The Employee Retention Credit (ERC) is a refundable tax credit that was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help businesses keep their employees on payroll during the COVID-19 pandemic. The ERC is available to businesses of all sizes, and it can be claimed for up to three quarters in 2020 and all four quarters in 2021.
In light of the recent Internal Revenue Service (IRS) announcements, IR-2023-169 and IR-2023-170, we urge businesses to be particularly vigilant in their retention of claim support documentation. The IRS has warned that aggressive marketing tactics have resulted in an influx of improper claims resulting in intensified focus on reviewing claims for compliance concerns.
As a business owner, you may be wondering if you claimed the credit properly. Here are the top four considerations for your ERC claim:
- Aggregation Rules and What Businesses to Include: The aggregation rules can be intimidating and are in stark contrast with the way businesses qualified for a Paycheck Protection Program (PPP) loan. Under the PPP, each legal entity could be considered separately for qualification purposes. However, under the ERC rules, where a person or entity has a majority ownership structure in more than one business, related or not, those businesses will require further diligence and consideration to determine inclusion.
- Parent-Subsidiary: In a parent-subsidiary, one business owns more than 50% of the other businesses; for example, a construction company that also owns a landscaping company.
- Brother-Sister Controlled Group: In a brother-sister controlled group, five or fewer people own 80% or more of the businesses. An individual who owned multiple businesses would fall into this category.
- Combined Group of Corporations: Not every business falls neatly into one of the two above categories. This option encompasses combinations of the above.
- Number of Full-Time Employees: The number of full-time employees you had in 2019 changes the way the ERC credit is calculated for 2020 and 2021. Remember, it is not a simple headcount calculation. You must consider each employee individually by the number of hours worked in 2019. The IRS determines full-time employment under either the monthly measurement method or the look-back method.
- Impact to the Business: In addition to proving that you have been subject to governmental order, you must also show a decline to the business’s gross receipts or employee hours during that period. It is extremely important that gross receipts are calculated correctly and to ensure that not only are you taking into account PPP receipts and “returns and allowances” appropriately, but also including miscellaneous income and interest income. It is important to follow IRS guidance on the calculation.
- Qualified Wages: It’s common for businesses to believe that all employees qualify for inclusion in the ERC credit calculation. However, unfortunately for small businesses, the owner, owner’s spouse, and family member wages are not eligible for inclusion. No one who falls within the following categories, in relation to a majority owner of the business, should be included in the calculation of qualified wages: a child, grandchild; a brother, sister, stepbrother, or stepsister; the father or mother or an ancestor of either a stepfather or stepmother; a niece or nephew; an aunt or uncle; and a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
To help protect yourself from fraud and ensure that your ERC claim is processed successfully, we recommend the following:
- Work with a qualified tax professional who can competently assess your eligibility and help you file your claim accurately and completely.
- Be prepared to provide documentation to support your claim, such as payroll records, revenue reports, and employee health insurance information.
- Avoid any ERC promotions that seem too good to be true, such as those that promise fast eligibility checks, require substantial upfront fees, or require anonymity.
We understand the ERC claims process can be complex. Ryan is here to help you every step of the way. We will ensure you receive the full amount of the ERC that you are entitled to, while also protecting you from the risks associated with fraudulent claims.
For clarity in determining eligibility on active or potential ERC claims, please reach out today to one of the Ryan professionals below.
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