Understanding The Employee Retention Credit

Michael Williams is a California-licensed attorney whose practice focuses on tax credits and M&A transactions. After starting his career with Ernst & Young, Michael provided C-Suite leadership to multiple organizations before starting his own firm; he received his J.D. from the University of Connecticut and an M.B.A. from Bryant University

Russ Prince: What is the employee retention credit?
Michael Williams: The Employee Retention Credit—ERC—is a refundable tax credit created as part of the CARES Act to encourage employers to keep their employees on the payroll. The ERC is available to qualifying employers for wages paid during the periods March 13, 2020 through September 2021.

It can be obtained whether or not an employer was deemed “essential” or previously received one or more PPP loans from the SBA. The total amount of the ERC is up to $26,000 total per employee, equivalent to 50% of qualified wages up to $10,000 paid to each employee in the calendar year 2020 and 70% of qualified wages up to $10,000 paid to each employee in the first three quarters of 2021.  

When filed retroactively, approved ERC refund claims result in direct payments to employers, which can be very helpful for organizational cash-flow purposes. The ERC is available to both for-profit and tax-exempt employers that experienced either: 

• fully or partially suspended operations due to federal, state, or local governmental orders or proclamations limiting commerce, travel, or group meetings due to Covid-19; or

• a significant decline in gross receipts during the calendar quarter.

Fully suspended operations generally mean that an organization could not open its doors. A partially suspended operation requires more qualitative analysis, and the following example may be helpful. 

The IRS has provided guidance that if you operate a full-service restaurant and, during Covid-19 were prohibited from having in-person dining or had to limit your operating hours but were still allowed to provide outdoor dining, takeout and delivery services, this should qualify you for the ERC. While the IRS has not provided specific guidance for every industry, analogous examples can include gyms, bars, retailers, charter schools, real estate brokerages, car dealers, manufacturers and others; the list is long. 

The qualification rules for 2020 are different from 2021, so a careful analysis should be completed to determine whether an employer qualifies and if so, to accurately determine the ERC to maximize the employer’s refund claim. 

Prince: What is the biggest mistake entrepreneurs make when it comes to the ERC? 
Williams: The biggest mistake I’ve seen entrepreneurs make is that they’re leaving millions of dollars on the table. Tax credits of any kind can be complicated, which is why it’s generally a niche area of practice. The ERC is no different; the rules are nuanced and often misunderstood by those unfamiliar with the program. 

The biggest mistake I’ve seen entrepreneurs make is that they work with a provider who does not have an intimate understanding of the credit, which manifests a two-fold problem: either the provider advises the client that they don’t qualify for ERC, or they fail to maximize the opportunity. Often times these providers are relying on outdated information or do not fully understand the ERC, to the significant detriment of their clients. 

I’ve done look-back reviews for clients whose payroll provider or CPA previously helped them with the ERC. On average they’re missing out on 30% of the potential credit. That can equate to a six- or seven-figure lost opportunity. 

Prince: How does an entrepreneur apply for the credit? 
Williams: While every provider has a different process, when working with clients I generally take a four-step approach: 

1. Conduct an in-depth analysis, usually in the form of a discovery call or meeting, to determine whether the client may qualify for the ERC;

2. Obtain and review payroll information for quarters in which the client may qualify for the ERC;

3. Calculate the potential credit and draft the required narrative to accompany the refund claim; and 

4. File IRS Forms 941-X Adjusted Employer’s Quarterly Federal Tax Return for each qualifying quarter.

Once filed and if approved, the client should expect to receive their refunds in four to six months from the IRS, though processing times can vary. As of now, the deadline for filing a refund claim for the ERC is based on the statute of limitations for each originally filed payroll tax return. However, some practitioners are concerned that legislation will be enacted to sunset the ERC more quickly, similar to the early closure of the PPP loan program. If that occurs, entrepreneurs who fail to timely file refund claims may miss out on a significant opportunity.

Russ Alan Prince is the executive director of
Private Wealth magazine and one of the leading authorities in the private wealth industry. He consults with family offices, the wealthy, fast-tracking entrepreneurs and select professionals. Connect with him on LinkedIn.com.

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