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What to know while helping clients with the ERC

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Since the Employee Retention Credit (ERC) was passed in 2020, tax professionals and accountants have been fielding calls from clients who have heard or seen ads about the lucrativeness of the ERC. Despite the numerous bogus ERC claims based on misinformation, the ERC is a legitimate opportunity every accountant should consider for their clients. Even if you don’t offer ERC services yourself, you should still know what to expect when working with an ERC referral partner.

Educate clients about ERC eligibility criteria

Caught up in the hyped-up marketing of ERC mills, clients may approach you with a flawed understanding of the eligibility criteria for the ERC. For this reason, it’s best to remind them that there are only two official tests for determining ERC eligibility:

  1. Gross receipts test: In 2020, a company must have experienced a decrease in gross receipts of at least 50%, when compared to the corresponding 2019 quarter, to qualify for the ERC. For 2021, a company is considered eligible for the ERC if its gross receipts decreased at least 20% during any quarter when compared to the same period in 2019.
  2. Suspended operations test: If a government order caused your client to fully or partially suspend their operations for any period in 2020 or 2021, they may be eligible for ERC during that period. The ERC suspension test involves many nuances and gray areas, which is why many ERC mills abuse it. It’s best to hang on to articles and alerts about the ERC so you can easily and quickly educate clients about fact vs. fiction.

Gathering the appropriate documentation to support ERC eligibility

Once you’ve educated clients about the ERC, it’s time to help them determine their eligibility. If they’ve qualified for the ERC under the gross receipts test, they’ll need to provide payroll tax returns for 2020 and 2021. In addition, you would want to obtain documentation related to wages used for the Paycheck Protection Program, if applicable, as well as amounts and dates for wages paid to employees during ERC-eligible quarters.

If they qualify for the ERC under the suspension test, gather and archive copies of local, state, and/or federal government orders that specifically mandate the client to fully or partially suspend their operations. For supplier shutdowns, you’ll also need copies of mandates that directly affect the client’s suppliers, as well as proof that the client searched for—and was unable to find—an alternative supplier.

Avoid pitfalls with essential businesses and ERC suspensions

If a client was deemed an essential business during the pandemic, you may still find ERC eligibility using the nominal portion or nominal impact guidelines described in IRS Notice 2021-20.

Nominal portion: If only a portion of a client’s essential business was suspended due to a direct government mandate, they may still qualify for the ERC if either of the following applies:

  • Gross receipts from the closed portion of the company’s operations total at least 10% of the total pre-pandemic gross receipts. As with the gross receipts test, the nominal portion clause requires a comparison of 2019 gross receipts.
  • Service hours worked by employees in that portion of the business comprise at least 10% of the company’s total service hours performed during that quarter. Again, you’ll need details regarding service hours for the corresponding 2019 quarter.

Nominal impact: If no portion of a client’s company was suspended, but they made modifications to comply with a direct, COVID-19-related government mandate, you may be able to find ERC eligibility under the nominal impact clause. This clause allows for possible ERC eligibility if a coronavirus-related modification resulted in a “more than nominal effect” on the client’s ability to provide goods or services during a normal course of operations. This gray area has given some ERC providers an out for claiming ERC based on minor adjustments, such as wearing masks, a premise that is debunked in Question 18 of Notice 2021-20. However, there are three caveats that you must carefully consider before rushing to claim the ERC on the premise that any modifications are eligible modifications:

  1. The nominal portion is tied to a nominal impact: Examples 3, 4, and 5 for Question 17 in IRS Notice 2021-20 determine nominal impact by determining whether a nominal portion of business operations was affected by the modifications.
  2. Modifications must have had a more than nominal effect on business operations: As described in Answer 18 of IRS Notice 2021-20, modifications—again, mask requirements—do not satisfy the “more than nominal impact” requirement.
  3. Parameters for nominal impact must be applied individually: Answer 18 in Notice 2021-20 recognizes that guidelines must be applied on a case-by-case basis since measures impact each industry differently. For example, occupancy restrictions on a retailer have less impact than occupancy restrictions on a restaurant.

Clients need us to separate facts from fiction

Although the ERC is a tremendous tax opportunity that should be explored by all companies, you should invest time into educating your clients. As our client’s most trusted advisors, it’s our responsibility to remain aware of misconceptions that may have occurred, and take steps to guide them toward a legitimate ERC eligibility decision that can withstand an IRS audit.

Editor’s note: Check out Cassidy’s article on ERC fraud.

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