5 Top ERC Myths Businesses Need To Beware Of

I authored an article in 2021 about frequent top myths about the Employee Retention Credit (ERC), which prevented different organizations from collecting this substantial tax break, including business owners, nonprofit organizations, and Native American tribes. However, the story surrounding the ERC has changed, and companies (I'll refer to them as "businesses" from now on) are now being swamped with false material, including claims that anyone can make the maximum ERC claim.

Many business owners have likely encountered enticing offers, with pop-up service providers guaranteeing substantial refunds of $26,000 per employee. Regrettably, many of these fleeting service providers fail to provide the complete picture regarding the ERC. Recently, the IRS issued a cautionary eyes open note urging businesses to exercise caution when presented with seemingly too-good-to-be-true pitches. While the ERC indeed represents a robust tax benefit that warrants consideration by small and medium-sized businesses, the reality is that not all businesses will meet the eligibility criteria. In our role at Alliantgroup, we have assisted numerous businesses in assessing their eligibility for the ERC, but we have also been tasked with delivering the disappointing news to several businesses and charities that they do not qualify. It is imperative to correctly determine (and document) whether your business is eligible for this intricate credit. The IRS has even published a comprehensive 72-page trainingguidelinefor its examiners on the ERC, underscoring the complexity of this credit.

Here are the top five new myths circulating about the ERC:

1. If you were affected by COVID you are qualified for ERC!

Myth: If you were affected by COVID, you automatically qualify for the ERC! Reality: To qualify for the ERC, businesses must demonstrate either a revenue decline or an impact on their operations due to COVID-19. Simply making operational adjustments in response to the pandemic does not suffice. Eligibility under the business impact test requires businesses to prove that a specific COVID-related government order or mandate (federal, state, or local) directly caused an impact on their operations and provide evidence of the extent and duration of that impact. Documentation is crucial, including details of the government order and the impact on the business during its active period.

2. Any government guideline qualifies you for ERC!

Myth: Any government guideline qualifies you for the ERC! Reality: Not all government orders and guidelines are considered qualifying. Some misinformed sources claim that CDC and OSHA guidelines automatically qualify a business for the ERC, which is not universally true. To meet the government order test for ERC eligibility, an order must be a legally binding mandate, not merely advice or a suggestion. It must also restrict commerce, travel, or group meetings due to COVID-19 and have jurisdiction over the employer's operations. Relying on non-binding guidelines can lead to ERC ineligibility.

3. A qualifying mandate that caused an impact to your business means you qualify!

Myth: Qualifying mandates that impact your business guarantee eligibility! Reality: Even if a qualifying government order has affected your business, it does not guarantee eligibility for the ERC. IRS Notice 21-20 stipulates that there must be a "more than nominal" impact on the business to qualify. This "more than nominal" test is often overlooked but is a critical component of the ERC assessment. If the impact of an order on your business was relatively minor or inconsequential, you may not be eligible. Determining whether your business meets this threshold requires careful documentation and possibly consultation with experienced tax professionals.

4. You get $26,000 for every employee!

Myth: You receive $26,000 for every employee! Reality: Calculating the ERC credit can be intricate, and it's vital for business owners to exercise caution. If you come across advice suggesting that you can calculate the credit by multiplying the number of employees by $26,000 and then inputting that figure on your 941-X form, skepticism is warranted. The ERC credit is calculated as 70% of qualified wages paid to an employee in a specific quarter, up to a maximum of $10,000. Therefore, the credit amount depends on factors like wages paid, the duration of the government mandate's impact, and other incentives already claimed.

5. A qualifying mandate that caused an impact to your business means you qualify!

Myth: You can claim $26,000 per employee even if you received PPP funds! Reality: Coordinating the ERC with other incentives can be complex, and many ERC providers miscalculate the interaction. While it is possible to claim both PPP and ERC, they have an interplay with each other and with any other incentives a business may have utilized, such as the restaurant revitalization grant or the Work Opportunity Tax Credit. The IRS emphasizes that the ERC cannot be calculated based on payroll costs already considered for PPP loan forgiveness. There is no double-dipping allowed.

One Undeniable Fact: Wage Deductions Must Be Reduced by ERC Amount It's crucial to acknowledge that wage deductions claimed on a business's federal income tax return must be reduced by the amount of the Employee Retention Credit. This is a non-negotiable requirement.

In conclusion, the Employee Retention Credit is a valuable incentive provided by Congress to support businesses in keeping their operations running and their employees on payroll. However, it is essential to approach it with a discerning eye, ensuring your business truly qualifies based on the IRS's stringent criteria and documentation requirements. While it may not be a gift from Santa, the IRS administers the ERC, and compliance with the law and government orders, along with meticulous record-keeping, are paramount to successfully claiming this credit.