IRS FAQ Employee Retention Tax Credit

IRS FAQ Employee Retention Tax Credit

Many taxpayers and practitioners anxiously await guidance and clarity on many aspects of the ERC.  All of the information presented below is based on the current guidance and our best attempts to keep up with current developments.  Neither our's nor the IRS’ FAQs are always current and may not be updated for the most recent developments.  Further, neither our's nor the IRS’ FAQs can be relied upon as legal authority.  However, companies can still review the ERC rules to determine eligibility.  LTRS continues to monitor ERC developments and will provide more information when available.

How much ERC money am I eligible to receive?

If your business was formed before February 16th, 2020, you may qualify for up to $26,000 per W-2 employee. If your business was formed after February 16th, 2020, you my qualify for up to $33,000 per W-2 employee. The total amount your business is eligible for will depend on the number of employees you have and other revenue reduction figures.

What is an eligible Employer?

a. Eligible employers are small businesses in the US that carry on a trade or business during the calendar year for 2020 and/or 2021 and have fewer than 500 W-2 employees. *1099 contractors do not qualify

b. This includes tax-exempt organizations that experienced either of the following:

Full or partial suspension to business operations during any calendar quarter in 2020 and/or 2021. These are attributed to governmental orders that limit commerce, travel, or other group meetings due to the COVID-19 pandemic.

Experienced a Significant Decline in Gross Receipts (“SDGR”) during a calendar quarter for 2020 or 2021. For 2020 quarters, SDGR is defined as a decline of at least 50% compared to the same quarter in 2019. For 2021, this metric has been reduced to a decline of at least 20% for the comparable quarter.

What if my CPA or other professional already told me I don’t qualify for the ERTC?

When a CPA or other professional deems a business to be “not qualified” for the ERTC, it is almost always due to the CPA’s analysis of the Revenue Reduction Test. CPA’s and other professional, broadly speaking, have been less than enthusiastic to analyze businesses under the Nominal Impact Test and have left such analysis to tax attorneys specializing in the ERTC.  If your are concerned that your business may qualify, get a 15 minute second opinion from an ERTC expert.  Then if you do not qualify, you are not missing out on a big opportunity.  Remember, the ERTC application has a time limit, once past, you have missed on one this opportunity forever!

Are there risks involved?

No. You pay nothing until you receive your ERTC check from the IRS. As part of our process we prepare a pre-audit report included with our application submission  We do this for three reasons, 1) The pre-audit report with the submission does the work for the IRS Review, leading to a faster approval.  2) We believe there will be a wave of audits coming in future years and we are building our submission packages in preparation for that possibility.  3) While you cannot prevent being randomly selected for an audit, if you build your application package for that possibility, you decease your chances of being selected.  In addition, in the event of a subsequent IRS audit challenging our legal determination of your eligibility, our ERTC Professionals will provide a full defense of your ERTC claim at no additional fee.  We can afford to do this for two reasons, 1) We guarantee our work and 2) we have already prepared for this event as part of our pre-audit application submission.

Is the ERTC specific to any industry?

No. The ERTC is intended for businesses the operated during the pandemic and maintained W2 employees. Only businesses that are directly related to federal or state government are ineligible. Private businesses from any industry, including non-profits, may qualify. 

Am I required to have a certain number of employees?

There are no minimum number of employees required to access the ERTC opportunity. However, employers with 100 in 2020, and 500 in 2021 can only use the qualifying wages of employees that were paid NOT to provide services.  You will often see advertisements saying, if your had more the 5 employees...... that is just because they do not want to work with small employers.

What are qualified wages?

Qualified wages is defined as compensation provided to employees during an eligible period after February 16th, 2020, inclusive of health plan expenses.

Are group healthcare expenses considered qualified wages?

Yes, group healthcare is part of the calculation of qulaifying wages

Do employee wages from before March 13 count as qualified wages?

No. There are no qualified wages (for either PPP and ERC) prior to March 13, 2020.

Can I qualify if I’m a 1099 Independent Contractor?

Unfortunately, not. This program is only available for companies that pay W2 wages to non-owners.

Can I qualify if I don’t have any W2 employees?

Unfortunately, not. This program is only available for companies that pay W2 wages to non-owners.

As an owner do my wages, or the wages of any family member I employ qualify?

Maybe. Wages of owners who have majority ownership, defined as over 50%, do not qualify, nor do the W2 wages of any immediate family members of the owner. In the case where an owner has less than 50% ownership, their W2 wages qualify, as do the W2 wages of immediate family members.

What are the main differences between PPP and ERC?

While both PPP and ERC are part of the CARES Act, there are some notable differences: the PPP was structured as a forgivable loan through your local bank via the SBA; the ERC is a payroll tax credit through the IRS – it is not a forgivable loan; it is cash for you to do whatever you choose. The PPP had a specific funding amount and PPP funds ran out; ERC funds don’t run out, you just have to claim your credit prior to the end of the 3 year lookback period. Finally, the PPP isn’t taxable; the ERC is.

How do I qualify?

A business is eligible if they meet one of two tests. Only one test is required and it’s possible to qualify under one test for one period, and another test for a different period.

