At first glance, the Employee Retention Tax Credit seems like “free money” provided by the federal government to compensate businesses for the struggles they faced during the COVID-19 pandemic.
While eligible businesses can claim up to $26,000 for each qualified employee, there are very specific rules that must be followed to collect the credit. Making an error, even an innocent one, can result in fines, audits, and other unpleasant consequences.
This article outlines some of the top Employee Retention Tax Credit hurdles businesses face and how to handle them.
1. Determining Eligibility
To claim ERTC funds, a business must have experienced a decline in gross receipts in 2020 and 2021 compared to the same quarters in 2019 or have been subjected to a modification in operations due to a government mandate.
Specifically, gross revenue must have declined by at least 50% in 2020 and 20% in 2021 when compared side-by-side to 2019 revenue figures.
One of the ERTC obstacles businesses have faced is passing the “suspension test,” which is required for eligibility for quarters in which revenue was not a qualifying factor. The challenge in determining whether a business passes this test has to do with the fact that the IRS has provided little guidance as to what meets this threshold.
To prove that operations were significantly impacted by government orders, it is highly recommended to save copies of any government instructions received and keep records of how your business was impacted.
2. Calculating Qualified Wages
Other issues with ERTC calculations include determining which wages are qualified under the credit. Several factors will influence this eligibility, including whether your business is classified as “small” or “large.”
Further, it turns out that if your eligibility is based on suspended operations and not revenue decline, qualified wages are limited to the time period in which your operations were affected. For example, if you only had to shutter your doors for two weeks in 2020 and did not experience a 50% or more decrease in revenue, your qualified wages may be limited to those two weeks (absent other interferences with operations).
3. Keeping Accurate Records
Given the complexity of the ERTC rules and the ever-changing landscape, it’s important to keep accurate records. This can be essential if your claim is disputed, and you need evidence to support the amount you have stipulated in Form 941-X.
Recordkeeping may present a challenge, however, especially if the rules have changed in such a way as to alter your eligibility. Small businesses and entrepreneurs, in particular, may be especially pressed in this area. It isn’t always easy to find the time to keep a detailed account of expenses, reconcile bank statements, and record activities that affect ERTC eligibility.
4. Reconciling Aid Received From Other Relief Programs
In the early days of the ERTC, a business that received a Paycheck Protection Program (PPP) loan could not claim ERTC funds as it was considered “double dipping.” That policy recently changed, and businesses can still be eligible for the ERTC even if they got PPP funds.
Double-dipping is still not allowed, so instead, a business will have to take PPP funds that were used to pay salaries out of the equation. In addition to the Paycheck Protection Program, there are also other government programs that could potentially impact ERTC eligibility.
Contact an Experienced Professional at Dayes Law Firm for Help Overcoming ERTC Challenges
If you would like help navigating ERTC difficulties, please feel free to contact us for a free consultation regarding any of your ERTC questions or concerns. Our firm has already helped many businesses claim millions in funds for Employee Retention Tax Credit claims, and we are ready to assist you as well. Give Dayes Law Firm a call at (800) 503-2000 to learn more today!