Myths About ERTC

Myths About ERTC | Myths about ERC | Facts about ERC

1. The IRS — not Santa — is in charge of reviewing requests for the ERC – and you need to look closely at the requirements of the law and relevant government orders – and then document and detail how your business qualifies and meets the necessary tests as outlined by the IRS.

Like most tax incentives and credits provided by Congress – the ERC is a keep-your-feet-on-the-floor exercise. Not being so blinked that you don’t look hard as to whether your business can qualify for this good incentive that Congress provided to help businesses keep their doors open and employees on payroll. But not so happy-clappy that you believe without question the voices telling you it’s a “whiskers-on-kittens” give away by Santa.

2. If you were affected by COVID you are qualified for ERC!

By now, most business owners and their CPAs know there are two paths to qualifying for the ERC; revenue decline and impact on the business. But many believe – wrongly — they can qualify for any complications their business had with their operations due to COVID.

No, no, no. Merely adjusting operations in response to COVID is not enough to qualify for the ERC. There are two things you need to show to be eligible under the business impact test; you need to show that a specific COVID-related government order or mandate (federal, state, local) caused the impact to your business and you need to show the extent and duration of that impact. In short, you must show that the order had a “more than nominal” impact on your business while the order was in full force and effect – more on that below. Best practice—you need to document the specific government order and detail and document the impact as to your business while that order was active.

3. Revenue Decline Is the Only Qualification Criterion

Contrary to popular belief, one of the common myths surrounding ERC is that you must have a revenue decline to be eligible for this tax credit. Legacy Tax & Resolution Services is here to set the record straight. While a revenue decline is indeed one way to qualify, it is not a requirement. Small business owners can also qualify for the ERC by demonstrating operational suspensions due to government orders or if they are a recovery startup business. Resolute's team of experts can help navigate these alternative paths to ensure you don't miss out on valuable ERC benefits.

4. PPP Loan Eliminates ERC Qualified Wages

Another misconception that needs to be dispelled is the notion that the Paycheck Protection Program (PPP) loan wipes out all qualified wages for ERC purposes. Legacy Tax & Resolution Services understands the intricacies of these two programs and the potential for synergy between them. While it is true that you cannot double-dip and claim the same wages for both the ERC and PPP forgiveness, there are still opportunities to maximize your benefits. Legacy's expertise ensures that you accurately identify and claim eligible wages, optimizing your ERC benefits while navigating the complexities of PPP forgiveness.

5. Any government guideline qualifies you for ERC!

First, an order must be an actual order and not simply advice or a suggestion. There’s a big difference between government orders that say a business MUST or SHALL do something versus a guideline that RECOMMENDS or says a business SHOULD do something. The latter do not qualify, so be careful what orders you or your ERC advisor are relying on for your qualifications. As the IRS guidance notes, a Mayor giving a speech encouraging residents to practice social distancing is not an order. Further, as the IRS guidance makes clear orders must limit commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19 if they are to be relied upon for ERC. Finally, government orders must have jurisdiction over the employer’s operations and the order must have a more than nominal impact on the business’ operations (discussed next).

6. A qualifying mandate that caused an impact to your business means you qualify!

Not so fast. Even if a qualifying order affected your business, you still may not qualify. IRS Notice 21-20 requires that there be a “more than nominal” impact on the business to be eligible. Unfortunately, the “more than nominal” test too often goes unmentioned — but it is a critical part of the ERC calculation analysis.

If you otherwise qualify, but the effect of an order on your business was mostly minor inconveniences, then you may not be eligible. A suspension of a more than nominal portion of a business’ operations is a very technical calculation – it needs to be well documented. If you are unsure, you need to check with experienced tax professionals that can calculate nominal impact based on the IRS’ guidance.

7. You get $26,000 for every employee!

Calculating your ERC credit can be quite complicated - and business owners should exercise extreme caution. If you hear that you can simply multiply how many employees you have times $26,000 and then place that number on your 941-X, you should be very skeptical of the advice that you are getting. There are 3 major factors that impact your refund: wages paid, duration of impact, and other incentives already claimed (discussed next).

The credit is calculated as 70% of qualified wages paid to an employee in a given quarter, up to $10,000. So, for some simple math, if you pay an employee $7.25 an hour, their wages would be about $3480 a quarter, taking 70% of that gives a maximum credit of $2436.

This assumes the qualifying government mandate lasted for the whole quarter. Not only do wages paid matter but also the length of time the mandate was in place. For instance, let’s say those same workers qualified due to a social distancing order but that order was only in effect for half of the quarter. You would then only get half of the maximum credit.

8: ERC Triggers an Automatic IRS Audit

Fear of triggering an IRS audit is a persistent myth associated with the ERC. However, Legacy Tax & Resolution Services wants to put this misconception to rest. While it is essential to ensure compliance and accurate reporting, claiming ERC does not automatically lead to an audit. The IRS conducts audits based on various factors, and claiming ERC alone is not a trigger. With Legacy's expertise and use of cutting-edge tools, you can confidently navigate the ERC process, ensuring accurate reporting and peace of mind.

9. If you claimed PPP you can still qualify for $26,000 per employee!

Interplay with other incentives is where most ERC providers are miscalculating the ERC. While you can claim PPP and ERC together, they will have interplay between themselves and any other incentives your business may have taken – such as the restaurant revitalization grant or the Work Opportunity Tax Credit.

As the IRS guidance notes: “the law now allows employers who received PPP loans to claim the Employee Retention Credit for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.” To state another way – the ERC cannot be calculated as to payroll costs that are taken into account for purposes of PPP loan forgiveness (no double dipping).