The first test is a quantitative test that was developed as an objective measure of whether COVID-19 impacted a company’s ability to generate revenues comparable to pre-COVID levels. This test is referred to as the “Substantial Decline in Gross Receipts” test, or SDGR. This test looks to compare quarterly periods in 2020 and 2021 to the same quarterly period in 2019. The relevant percentage threshold is 50% in 2020 and 20% in 2021. For example, if an employer had $49,000 of gross receipts in Q2 2020 compared to $100,000 of gross receipts in Q2 2019, this 51% decline would qualify the employer under the SDGR. Similarly, an employer with $79,000 of gross receipts in Q1 2021 compared to $100,000 gross receipts in Q1 2019, would also meet the SDGR test for Q1 2021. Note that in nearly all cases, if a business qualifies under this test for a quarter, they will qualify automatically for the following quarter, provided at least 6 months of eligibility. The look-forward and look-back tests can be quite complicated and we work with our clients closely to help evaluate eligibility.

Even if a company doesn’t meet the SDGR, they can still qualify if they meet the Full or Partial Suspension of Operations test, or FPSO. The full or partial suspension test applies for the periods of time when the operations of a business are shut down due to government order, or are subject to certain restrictions / modifications while they are allowed to keep their doors open (such as reductions in operating hours and capacity limit restrictions). An example of a partial suspension is a restaurant that was forced to move to take-out or delivery only, or was forced to move to a reduced capacity limit with dine-in service due to social distancing requirements. A gym or fitness center that is required to move to appointment-only, reduced capacity, closed day-care facilities, etc. might also qualify under the partial suspension test. A doctor’s office that does more than a nominal amount of elective procedures will almost always have a partial suspension for some period of time. A lesser known partial suspension can occur when a business is affected due to supplier related issues. For example, a business that cannot obtain materials or supplies from vendors that were shut down by COVID-19, can also translate into the first business being treated as partially suspended. Finally, there are complex rules that look at businesses with multiple locations, segments, or divisions and can cause the entire business to be treated as partially suspended, even if only due to one of locations, segments, or divisions.

When is the operation of a trade or business partially suspended for the purposes of the Employee Retention Credit?

The operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations.

Examples of such orders include:

Limitation of an employer’s customer/store capacity

An employer’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.  Be careful here, some ERTC sales organizations are selling this as the catchall solution for any business that are not able to qualify under SDGR. 

An employer is required to move to an “online format” or “telework” that results in the operations of the business not continuing in a comparable manner as if the business were open regularly

An employer's workplace is closed by a governmental order for certain purposes, but the employer's workplace may remain open for other purposes or the employer is able to continue certain operations remotely

An employer that reduces its operating hours

Employers that operate a trade or business in multiple locations and are subject to State and local governmental orders limiting operations in some, but not all, jurisdictions

If the order was effective for a portion of the calendar quarter, then the employer is an Eligible Employer for the entire calendar quarter.

Note: This method of qualification needs to well documented and audit proofed.  It is our opinion, there is going to be a wave of IRS audits in the future because the IRS does not have the time now to closely scrutinize FPSO cases. 

Do we still qualify if we remained open during the pandemic?

Yes. To qualify, your business must meet either one of the following criteria:
1. Experienced a decline in gross receipts by 50% in 2020 or 20% in 2021, or
2. Had to change business operations due to government orders
3. Many items are considered as changes in business operations, including shifts in job roles and the purchase of extra protective equipment.

How do I apply for ERTC tax credits?

Unlike the Payroll Protection Program (administered by the Small Business Administration), there is actually no “application process” for the Employee Retention Tax Credits.  You simply claim the ERTC tax credit like you would any other tax credit - by asserting to the IRS that you can legally claim the credit.  When you claim a child tax credit, you do so by asserting this fact on your Form 1040 Personal Income Tax Return.  The difference is that when you claim an ERTC tax credit, you do so on your Form 941 Employer Quarterly Tax Filing.  To claim the credits, you must file an amended form (the Form 941-X) which will trigger an "overpayment" notice from the IRS and they'll cut you a refund check for the credits you claim.

Why am I just hearing about this now?

ERC “Version 1” went live in March of 2020 but was mostly ignored due to the focus on PPP. However in December 2020, the Government updated the law with the release of ERC “Version 2” through the Consolidated Appropriations Act. Under Version 2, employers were both retroactively and prospectively allowed to take both ERC and PPP (Round 1 and 2). Version 2 also extended the credit into Q1, Q2 and Q3 of 2021 and increased the field of eligible employers by allowing companies with up to 500 employees to take the credit, up from 100 for 2020. In short, it was a huge expansion of eligibility which opened up a significant opportunity for hundreds of thousands of businesses in the US.  The ERTC has evolved significantly since its inception and this evolution has resulted in confusion and misunderstanding of the program. Without following the details contained in hundreds of pages of the CARES Act, along with subsequent executive orders by both President Trump and President Biden, the opportunity in the ERTC can be easily missed.

Are benefits of the Employee Retention Credit the same for large and small employers?

Small employers receive enhanced benefits under the ERC regime.  Specifically, for the time they are an Eligible Employer, they can include wages paid to all employees. Large employers can only include wages paid to employees for not providing services.

How do I calculate if an employer is a large or small employer for the Employee Retention Credits?

• For the 2020 ERC, an employer with 100 or fewer average full-time employees (as measured in 2019) is defined as a small employer.
• For the 2021 ERCs, an employer with 500 or fewer full-time employees (as measured in 2019) is defined as a small employer.
• The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code.  An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12.  Special rules apply to those who were not in business all of 2019.

