Navigating Employee Retention Credit: Avoiding Pitfalls for Your Business

The IRS has announced “an immediate moratorium through at least the end of the year on processing new claims…to add more safeguards to prevent future abuse and protect businesses from predatory tactics.” While this moratorium is in place, companies that qualify for the Employee Retention Credit can still get ready to apply once the IRS lifts the moratorium. Now is a great time to do research and prepare.

As businesses are still striving to recover from the economic impact of the COVID-19 pandemic, government initiatives such as the Employee Retention Credit (ERC) have provided valuable support. The ERC is a tax credit that aimed to encourage businesses to retain and rehire employees during the pandemic years 2020 and 2021. While the credit can be advantageous, it’s important to navigate it carefully to avoid potential pitfalls. In this blog post, we will explore key considerations and strategies to help your business make the most of the ERC while avoiding common missteps.

Understand Eligibility Criteria

The first step in avoiding ERC pitfalls is to familiarize yourself with the eligibility criteria. Initially introduced as a provision under the CARES Act, the ERC has undergone several updates. Keep track of the latest guidelines provided by the IRS to stay informed and compliant.

There are three ways to qualify for the ERC:

Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
Qualified as a recovery startup business for the third or fourth quarters of 2021.

Your business size and ownership situation also play a part. Be sure you fully understand these components.

Accurate Calculation and Documentation

Precise calculation of the ERC is vital to avoid overclaiming or underutilizing the credit. Analyze your payroll records, employee counts, and eligible wages diligently. Document all relevant information, such as the number of employees, their hours, wages, and any qualified healthcare costs. Understand which wages are eligible and which aren’t. For instance, majority owner’s wages are not eligible wages for this credit. Neither are their family members wages. Thorough documentation will help substantiate your claim and help with potential inquiries. It would be a good idea to keep the documentation you used for the credit for 10 years instead of the normal 7.

Coordinate with Other Relief Programs

Businesses might also have participated in other government relief programs such as the Paycheck Protection Program (PPP). Receiving a PPP loan does not preclude you from receiving the ERC. You can get both. But coordinating these programs effectively is crucial to prevent potential pitfalls. Ensure that you avoid double-dipping or overlapping claims, as wages covered under a forgiven PPP loan are not eligible for the ERC. Consult with tax professionals to determine the best strategy for maximizing the benefits of both programs.

Don’t Fall for Aggressive Marketing

There are many companies that have sprouted during the lifetime of the ERC who are attempting to cash in on what they see as a golden opportunity. These companies are promising outrageous refund amounts, skirting eligibility requirements, and charging high fees. The IRS is currently investigating many of these companies and their clients. The main reason for the current moratorium is to implement safeguards to protect taxpayers from these predatory companies.

Seek Professional Guidance

The Employee Retention Credit is one of the most complex tax credits offered by the government. Navigating the complexities of the credit can be challenging. Engaging the services of tax advisors, accountants, or legal professionals with expertise in the ERC can be highly beneficial. These professionals can provide tailored advice based on your specific business circumstances, help optimize your claim, and minimize the risk of pitfalls or errors.

Conclusion

The Employee Retention Credit is a valuable tool that can provide significant financial relief to businesses striving to retain and rehire employees during challenging times. However, understanding the eligibility criteria, accurately calculating the credit, coordinating with other relief programs, avoiding predatory marketing companies, seeking professional guidance, and maintaining thorough documentation are vital strategies to apply for the credit properly. By following these strategies, you can navigate the ERC program successfully, optimize its benefits, and minimize any potential risks or compliance issues for your business.