Employee Retention Credit

By Kenneth H. Bridges, CPA, PFS November 2023

If you own a business, you have almost undoubtedly received emails, flyers and other solicitations suggesting that you can receive up to $26,000 per employee from the IRS; and the contingency fee consulting firm will help you get it for a percentage of the claim.

This may sound too good to be true.  So, is it true?  Well, it can be true; if you have the right set of facts and qualify under the rules.

As discussed in my June 2020 and April 2021 articles about Covid-stimulus legislation, legislation enacted in March 2020 and expanded in December 2020 provided for an “employee retention credit” (ERC) to reward employers who continued to pay employees during a time when the business was partially or fully suspended by government orders pertaining to Covid-19 or suffered a substantial decline in revenue during that time period. 

As originally enacted in March 2020, the ERC was a maximum of $5,000 per employee (50% of qualified wages of up to $10,000 paid between March 12, 2020 and December 31, 2020). To be eligible, an employer’s business had to be partially or fully suspended by orders from a governmental authority due to the Coronavirus or have had a 50% decline in revenue. For employers with 100 or fewer full-time employees (based on 2019 average), qualified wages included up to $10,000 per employee; regardless of whether they were able to work.  For employers with more than 100 full-time employees, the amount was limited to being only those employees who were unable to work due to the shutdown. Employers accepting PPP funds were not eligible to claim the ERC.  Since the PPP was, in general, more advantageous, the ERC was largely overlooked (except by those who were ineligible for PPP, such as 501(c)(7) organizations or companies with more than 500 employees).

Legislation enacted in late 2020 (CAA 2021) changed the rules to provide that you could claim the ERC even if you accepted a PPP loan; just not for the same costs.  The legislation extended the ERC through June 30, 2021 (later extended to 12/31/21 by subsequent legislation, and then later suspended for the 4th quarter of 2021), reduced the definition of substantial decline in revenue to 20% (beginning with Q4 2020 when compared to same quarter of 2019), increased the credit amount from 50% of qualified wages to 70% of qualified wages (effective 1/1/21), increased the limit on qualified wages (1/1/21) from $10,000 per employee in total to $10,000 per employee per quarter (with the wage limitation being based on amounts paid each specific individual, not by dividing total wages by number of employees) and increased to 500 the number of employees for small employer status. With these enhancements, the credit for 2020 and 2021 combined can potentially be as much as $26,000 per employee (and could have been as much as $33,000 per employee, had Congress not later suspended for the 4th quarter of 2021).

As discussed above, to be eligible for the ERC, the employer must have either suffered a substantial decline in revenue (originally defined as 50%, and later reduced to 20%) or have been subject to a government-mandated partial or full suspension of operations. The decline in revenue test is fairly mechanical.  It is with the government-mandated partial or full suspension of operations where the action appears to be.  IRS position is that to be eligible under this standard the suspension must be due to an order (not a suggestion or guidance) from a government with jurisdiction over the business, which limits commerce, travel or group meetings due to Covid-19, and results in a suspension of more than a nominal portion of the business (with “nominal” defined as being at least 10% of the revenue or employee service hours of the business).

The IRS, AICPA and many others have issued warnings that they believe some of the credit consulting firms are encouraging taxpayers who are not eligible under the standards to claim the ERC; and the IRS has announced that it is permitting anonymous reporting of potential ERC fraud claims.  Some of the credit consulting firms appear to demand payment prior to the taxpayer receiving a refund.  Further, even if the taxpayer does receive a refund check from the IRS, that does not mean the IRS has reviewed the claim for eligibility or accuracy; and the IRS can potentially come in many years later, examine the merits of the claim, disallow it, and seek recovery of the credit received plus penalties and interest thereon.

In September 2023, the IRS announced (IR-2023-169) that due to “aggressive marketing to ineligible applicants” it was placing an immediate moratorium through at least the end of the year on processing new ERC claims and that “hundreds of criminal cases are being worked, and thousands of ERC claims have been referred for audit.” A month later (IR-2023-193), the IRS provided guidelines for businesses which wish to withdraw an ERC claim.

Our guess is that past ERC claims will attract scrutiny from due diligence teams in M&A transactions, capital raises and other situations for many years to come.

It should be noted that if you claim the ERC you are supposed to go back and amend income tax returns to reduce your deduction for wages for the amount of the ERC for the period the wages were paid which gave rise to the credit.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.