Does my company still qualify if I have more than 500 employees?

Yes. however, you can only claim the wages paid to a furloughed employee(s).

What if I have more than 500 employees?  Am I still eligible?

Maybe!  The employee count is based on “full-time equivalent” employees.  So if you have employees who worked less than 40 hours per week, they will be counted differently.  Additionally, if you paid any employees NOT to work or to work less than the hours they were paid, those employees would be counted differently also.

Do I only qualify if I had a revenue reduction?

Revenue reduction is only one of a few ways that qualifies or disqualifies a business from ERC. If you can demonstrate interruption in business operations in each quarter, we can help you document and present to become qualified for the ERC.

Am I still eligible for ERC money if my business was not shut down during the pandemic?

Maybe!  A greater than 20% drop in revenue is usually enough to qualify your business in 2021, or a greater than 50% reduction in revenue in 2020.  Even a partial suspension order by the government (federal, state, or local) of your business could potentially qualify for the ERC, separate from the reduction in gross receipts test.

What if we received benefits from the Shuttered Venue Operators Grant, does my business still qualify for ERC?

Maybe!  However the Shuttered Venue Operators Grant benefits need to be taken into consideration in the ERC calculation.

What if we received benefits from the Restaurant Revitalization Fund, does my business still qualify for ERC?

Maybe!  However the Restaurant Revitalization Fund benefits need to be taken into consideration in the ERC calculation.

What wages qualify for the ERC?

Wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses will qualify when determining the Employee Retention credit. Payment must have been made after March 12, 2020 and qualify for the credit if paid through Dec 31, 2021.

If my company was deemed “an essential business” and stayed open, can I still qualify for ERC money?

Maybe!  Almost any impact or change in your business can qualify you.  For example, you may qualify even if you were open, but your vendors were closed, and/or you couldn’t go to a client’s job site.

If we lost money and don’t have any tax liability, can I still get a refund?

Yes!  ERC is a “refundable credit,” which means You do not have to have a tax liability to receive the funds.  Any credit above your tax liability will be sent to you as a refund.

What if our organization is a non-profit or charity?  Are we still eligible for ERC money?

Yes! The ERC is also designed to benefit charities such as churches, non-profit hospitals, museums, etc.  Charities can be excellent candidates for the ERC.

What if I have bad credit? Is there a credit check involved?

It doesn’t matter, because this is not a loan – it’s a tax credit. There are no credit checks, collateral, or personal guarantees required.

What is considered Gross Receipts for ERC?

• For taxable entities:
  • Total sales (net of returns and allowances) and all amounts received for services.
  • Includes any income from investments:
    • Dividends
    • Interest
    • Rents
    • Royalties and annuities, regardless of whether those amounts are derived in the ordinary course of the taxpayer’s trade or business
  • Reduced by the taxpayer’s adjusted basis in certain property used in a trade or business or capital assets sold.
  • Tax accounting method for income recognition applies.

• For non-taxable entities:
  • Gross Receipts means gross receipts of the taxable year and generally includes all receipts.
  • Tax accounting method for income recognition applies.
  • Includes proceeds from investments and grants.
  • Not Reduced by the taxpayer’s adjusted basis in certain property used in a trade or business or capital assets sold.

If I qualify under the Government Mandate Test, does that automatically qualify me as an eligible employer for the entire quarter?

Technically, yes, but you only pay qualifying wages while the mandates are in effect and they are having a more than nominal impact on the business.  This is were working with a knowledgeable and qualified CPA firm is to your benefit

Can I get both the ERC and PPP Loan?

Yes.  While an employer may not include wages funded by a PPP loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses.  The ERC eligibility periods are longer.  PPP loans can also fund non-wage expenses.  PPP will only account for 2.5 times your monthly payroll expenses and is meant to be spread out over 6 months. This leaves plenty of uncovered wage expenses for claiming ERC

For ERC purposes, it is most important to develop work papers that allocate the PPP funding across the entire 24 week Covered Period.

PPP funding may be allocated to wages that would not generate any ERC (e.g., to owners of the company or to wages in excess of $10,000 in one of the four ERC credit-generating periods).  This is were working with a knowledgeable and qualified CPA firm is to your benefit

Does PPP forgiveness count as gross receipts for ERC?

No. Based on safe harbor guidance released by the IRS in August 2021, it has been confirmed that PPP forgiveness does not create gross receipts in the amount of the forgiveness (this also applies to Shuttered Venue Grant proceeds and Restaurant Revitalization Funding)

I got an Economic Injury Disaster Loan (EIDL); can I also get ERC?

Yes. There are no restriction around ERC for those who received EIDL. 

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Is the Employee Retention Credit only for full-time employees?

No. An employer may include wages paid to part-time and full-time employees in the calculation of the ERC. The only limitation on the calculation of the credits is that an employer may only calculate the credits on the first $10,000 of wages and health plan costs paid to each employee during each credit-generating period.

If I use a PEO instead of a traditional payroll tax provider, can I still claim the ERC?

Yes.  Employers using a PEO are still entitled to claim the ERC.

What if I already received PPP?

