in the PPP forgiveness application. This candidate was asking a great question, but unfortunately, it did not capture the complexity of the ERC/PPP interplay in its entirety. The fact that this candidate was asking this question at all means that there is a more detailed analysis that they should be doing in connection before they file that PPP forgiveness form.
One call came in from a prospective client whose business had already filed for PPP loan forgiveness. By the time they had reached out to us, it was too late. They did not file the forgiveness form in a way that would maximize the ERC. Now, in order to successfully claim their ERC, the PPP forgiveness application will have to be amended. This may sound straightforward, but the time, effort, and knowledge required to accomplish it are no small investments. By the time all is said and done, the company will have done twice the work for no more credit – and possibly less.
The groundwork is laid for another, more dire type of scenario when businesses miscalculate their ERC eligibility. Not getting what you’re entitled to is disappointing, of course, but what’s equally bad (and sometimes much worse) is getting a lot more than you’re entitled to. Both problems arise frequently due to a misunderstanding of ERC eligibility based on the concept of a “partial suspension of operations” and the materiality of that suspension on the controlled group as a whole.
Businesses can be partially suspended by COVID-19, but what you might not know is that there are specific rules regarding the materiality of the pandemic’s impact on the business and also how other entities controlled by the same ownership group may impact that interpretation. Whether it’s missing out on millions of dollars in ERC credit or being faced with an audit, repayment, and fines from the IRS, neither is a good look for the bottom line.
We see and hear about similar misunderstandings on an almost daily basis, which is hardly a surprise. The CARES Act (parent of the ERC) is a massive stimulus package that was written and passed extraordinarily quickly and has been the subject of contradictory guidance from the IRS, so it’s no wonder that confusion abounds when it comes to claiming pandemic-related credits.
Another client that reached out to us had already claimed some ERC based on a worksheet that their payroll company had provided them. This client had a substantial credit, almost $750,000 per month. To the client, this initially sounded like a great idea. Upon their further review, they realized that taking such a tremendous tax position without professional advice was not ideal. If they had continued down this path for the year, they would have received several million dollars in refund checks from the IRS and would not have any of the IRS required documentation in the event of an audit. The client would simply have a number calculated by its payroll company, without any substantiation. Also, the payroll company would not have defended the client in the event of an audit. The client would have been left on their own.
Again, it’s hard to fault the taxpaying companies in these situations. Too often, resources that explain the benefits of tax credits – whether webinars, forums, or others – fail to give adequate details or link to reliable, expert guidance. That’s especially unfortunate when the reality is that most businesses are eligible for more and bigger credits than they realize – if only they had the precise knowledge of how to go about the claims process.
As a business owner, financial executive, or HR executive, everything you need to know is out there. Sometimes, however, it’s not knowing what you don’t know that leads to a mistake you can’t undo.