And One Truth – Must Reduce Wage Deductions By Amount Of ERC

The IRS is clearly concerned (raised in their press release) – and we see in our own work when asked to review work from accountants other tax providers supporting ERC calculations – that the taxpayer is not told that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the employee retention credit.

Dean Zerbe

Conclusion - People need ERC tax experts to get them the expetise needed.

More Myth about ERTC

1. ERTC is over?
No. Available on qualified wages from 3/13/2020 through 9/30/2021 (12/31/2021 if recovery start up business.)

IRS Notice 2021-20, 2021-23, 2021-49

2. You can't get ERTC if you got PPP?
Wrong. You can get both per the Appropriations Act enacted 12/27/2020. IRC Notice 2021-20 Page 12.

3. You must experience a reduction of gross receipts AND be closed partial/full due to governmental shutdown?
No. It is either/or. Only one event need occur. IRS Notice 2021-20 Page 7.

4. If you pay someone a Form 1099, you can use that to obtain ERTC?
Wrong. The person receiving the Form 1099 is a self-employed individual, and does not qualify. IRS Notice 2021-29 Page 20, Q&A #5

5. If your customer is affected, you can qualify for ERTC?
Wrong. IRS Notice 2021-20 Page 29 Q&A #13.

6. If your supplier is affected, you can qualify for ERTC?
Myth in that your supplier must be shutdown due to governmental order, and due to that governmental order the supplier could not send you critical supplies that had a more than nominal affect on your business, and then only the dates it had an affect on your business, no more than the
dates of the suppliers governmental orders; with a copy of the governmental order with proof that supplier couldn't provide supplies to your business because of the governmental order, with proof you tried to play orders that were unfulfilled and proof the supplies were critical and had an actual
affect on your business. IRS Notice 2021-20 Page 28 Q&A #12

7. If supplier is the cause of your qualifying event, you qualify for the entire quarter?
Wrong. IRS Notice 2021-20 Page 43 Q&A #22, it is only for the actual period (beginning date to ending date) that the suppliers shutdown effects your business.

8. Essential businesses don't qualify for ERTC?
Wrong. If their gross receipts are down accordingly, they qualify. Also, if they have a non-essential component of their operations that such revenues exceed 10% of the overall gross revenues, the entire business can qualify if there was a governmental order. Also, if aggregation is applied with
multiple owned businesses, it may qualify. It is not an absolute that essential businesses don't qualify. IRS Notice 2021-20 Page 27 Q&A #11.

9. You separate non-essential employees from essential employees?
NEVER, no matter the qualifying event for ERTC, you never segregate essential and non-essential employees. IRS Notice 2021-20

10. If a business is closed for any period of time due to governmental order, they qualify for the entire quarter?
Wrong as only the qualified wages during the actual days of the shutdown qualify. IRS Notice 2021-20 Page 42 Q&A 22.

11. When determining if gross receipts are down, you compare 2021 to 2020?
Wrong, as you always are comparing the quarter's gross receipts to 2019; whether for 2020 or 2021. IRS Notice 2021-20 Page 44 and IRS Notice 2021-23 Page 5

12. Full-time equivalents are applied when determining the full-time employee head count in 2019?
Wrong, as you only include actual full-time employees. IRS Notice 2021-49 Page 20.

13. Owners, spouses and relatives qualify for the ERTC?
Only if the constructive (aggregated) family ownership is 50% or less or only if the over 50% owner has no living relatives. IRS Notice 2021-49 Page 25.

14. ERTC has no tax affect?
Wrong, While it is not taxable income, it must be treated as payroll reduction for the years for with the credit is receives. The taxpayer must reduce the payroll expense deduction on the original return, which would likely cause taxable income. IRS Notice 2021-20 Page 92 Q&A #60.

15. ERTC reduces the wage deduction when the employer receives the refund check?
WRONG, as the reduction of the wage deduction is recognized in the year in which the wages used to obtain the ERTC were deducted for income tax purposes, which means an amended income tax return is required. IRS Notice 2021-49 Page 24.

16. An employer that operates a trade or business in multiple locations and is subject to governmental orders requiring full or partial suspension of its operations in some jurisdictions, but not in others, is not considered to have a partial suspension of operations?

Wrong, the employer may still qualify IRS NOTICE 2021-20, Question 20

17. An employer that is subject to a governmental order to fully or partially suspend its business operations and the order is subsequently lifted in the middle of a calendar quarter, the employer is eligible for the entire calendar quarter?

Wrong, the employer is eligible on for the actual shutdown period. IRS NOTICE 2021-20, Question 22

18. For members of an aggregated group, the average number of full-time employees is determined based on a company by company basis.

Wrong, It is based on an average of the group of companies. IRS NOTICE 2021-20, Question 32

19. Self-employed individuals are eligible for the employee retention credit?

Wrong, Self-employed Individuals do not qualify. IRS NOTICE 2021-20, Question 5

20. Household employees are eligible for the employee retention credit?

Wrong, Household employees do not qualify. IRS NOTICE 2021-20, Question 6

21. If a governmental order causes the customers of a business to stay at home, or otherwise causes a reduction in demand for its products or services, and the business
responds to the lack of demand by suspending some or all of its operations, the business is considered to have a suspension of operations due to a governmental order?

Wrong, this would not be considered due to governmental shutdown orders. IRS NOTICE 2021-20, Question 13

Deadline for 2020: April 15, 2024