Paycheck Protection Program (“PPP”) recipients are now eligible. Yes! Before the Consolidated Appropriations Act (CAA) was passed in December 2020, businesses could not claim ERC if they had accepted a PPP loan. With the updated CAA, businesses are eligible in 2021 even if they claimed a Paycheck Protection Program loan.  The ERC was not widely used until March 2021, when updated IRS regulations made this type of COVID-19 Relief more accessible. In short: thousands of businesses who once picked between the PPP and ERC may now use both stimulus programs. 

I got an Economic Injury Disaster Loan (EIDL); can I also get ERC?

Yes. There are no restriction around ERC for those who received EIDL. 

What if my revenue went up in 2020 or 2021? Can I still qualify?

Absolutely! It’s called the “Employee Retention Credit.” It is intended to help businesses that kept people employed during the height of the pandemic. This means you can qualify even if your revenue increased. You’ll need to qualify using one of the other qualifications - either shutdowns/mandates or supply chain disruptions.

My revenue in Q1 2021 is back to pre-pandemic levels - so I must be ineligible - right?

Even though you may feel like revenue is back to normal, there are some items you want to consider before passing on this ERTC assessment.  First, even if revenues have returned to “normal” in 2021, you may have qualified in 2020 and you can retroactively claim those credits. That eligibility criteria in 2020 was based on revenue declines from 2019, or if your business was partially or fully closed due to governmental mandate.  Second, while your revenue may have returned to “normal” in Q1 2021, remember that we are comparing your Q1 2021 to Q1 2019. If 2019 was a year of growth for your business, then your revenue levels 2 years ago may have been much less than Q1 2020.  And lastly, if your revenues were down in Q4 2020 by just 20% compared to Q4 2019, then you are automatically eligible for Q1 2021. There is a safe harbor provision that few advisors are talking about, and it means that many businesses are qualifying for $7,000 per employee in Q1 2021.  I know, it seems too good to be true, but the government wants to incentivize and reward you for keeping US residents employed and money flowing through our economy as we rebuild bigger and stronger than before.

Can churches and other religious organizations qualify for ERC?

Yes.  The Employee Retention Credit is available to churches and other religious organizations that were impacted by government-ordered capacity restrictions on gatherings or that experienced significant declines in gross receipts.

Do companies owned by Private Equity Funds need to aggregate their gross receipts and employee counts together when determining eligible employer status?

Generally, no.  Brother-sister portfolio companies under the fund can likely be treated as separate trades or businesses when considering eligible employer status because the Fund owning the portfolio companies is not an active trade or business (rather a passive investment vehicle).

What are examples that allow an automotive dealership to qualify for the ERC due to the effects of COVID-19 mandates limiting commerce, travel, or group meetings?

See Examples Below:

• Mandates for showroom closures: Consider limitations on indoor capacity that impacted your ability to effectively perform sales and marketing
  • Example A: A series of dealerships in Pennsylvania were required to limit indoor showroom capacity until halfway through 2021.  The sales force significantly impacted – could not conduct normal operations
  • Example B: A dealership in Maryland normally held regular outdoor marketing events that significantly boosted visibility and customer traffic.  This dealership was unable to hold events due to limitations on gathering sizes.
• Limitations on travel caused by geographic lockdowns in 2020 and 2021:
  • Example: A Dealership in on an island location was closed off from mainland.  No visitors were allowed on the island from March – May 2020
• Supply chain disruptions due to mandates affecting shipping and manufacturing: This affects dealerships who source parts from entities partially suspended by government mandates.
  • Example A: Port closures in China caused disruptions to the supply chain for periods in Q2 and Q3 2021.  Dealerships who source cars and car parts out of these locations can be eligible for the period of time that the ports were shut down.  Affected ports include Shanghai, Yantian, and Ningbo-Zhoushan.
  • Example B: Mexican manufacturing centers were heavily affected by indoor capacity limitations affecting the supply chain for automobiles in 2020 and 2021.

I thought payroll taxes deferred in 2020 had to be re-paid. Does ERTC work the same way?

You are most likely referring to a provision of the CARES Act that allowed employers to defer the deposit and payment of the employer's share of Social Security taxes. Those deferrals must then be repaid - with at least 50% of the balance due by 12/31/21 and the remaining balance due by 12/31/22.  ERTC credits are NOT a deferral. They are dollar-for-dollar credits against wages you’ve paid. Not taxes you've paid, but actual wages.  These credits will come in the form of a refund check directly to you (unless you owe back taxes in which case the IRS will first apply the credits to those back taxes and cut you a check for the difference).  And you will NOT have to re-pay these funds (unless, of course, you don’t provide adequate documentation in the course of an audit).

Does the Receipt of Payroll Tax Refunds under the ERC Trigger Title IX for Private Schools?

There is no guidance specific to independent schools indicating that the refund of payroll taxes under the ERC program will be considered federal financial assistance for purposes of requiring independent schools to comply with certain federal laws, such as Title IX of the Education Amendments Act of 1972.

When is the Operation of a Trade or Business considered partially suspended for the ERC?

An employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations since the employer's operations have been limited by a governmental order.

Will the ERC funds run out?

All eligible employers will receive the funds. Tax refunds are issued by the U.S. Treasury. This is not a lending program.

How long is the ERC program open?

For most businesses, this program will be open into 2025 (unless Congress changes the rules again). It is available as long as you can file amended 941 returns, which is the latest of 3 years from the date you filed you’re the original return or two years from the date you paid the payroll taxes, whichever is later.

