By  Tony Montanaro, CPA/ABV, CFE

Employee retention tax credits (ERC) have provided much needed relief to qualifying businesses negatively impacted by the COVID-19 pandemic; however, business owners should be wary of firms aggressively marketing these credits.

Background of Employee Retention Credits

Employee retention tax credits were initially created as part of the CARES Act, and later expanded through the Consolidated Appropriations Act.

Qualified businesses can now qualify for fully refundable credits totaling up to $5,000 per employee for 2020 and up to $7,000 for each of the first three quarters of 2021 (or $21,000 per employee). Businesses can qualify to claim these tax credits as a direct result of a significant reduction in quarterly gross receipts (50% for 2020 and 20% for 2021) as compared to the same quarter in 2019 or a government order to fully or partially shutdown operations. While the revenue reduction requirements are strictly defined, determining the impact of government shutdown orders requires a careful assessment of the facts and circumstances and some firms have taken an aggressive stance on this issue.

IRS Guidelines on Shutdown Qualification

The IRS has previously provided general guidelines and examples on what qualifies as a “full or partial shutdown” for the purpose of determining eligibility to claim employee retention credits (for full details Click Here) Firms aggressively marketing these credits may claim that any business that had operations impacted by the pandemic can qualify.

Some examples provided by these firms may included restricted access to customer offices or limitations in the ability to conduct in-person meetings. While these restrictions were often based on recommendations or guidelines issued by the CDC, they do not rise to the level of a direct government order. Examples of “government orders” as provided by the IRS includes the following:

  • An order from the city’s mayor stating that all non-essential businesses must close for a specified period;
  • A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and work at the workplace location;
  • 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;
  • An order from a local health department mandating a workplace closure for cleaning and disinfecting.

In addition, businesses must be able to show that their operations were fully or partially suspend as a direct result of the government order. A business that had its physical workplace shutdown but was able to continue operations remotely in a comparable manner would generally not be considered to have had its operations suspended. Restaurants who operated under indoor occupancy limits generally will qualify even if they were able to continue take-out or outdoor dining, due to more than a nominal portion of its business being partially shutdown (indoor dining). Ultimately in all these examples a careful consideration of the facts and circumstances is required.

Summary

Business owners should be skeptical of offers from firms that appear to take a broad stance on the qualification requirements. These firms also bill on a contingency basis, often charging fees in the range of 25%-35% of the credits received. The IRS has already indicated that these credits will be receiving increased scrutiny. The cost to defend against and IRS audit as well as penalties and interest on disallowed credits can be substantial.

Please contact your Louis Plung advisor with any questions about the employee retention credit qualification requirements. [email protected].