Plenty of rules in life help us keep things running smoothly and minimize harm. Financial regulations and accounting standards are no exception. It’s important to understand how to properly account for ERTC advance payments, similar to how a PPP loan is accounted for. Entities should note that ERTC is structured as a government grant.
Document the Impact of Government Orders
Businesses that qualify for ERTC receive significant tax relief, including reimbursement of up to $5k/employee in wages per quarter. But many compliance considerations must be weighed to ensure you meet IRS and congressional requirements for the credit. This includes carefully documenting the impact of government orders, accurately calculating qualified wages, and maintaining comprehensive documentation.
Having a plan to address these requirements helps minimize risk for your clients. In particular, the impact of supplier shutdowns and social distancing restrictions are currently drawing the most attention from auditors, so ensuring your clients have accurate and detailed information on these issues is critical to avoid misinterpretation or overclaiming.
To meet the government shutdown test, a business must be unable to purchase critical supplies from a single source. However, many ERTC providers claim that entire industries qualify for this requirement, even if the businesses could still operate and maintain strong receipts. This is a dangerous interpretation of the rule, and it can result in significant fines and penalties if the IRS audits the business.
It’s important to remember that the ERTC changes in rules apply to for-profit entities but not government entities or nonprofits. If you serve a government entity client, review IRS guidance carefully and consult with your client’s accountant and applicable payroll company to understand the rules.
Document the Impact of Supplier Shutdowns
The ERTC provides significant payroll tax relief during the COVID-19 pandemic, and it’s important to understand the impact of the credit on your business. Asure’s team of expert professionals can help you determine if your business qualifies for the credit, file amended 941 returns, and comply with IRS rules related to ERTC.
The ERTC eligibility requirements require a business’s gross receipts to be reduced by more than 50 percent for one or more quarters. But the definition of “reduced” is very specific, and many businesses have difficulty understanding whether their operations meet the test. A business must show that its operational capacity was significantly diminished due to government orders or social distancing restrictions to qualify. For example, a nail salon that was forced to change its layout due to social distancing orders might have strong enough evidence to support an ERTC claim.
A business must demonstrate that government orders or social distancing restrictions substantially increased operating costs. This includes a business’s rental expenses, utilities, and non-payroll costs. Additionally, the ERTC rules require that the wages of owners and spouses be included in qualified wages if they are subject to FICA. However, these expenses were not included in the PPP loan forgiveness application or the business’s initial application for the credit. In that case, they cannot be added to the qualification calculation after the fact.
Document the Impact of Social Distancing Orders
A common myth is that only businesses shut down completely by government order qualify for the Employee Retention Credit (ERC). However, if a business has been able to open but were forced to reduce hours, cut back on employees or restrict customers, it would likely qualify as a partial shutdown business.
Additionally, the CAA and American Rescue Plan Act of 2021 expanded the ERC eligibility to allow companies that received a PPP loan to claim it. This is welcome news for many small businesses that had to obtain this assistance. In August of 2021, the IRS clarified some issues related to the ERC in Notices 2021-49 and 2021-33. Specifically, it was clarified that tips (as long as they are subject to FICA) are considered qualified wages for the ERC and that owners’ and spouses’ wages can be included in calculating qualifying wage amounts as long as the proper attribution rules are followed.
Document the Impact of Other Restrictions
In addition to focusing on documentation for ERTC compliance, tax professionals should ensure they are aware of other key considerations that may impact their client’s eligibility for the credit. These include familiarity with IRS guidance, accurately calculating qualified wages, maintaining comprehensive documentation, and compliance with timeframes and deadlines. Implementing strong internal controls and collaborating with tax professionals can help businesses to navigate potential audits and maintain compliance throughout the ERTC process.
For example, IRS notice 2021-49 clarifies that tips must be included in qualifying wages as long as they are subject to FICA. In addition, Notice 2021-49 also outlines attribution rules that must be applied to determine whether owner/spouse wages are eligible for the credit. To avoid interest charges and penalties, these rules must be followed.
Another consideration is that the ERTC can only offset OASDI taxes (the employer’s 6.2% Federal social security tax) and not other payroll taxes such as state unemployment compensation taxes, employer FICA contributions, or local income taxes. As a result, ERTC claims must be, at most, the amount of these other taxes being offset.