My revenue went up in 2020, can I still qualify for ERC?

Yes! There are two possible qualifications for 2020: revenue reduction or a "full or partial shutdown of your business due to COVID-19". Specifically, the IRS describes this as "A government authority required partial or full shutdown of your business during 2020 or 2021. This includes your operations being limited by commerce, inability to travel or restrictions of group meetings." Below are several examples of qualifying events:

i. Example 1: A restaurant must close or limit its on-site dining. Such as having to close every other table, due to COVID-19 restrictions.

ii. Example 2: A business that needs to meet with clients in person and had to cancel meetings due to COVID-19 restrictions.

iii. Example 3: A business had to reduce their operating hours because COVID-19 restrictions and cleaning requirements.

iv. Example 4: A business had delayed production timelines caused by supply chain disruptions.

v. Example 5: A business with a planned event had to cancel that event or restrict the amount of people who could attend due to COVID-19 restrictions.

What if I have bad credit? Is there a credit check involved?

Credit is not a determinate! This is not a loan.  This is a tax credit to help businesses that kept people employed during the height of the pandemic.. There is no collateral required, credit checks, or personal guarantees.  Yeah, if you qualify, think of it like a grant you do not have to repay.

What if my business is now closed, can I still qualify for ERC?

Yes, there is a possibility. It would depend upon when your business closed. Call Legacy Tax & Resolution Services today and let us walk you through the process.

How is ERC different from PPP?
PPP was a forgivable loan. ERC returns the payroll taxes that your business has already paid. Once you receive the ERC funds from the US Treasury,  no further action is required on your part.

My business was profitable or deemed essential, can I still qualify?
Absolutely! Both Essential and Non-essential businesses alike can qualify, and a decline in revenue is not required. Many of our clients even had increases
in sales, but still experienced disruptions or were negatively impacted.

Why haven't I heard about ERC before?.
PPP was heavily marketed by the SBA, while ERC is claimed directly through the US Treasury. Along with our partners, it’s our mission to educate you and obtain for your business the payroll tax refund that your business is entitled to.

Why isn't my bank talking about this?

Your banker was probably very helpful when it came to getting your PPP funds because they were effectively signing you to an SBA-guaranteed loan. The SBA paid the bank administrative fees based on the PPP loans they made, and so they were incentivized to educate you about the program and get all your paperwork in order.  Compared to the ERTC, the PPP program was also a rather simple calculation. 2 ½ times your average monthly payroll including health insurance and state unemployment taxes.  From the conversations we’ve had with bankers, they have no interest in involving themselves in your employment tax compliance. For them it is a liability and beyond their scope of services.

(Edit for 2023: Bankers are now on top of this. ERTC isn't the mystery that it once was so bankers are making backroom deals with large ERC "specialists" to sell their list of clients. Buyer beware of these firms, even if they are recommended by your banker. The Financial Meltdown of 2008 and the continued fraud at Wells Fargo has shown us just how much we can trust the bankers when their pocketbooks are padded.

What about my Payroll Service Provider? Shouldn't they be on top of this?

Your Payroll Service does an excellent job of executing the fundamentals of paying your employees, paying your employment taxes and filing your quarterly reports.

However, we have yet to find a Payroll Service that allocates PPP and ERTC as precisely as we do . . . by employee, by day, by hour.  This is especially troubling considering how these companies are positioned as experts in all things payroll . . . and yet they were not built for this level of data analysis. We have consistently seen these services (and I'm even talking about the big ones like AD*, Payche*, He*rtland) under-claiming these credits and charging a hefty fee all the same. But an even bigger deal . . .

Most Payroll Services are asking clients to sign an indemnification waiver before submitting a Form 941-X because the Payroll Service can take no responsibility for the accuracy of the ERTC credits you are claiming. And even more troubling, they are allowing you to claim ERTC by checking a box and attesting that you had a full or partial suspension of operations.

This is NOT okay!

It is particularly important to develop contemporaneous documentation to support your tax position in the event of an IRS audit.  We think the IRS is going to have a field day auditing all of these clients who filed their Form 941-X through their payroll company. All they have to ask is "How did you qualify?", and they'll be recovering ill-gotten refunds and penalties and interest by the BILLIONS!

But not to only highlight the negative, there are certainly exceptions to that rule . . .

And there have been plenty of Payroll Services that we’ve worked with who are happy to provide the payroll registers that we need to perform the allocations. And they are happy to file the Amended Form 941-X when they act as a PEO (Professional Employer Organization) and file all their clients' payroll taxes on a single Schedule R

Why can't my CPA do this for me?

There are over 70,000 pages of tax code; it’s impossible to be an expert on all of them. Tax Resolution and Tax Recovery is all we do. It’s like the difference between your family doctor and a neurologist. By concentrating on this one program, we understand the intricacies and nuances involved in determining your eligibility and accurately calculating your refunds.  Whether your tax accountant is a CPA or EA, he or she most likely only prepares your Federal and State Income Tax Returns. However, ERTC credits are claimed against Payroll Taxes on Form 941-X.  The complexity of the ERTC program is a beast unto itself and every tax accountant we’ve talked to has said they focus on staying up-to-date on the ever-evolving income tax code, and they can’t now become experts in the ERTC program as well.  If your tax accountant is comfortable determining your eligibility by quarter and year, computing your credits, and preparing contemporaneous documentation to support an IRS audit, then you should certainly let them handle all of this.  If you want to preserve that relationship and let us handle this special situation, we're happy to engage.

