As an accounting professional, you're all too familiar with the financial ups and downs our country has faced in these last few years. But through all the uncertainty, one thing has proven to be a lifesaver for businesses: the Employee Retention Credit. This refundable tax credit has been a vital financial support for businesses that kept employees on payroll during the pandemic.
With the deadline to retroactively claim the ERC quickly approaching, your understanding of this tax credit's nuances is more crucial than ever. After all, no one wants to leave free money on the table.
The basics: What is the ERC?
The ERC was designed to encourage employers to hold onto their staff throughout the financial turbulence of the COVID-19 pandemic. But, as you know, tax laws aren't always straightforward. The guidelines around the ERC are particularly thorny, and without a good grip on them, it can feel like you're lost in a labyrinth.
To successfully guide your clients through this maze, it's key to nail down the four major qualifying factors:
- Experiencing a full or partial shutdown due to government orders
- Experiencing a significant decline in gross receipts;
- A reduction in the number of full-time employees; and,
- The amount of qualified wages paid.
Each of these four factors holds its own set of tricky details. For instance, determining "a significant decline in gross receipts" isn't as easy as lining up revenues from successive years. Instead, it requires a detailed analysis of specific quarterly revenues compared to the same quarter in 2019. This nuanced understanding is crucial to correctly determine eligibility for the ERC.
Avoiding common mistakes
One of the most common mistakes you might see when clients are claiming the ERC is misunderstanding or misapplying the eligibility criteria. This often stems from a lack of understanding of the specific requirements of each criterion. For example, the "significant decline in gross receipts" criterion requires a careful and detailed analysis of quarterly revenues. Overlooking this detail could lead to clients either missing out on a credit they are eligible for or claiming a credit they are not entitled to, which could lead to complications down the line.
Another common pitfall is the misclassification of wages. The ERC applies to "qualified wages," which refers to wages paid to employees during periods of business suspension or significant decline in gross receipts. However, not all wages qualify for the ERC. You need to ensure your clients are only claiming the credit for eligible wages. Misclassification of wages can lead to incorrect claims and potential issues with the IRS.
Lastly, ignoring the risk of audits is a mistake that can have serious consequences. Non-compliance can lead to audits by the Internal Revenue Service. If your clients get caught up in an audit, there could be unfavorable results, a return of funds to the IRS due to miscalculations, and additional cost of legal and tax specialist fees to correct oversights and miscalculations.
Maximizing the ERC
To fully leverage the benefits of the ERC, consider conducting a comprehensive review of your clients' operations during the time in which the tax credit was in effect (after March 12, 2020, and before Jan. 1, 2022). You'll need to analyze each quarter individually to identify periods of eligibility and calculate the credit accurately for those periods.
One of the best things your clients can do is to maintain detailed records of their operations during this time period. If they no longer have these records handy, it is in their best interest to locate them and set them aside for safekeeping. Important records include documentation of any government orders affecting their operations, changes in gross receipts, and wage records. Detailed recordkeeping not only aids in the accurate calculation of the ERC but also provides valuable documentation in the event of an IRS audit.
Final thoughts
Mastering the ERC maze may seem daunting, but it's an essential skill for accounting professionals in our post-pandemic economy. By familiarizing yourself with the intricacies of the qualifying factors, avoiding common mistakes, and implementing comprehensive review strategies, you can help your clients maximize their potential tax credits and support their journey towards financial stability. As the retroactive claim deadline approaches, let your knowledge be the key that opens the door to financial relief through the ERC.
