The Employee Retention Credit – Not So Fast

You may have heard or seen the ubiquitous advertisements for COVID-19 payroll tax credits: “Everyone is eligible, claim free money fast with no strings attached!” The highest profile and most lucrative COVID-19 payroll credit available is the Employee Retention Credit (“ERC”). The ERC was enacted in March 2020 to help impacted businesses and organizations avoid layoffs during the COVID-19 pandemic. To qualify for the ERC, a business must have experienced either a government-mandated full/partial suspension of operations or a significant decline in gross receipts.

The maximum payroll tax credit under the ERC program is:

• Tax year 2020: $5,000 per employee per annum (50% of the first $10,000 of eligible wages)
• Q1, Q2 and Q3 of 2021: $7,000 per employee per quarter, which translates into a maximum credit of $21,000 per employee for 2021 (70% of the first $10,000 of eligible wages per quarter, per employee, assuming a business qualifies for the first three quarters of 2021)

The significant decline in gross receipts test can generally be straightforward. However, the suspension of the operations test is based on facts and circumstances, unique to each taxpayer. Some situations may be clear cut, many others fall into a gray zone. While we have assisted many clients in reaping the tremendous benefits of the ERC, many others were deemed ineligible. Assuming a taxpayer meets one of the two ERC qualification tests, it cannot use the same wages used for PPP forgiveness to claim the ERC.

It is important to note that the American Rescue Plan Act (ARPA) extended the ERC's statute of limitations for IRS examination to five years. The IRS is in the process of training enforcement agents to identify cases where the ERC was improperly claimed. Accordingly, a qualified tax professional should be engaged to determine eligibility for the ERC.