My bookkeeper has all my info . . . can they handle my ERTC claims?

Your Bookkeeper should certainly have access to all the information that is needed for an accurate calculation of your legal ERTC claim. They will have your financial reports, payroll registers, and PPP loan forgiveness documents.  The Million Dollar Question is . . . Do They Have The Time?  Do they have the time to dig into the text of American Rescue Plan Act of 2021.  And its accompanying referenced laws like: , PPP Payroll Flexibility Act and the Consolidated Appropriations Act.  Time to read the IRS Interpretations and FAQ’s? And cross-reference those definitions with that of PPP which was separately definedCARES Act, Families First Act, Payroll & Healthcare Enhancement Act and dissimilarly interpreted in the Small Business Administration's Bulletins and IFRs?  Do they have the experience of applying IRS Notice 2021-20 to situations like yours?  Do they have the time to ensure accuracy in eligibility determination, maximize your computation and create the supporting documentation you’ll need to support an IRS audit of employer taxes?  So far, we have not found a bookkeeper who is able to take all this on, while handling the day-to-day of bookkeeping.

What is your fee and when do we pay it?
There are no up-front fees or obligation to receive your refund analysis. You will never come out of pocket to pay our fee. We're paid only as you receive your refund checks. Our fee includes preparation of your claims by an expert CPA or Tax Attorney who specializes ERC refunds. We also stand behind our work with  Audit Protection at no additional cost.

How do I know if my business qualifies?
The IRS expects 70% - 80% of small and medium businesses to qualify. If your business experienced disruptions to commerce, travel, or group meetings, you qualify! This includes supply chain disruptions, price increases, staffing shortages, difficulty hiring, reduced hours, reduction in goods or services offered, were unable to travel, or attend conventions. Talk to one of our Refund Specialists to find out more.

Is it true that "Supply Chain Issues" will qualify me for these credits?

While technically "true", this should come with a HUGE warning label.  There are a ton of ERTC companies (some are just marketing outfits) telling business owners they will qualify if they have any supply chain issues. Frankly, they are telling people that they qualify for almost anything pandemic related.  We've even had a prospect tell us they were qualified by another firm because they had trouble hiring people due to all the unemployment checks.  Bottom Line: the partial suspension of operations (even due to supply chain constraints) must be as the result of a government mandate. There are plenty of businesses where a case can be made, but that is exactly what needs to occur . . . a case must be made.  This is where we lean on tax attorneys to assess all the federal, state and local mandates to determine how those mandates results in a "more than nominal" impact which resulted in a partial suspension of operations.  Even if you did not have supply chain issues, you may still qualify based on the reduction of revenue.  We are definitely not saying that "Supply Chain" cannot be a valid reason. All we are saying is that you had better be prepared with contemporaneous documentation to support that determination because this will be a point of emphasis when the IRS audits these refunds.

How do you know you are working with an expert that is going to maximize my refund?

Here's an example of why this matters: While many other calculate the credit at their most basic level . . . we use algorithms to optimize these credits by employee . . . by day.  Cast in point, If you received PPP funds, the precision with which we allocate these funds is critical to ensure there is no "double-dipping" while also maximizing every dollar that is legally owed to you.  Since we allocated wages by employee by day, we may use PPP funds to pay an employee in the morning, and use their afternoon pay as qualifying wages for ERTC. This means that for many clients, we allocate 100% of their PPP funds without having to reduce the maximum allowable credits for each employee (that's up to $5,000 per employee in 2020 or $7,000 per employee per quarter in 2021).

So if you want to know whether the ERTC firm pitching you is truly maximizing your refund, If they are not asking for a quarterly summary of payroll . . . then there is no way they can allocate this precisely by day by employee.  Unless they are getting a payroll report showing every employee and the breakout of every paycheck, then you're not working with an "expert".

How long does it take to get my refund?
Our work will be completed within 10-14 days of receiving your documents. You’ll receive refund checks from the US Treasury in 3-4 months depending upon backlog. The longer you wait, the longer it will take!

How is my refund calculated?
Determining the proper amount that you’re entitled to is a complex accounting process. Although these are payroll tax credits, what you’ve paid in payroll tax has no bearing on your ERC calculations.
The refunds are based on many factors including qualifying quarters, number of employees, hours worked, wages paid and if applicable, PPP loans, group health premiums and participation in other
government programs to name a few.

What if we wait to claim ERC?
Time is of the essence as the program has technically expired. We have a limited window of time to claw back the money which is rightfully owed to you. The program could run out of allocated funds at anytime and is subject to the whims of congress. Don’t delay!
 

But I've been told my business does not qualify. 
Our team has already recovered over $450 million in refunds that businesses were entitled to. Many  times for companies who were previously told they didn’t qualify. It won’t cost you a penny to see how much we can recover for you.

Do I have to pay this back?
It’s a refund of payroll taxes. It’s YOUR money!  There are no limitations on how you use it.

Are there restrictions on my ERC funds?

There are no restrictions on the use of funds.

Are my ERC monies taxable?

