Avoiding Improper Employee Retention Credit Claims

As employers prepare for their upcoming tax filings, one question that comes to mind for many business owners is the Employee Retention Credit (ERC). This tax credit was implemented by The CARES Act to address issues related to the onset of the COVID-19 pandemic.  The Act was meant to encourage businesses to keep employees on their payroll. Eligibility for the credit was contingent upon businesses continuing to pay their employees during the COVID-19 pandemic.

Employers who received a Paycheck Protection Program (PPP) loans are still eligible for the Employee Retention Credit, up to $26,000 per employee. These eligible business taxpayers can claim the ERC on an amended payroll tax return for a period within the specified dates. Filing deadlines for amended returns are:

• April 15, 2024, for all 2020 amended returns
• April 15, 2025, for all 2021 amended returns

Misinformation Associated with the Employee Retention Credit

As questions arise for businesses as to whether they qualify for the credit, many third-party entities are taking the wrong position where taxpayer eligibility and credit computation are concerned, leaving employers in serious jeopardy. Some third parties are charging  hefty upfront fees or a fee contingent on the refund amount. Be sure you understand the rules for qualification before your business claims the credit. If you do claim the credit, be sure you are aware that the credit is taxable, and an amended income tax return is also required to be filed. Any business that filed an income tax return that deducted qualified wages before filing an employment tax return claiming the credit should file an amended tax return to correct overstated wage deductions. Despite the inaccurate information provided by some these third-party entities, in the end, the business itself is responsible for all information reported on its tax returns-- even if that information is wrong. Improperly claiming the ERC could result in the business being required to repay the credit along with penalties and interest. The ERC is beneficial for those that qualify, but make sure you understand the rules before you assume you qualify.

Eligibility For the Employee Retention Credit

To be eligible for the ERC, employers must have met one of three possible requirements, including:

• They experienced a significant decline in gross receipts during 2020 or a significant decline in gross receipts during the first three quarters of 2021, or
• They sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021, or
• They were qualified as a recovery startup business.

Business have until 2024 to review their 2020 and 2021 payroll records during the pandemic to potentially retroactively claim the credit with an amended tax return. Eligible employers cannot claim the ERC on wages reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness. Additionally, only recovery startup businesses were eligible for the ERC in the third and fourth quarter of 2021.

Contact your CRI advisor for more information on the Employee Retention Credit, eligibility requirements to see if your business qualifies, and how to claim the credit retroactively.