Employee Retention Credit: Benefits versus Risk.

Employee Retention Credit: Benefits versus Risk.

by Dave Horwedel, EA, CEO of Torchlight Tax.

There is a lot of false data out there about the Employee Retention Credit, also called the ERC or ERTC. Many employers who don’t qualify for the ERC have been told they do. Many employers who do qualify for the ERC have been told they don’t.

Recently formed tax firms are springing up all across the United States composed of “ERC gurus.” In many cases, these are marketers, not tax professionals. In their view, just about everybody qualifies for the ERC.

The IRS, unfortunately, has fairly specific guidelines.

On the other side, we have some EAs and CPAs, not trained up on the ERC, who think nobody qualifies. This is probably because they were very busy doing taxes, and when the Employee Retention Credit first came out, qualifications were really steep. Later, the law changed and qualifications became easier to meet.

There is a lot of money involved in this. Potentially an employer could get $26,000 for every employee he employed during 2020 and 2021. If you got 50 employees, we’re talking about 1.3 million dollars.

So if you qualify for this, you definitely want to apply and get that money. But also if you don’t qualify for it, you don’t want to apply, get that money and then have to pay it back later to the IRS. There is certain exact data needed to calculate whether person is eligible for the ERC or not.

The first test, and there are several, is called the gross receipts test. If your gross receipts for any quarter in 2020 were down versus 2019 by more than 50%, then you likely qualify for the ERC simply based on the gross receipts test. For 2021 the gross receipts test versus 2019 is more than 20% down. But what if your gross receipts weren’t that down? Do you not qualify? In very many cases, you do.

In order to qualify for the Employee Retention Credit, If your gross receipt don’t meet the gross receipts test, you have to be able to demonstrate, as a result of modifications required by federal, state, and local government orders, you had a decline or reduction in your ability to deliver goods and services of more than 10% versus the same quarter of 2019.

Now, what does a decline in the ability to deliver goods and services mean? It is kind of loose. The law itself is even looser, but the IRS has said that you have to be able to demonstrate this decline or reduction of more than 10%.

Well, in working with people for the Employee Retention Credit, I discovered that you really have to dig in and you really have to look, You don’t want to get it if you don’t qualify, and you very possibly might get it if you don’t qualify on the first run through.

But the IRS has extended the audit frame from up to three years, up to five years.

So they might audit you five years from now if you put in for the ERC, and it wouldn’t be that difficult, if you didn’t qualify, to discover you didn’t qualify. It wouldn’t be hard for the IRS to program their computers so that they would show who had up-trending income during the pandemic and just audit those people.

So, does it mean that if you have up-trending income that you don’t qualify? No. You have to be able to defend a reduction in your ability to deliver goods and services of greater than 10% for any quarter that you qualify for.

Now, it’s been fascinating dealing with many, many clients in this area because, the first thing they often say is, “Oh, I know I qualify,” or “I don’t think I qualify.”

But in actual fact, you have to do a real investigation and you have to take a look as to what actually happened. And what you want to be able to do is say, “Okay, we’ve reviewed this and we’re able to show a greater than 10% decline in the client’s ability to deliver goods and services.”

I had one client, his gross receipts went up, they went down, they were all over the place. But he had a really tough time. So I did a little analysis of his income and his expenses and everything, and he was saying that a lot of the money he made in 2020 and even 2021 was from income that was generated earlier. And so I asked, “Well, what type of statistic do you have that shows your ability to deliver goods or services?”

And we drilled it down, did an analysis of how many orders he took and filled in each quarter. And we discovered that he was 47% down one quarter versus 2019, the corresponding quarter.  other one, he was 25%, 16%, but he was always at least 16% down in his orders. Well, that sounds like a greater than 10% decline in his ability to deliver goods and services to me.

Now, if you’re eligible, that means you can get up to $26,000 per employee, if you’re eligible for all quarters. And that assumes the employee made about $800 a week in W2 income. If you’re paying subcontractors, people not on w2, that doesn’t qualify. There are all kinds of other very fine, very picky rules.

We’re not going to go over them in this article right here. If you’d like to find out if you do qualify, contact me at Torchlight Tax. You can call me at +1 877-758-7797, or you can email me at dave@torchlighttax.com. We will look over the data that you send us, ask you questions, and determine whether you qualify or not, at no charge to you.

If you qualify, we will actually tell you how much you qualify for, and we will send you an engagement letter and we will actually work out what we’re going to do with you, how we’re going to help you. And we’ll go ahead and file your amended tax return. Then probably three to nine months later, you’re going to start getting a bunch of refund checks.

Once we get the refund checks, we will any necessary income tax returns for you. And we will stand by to defend you, for no extra charge, for the 5 year audit window.

And if you don’t qualify, we’ll tell you. We’ll shake hands and you won’t have a fee. Once again, this is Dave Horwedel. Call me at +1 877-758-7797 or email dave@torchlighttax.com. I look forward to hearing from you. I would like to assist you in getting this credit if you qualify.

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