Although the ERC is not taxable, it is subject to cost disallowance laws that essentially render it taxable. So yes, 100% of your ERC is taxable in the year it’s received, subject to your business having taxable income. ERC is a reduction of wage expense in the relevant year. If, for example, you deducted $15,000 in wages and you received $5,000 in ERC, you would have $10,000 in deductible wages.  Therefore, the $5,000 in ERC would be taxable income because you already deducted 15,000 in wages for which you received $5,000 in ERC.  See IRS Notice 2021-49 for further clarification.

How long will it take to receive my ERC money?

Currently, the IRS is not providing any estimates related to the timing of Employee Retention Credit receipt. However, they have indicated that there are over 1.8 million paper payroll tax returns in the queue with the IRS. Our best guess is that you’ll be waiting 6+ months from the filing date of your claim. The good news is that In order to remove the uncertainty to our qualified clients on the timing of receipt of their credit, we offer an advance payment option that enables the receipt of funds in as little as two weeks following the submission of our package to the IRS.

What is the interplay between wages included in the WOTC Credit and wages utilized in the ERC Calculations?

• Wage expenses utilized in the ERC calculation cannot also be used in the WOTC Credit calculation.
• Wage expenses that qualify as both ERC-eligible Qualifying Wages and WOTC Credit purposes still need to be included as QREs in the base year calculations for future year WOTC Credit calculations.
• Wages funded by PPP can be included in the WOTC credit calculation.

What is the interplay between wages included in the R & D Credit and wages utilized in the ERC Calculations?

• Wage expenses utilized in the ERC calculation cannot also be used in the R & D Credit calculation.
• Wage expenses that qualify as both ERC-eligible Qualifying Wages and R & D Credit purposes still need to be included as QREs in the base year calculations for future year R & D Credit calculations.
• Wages funded by PPP can be included in the R & D credit calculation.

Are most companies utilizing the Gross Receipts Test or the Government Mandate Test to reach eligibility for ERC purposes?

For the 2020 ERC, most companies are qualifying as an eligible employer under the Government Mandate Test.  For the 2021 ERCs, most companies are qualifying as an eligible employer under the Gross Receipts Test.

What is a Severely Distressed Employer?

If you experienced over 90 percent loss in gross receipts when comparing a quarter against the corresponding one in 2019, you are a Severely Distressed Employer and you are not subject to caps or maximums when claiming ERC. 

FAQs Specific to Restaurants

My restaurant is currently required to close at an earlier hour than its regular closing time due to a statewide government curfew.  Is my restaurant considered partially shut down for purposes of determining eligibility for the ERC?

Yes.  According to FAQs published on the IRS website, a governmental order includes an order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period.

Under a government order, my restaurant is required to reduce the seating capacity of our indoor dining room to accommodate for social distancing.  However, the indoor dining room is open, and we are still able to offer delivery and carry-out.  Is my restaurant considered partially shut down for purposes of determining eligibility for the ERC?

It depends.  IRS guidance says that if all of an employer’s business operations may continue, even if subject to modification (for example, to satisfy distancing requirements), such modification of operations is not considered to be a partial suspension of business operations due to a governmental order, unless the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances.  The IRS guidance does not define “nominal,” so each employer’s fact pattern must be reviewed on a case-by-case basis.

Our company owns restaurants located in California, North Dakota and Utah.  The restaurant locations in California were required to shut down due to government order.  The ones in North Dakota and Utah were not.  Is our company considered to have a suspension of operations due to a government order?

Yes.  According to IRS guidance, employers that operate a trade or business in multiple locations and are subject to state and local governmental orders limiting operations in some, but not all, jurisdictions are considered to have a partial suspension of operations.  In this example, the company has a partial suspension of operations because of the government order in California.  The partial suspension results in the company being an eligible employer nationwide.  For a company that has set up separate legal entities for each state’s restaurant locations, it will need to consider the ERC’s aggregation rules.

Our restaurant, a limited liability company (LLC), is owned 100% by one individual.  That individual also owns 100% of two other restaurants that are also LLCs. Are we required to look at the three entities as one single employer for purposes of the ERC?

Yes.  Under the ERC, employers are required to review the aggregation rules.  All entities that are treated as a single employer under section 52(a) or (b) of the Internal Revenue Code or section 414(m) or (o) of the Code are considered one employer for purposes of the ERC.  The aggregation rules can significantly impact a group of related entities’ ERC, so these rules must be taken into consideration when determining eligibility and calculating the ERC.

Is my restaurant required to include part-time employees in the calculation of employees to determine if we are a large employer for calculating qualified wages?

No.  Part-time employees are not included in the calculation of employees to determine large employer status.  A company must calculate the average number of “full-time” employees employed during 2019.  The IRS guidance for the ERC states that a “full-time” employee means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month.  Restaurants should remember to count both the restaurant employees and those that work at their corporate office.  They also need to keep in mind the aggregation rules discussed above when calculating the number of full-time employees.

As a reminder, the definition of a large employer for 2020 ERC was defined as more than 100 full-time employees, and for 2021 ERC is defined as more than 500 full-time employees.  Both full-time employee counts are based on 2019 full-time employee counts.

When calculating qualified wages, should we include the wages of only the full-time employees or all employees?

If the company is a large employer for purposes of the ERC, qualified wages are wages paid to an employee for time that the employee is not providing services.  If the company is not a large employer, qualified wages are the wages paid to any employee, whether they provided services or not.

Are tips included in the calculation of qualified wages?

At this time, IRS guidance is unclear as to whether tips should be included in wages.  LTRS will provide more information on this topic when guidance becomes available.

My restaurant currently claims the Work Opportunity Tax Credit (WOTC).  If we claim the ERC, will that impact the calculation of the WOTC?

Yes.  IRS guidance confirms that companies cannot “double dip.” The same wages cannot be used for both the ERC and the WOTC.  Companies that currently claim the WOTC will want to inform their WOTC providers that they are planning to claim the ERC, so applicable qualified wages are not included in both credit calculations.

My restaurant utilizes a PEO to report our payroll.  Can we still claim the ERC?

Yes.  A common law employer, if eligible to receive the ERC, is entitled to the ERC regardless of whether it uses a PEO.  IRS guidance explains that if a PEO is claiming the ERC on behalf of a client employer, the PEO must collect from the client any information necessary to accurately claim the ERC on its client’s behalf.  Restaurants that use a PEO should inquire about the process with their PEO to claim the ERC.

General Topics Related to ERC

Why do you NOT believe in having tax attorneys on staff?

We most certainly have our own tax attorneys to assist us, but this question comes up when a client wants to qualify based on a partial suspension of operations and they cannot provide us a clear understanding of which government mandates restricted their operations. While some ERTC firms boast of having attorneys on staff to write memos for their clients, we are fundamentally opposed to that concept.  Instead, we recommend that you engage an attorney independently. We are happy to refer you to attorneys that we know who will do a fine job. However, we believe there should be a clear separation between the attorney's opinion letter and our firm who is calculating your credits. Since our fees are based on a percentage of the refunds that you receive . . . and since the size of those refunds are based on the time period that you qualify . . . we do not want there to be even an appearance of a conflict of interest.  If the IRS comes to audit, we want your truth to be that you engaged an independent, third party law firm to assess your eligibility and provide an opinion letter . . . and you brought that letter to us, an independent CPA firm.  What more could the IRS expect of you as a taxpayer? With that level of diligence, we can all sleep easy at night.  And to be clear, we do not require (or even recommend) these letters for every client. Less than 2% of our clients have needed these letters and this is really just a function of us being very conservative in our own judgment.  When other firms talk about being "aggressive" with these refunds, that's a position we just cannot support.  There's no need for that. Just apply the facts to your situation, execute the math precisely, and sleep easy knowing it is not gojng to come back to haunt you.

Can my accountant or bookkeeper handle the filing for the ERC money?

Doubtful.  Determining the proper amount of credit, you can claim – and properly documenting it – is significantly more complicated than the PPP program.  There are special rules and restrictions to this program and special paperwork requirements, so unless your accountant has taken an advanced course and become a certified expert on the ERC program, you’ll want to use a CPA specializing in Employee Retention Credit.

What does the Legacy Tax & Resolution Services (LTRS) do for my business?

We will provide you full ERC services, including filing and claiming your Employee Retention Credit from the IRS. For those that qualify and wish to receive cash fast, we can even arrange for an advance payment of up to 70% of your total credit within as little as 3 – 4 weeks!

Through our process we will collect qualitative and quantitative data to evaluate your eligibility and then perform detailed and complex computations to determine your ERC. Through sophisticated analysis and reporting, we are able to maximize the ERC for clients by carefully selecting how certain wages are treated for PPP versus ERC purposes at the employee level as well as understanding the nuances of a complex tax code.

For all of our clients, we deliver a +10-page report documenting your eligibility as well as the results from our proprietary ERC calculator that supports the numbers used to claim your credit. We then prepare any amended payroll tax returns, Form 941-X(s), and file your ERC claim with the IRS. When we do that, we request a refund check for you.

And when that work is done, we commit to helping you in the future in case there are questions about how you arrived at your IRS filing. We do it all for you!

How are your clients getting refund checks in 2 weeks instead of 9 months?

ERTC was meant to help impacted taxpayers, but the manual amendment process (you read that right, no e-filing) has led to a huge backlog of files at the IRS. For taxpayers in need of funds faster than the 8 to 12 months we expect, we have undergone due diligence with an ERTC Investment Fund that is advancing cash in 2 to 4 weeks.  This was a monumental milestone for us because it was institutional acknowledgment that our methodology was sound - our calculations precise - our calculations legally maximized. Because after all, institutions don't want to lend money on a bogus receivable . . . they receive our workpapers as collateral.  In the interest of full disclosure, we introduce you to the Fund after we have completed your calculation and presented your Form 941-X's. But beyond that introduction, there is no financial relationship between us and Fund. We want to keep this at arm's length - we have no desire to wade into the regulations and protections of the consumer financing industry.

If the amended are processed by an ERC processing company, do they accept the liability on any false claims and incorrect filings.

The short answer no! Ultimately you and your company are going will be held responsible for the documents that are submitted to the IRS.  As a matter of fact the IRS just issues a new warning  "IRS issues renewed warning on Employee Retention Credit claims; false claims generate compliance risk for people and businesses claiming credit improperly".   In my opinion you should only be working with an EA, CPA or Tax Attorney based firm that will provide you with an "Audit Proof" executive summary of their findings.  Working with an EA, CPA or Tax Attorney based firm gives you some assurance that they have an ethical and fidicuary responsibility to properly submit documents to the IRS on your behalf.