How to find out if your business qualifies for the employee retention tax credit

Small businesses are facing an onslaught of ads, phone calls and emails to help them claim tax credits during the pandemic. However, experts urge business owners to review compliance with a qualified tax professional.

The tax credit, known as the Employee Retention Credit or ERC, came into effect in 2020 to support small businesses during the Covid-19 pandemic, up to $5,000 per employee in 2020 or $28,000 per employee in 2021.

Although the credit applies to the 2020 or 2021 tax year, business owners still have time to amend returns and claim the credit, prompting a flood of ads from companies offering help.

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“The calls and demands are brutal,” said certified financial planner Craig Hausz, CEO and managing partner of CMH Advisors in Dallas. He is also a certified public accountant. “Our customers buy a ton of these and just bomb them.”

Although Hausz completed at least 100 amended documents for clients to claim employee retention loans, they notified clients when they did not qualify.

Christine Esposito, director of tax policy and advocacy for the American Institute of CPAs, said “ERC mills” have emerged paying 25% to 30% of small business loans.

“There’s a huge monetary incentive,” he said.

ERC mills may promise business owners they will qualify or bill owners a larger credit than the CPA told them, Esposito said. “It really puts a strain on a lot of customer relationships,” he said.

The IRS added the issue to its annual list of “Dirty Dozen” tax scams for 2023, after warning business owners in October about “third parties” promoting the employee retention credit.

“While the credit provides financial assistance to millions of businesses, there are promoters who mislead people and businesses into thinking they can claim these credits,” IRS Commissioner Danny Werfel said in a statement in March.

According to Hausz, one of the problems with claiming the employee retention credit is complexity, and the rules changed between 2020 and 2021.

The loan was enacted to keep employees on payroll during quarters affected by the Covid-19 pandemic. Although compliance was initially from March 13 to December 31, 2020, the timeline for most businesses has been extended to the third quarter of 2021.

To qualify in 2020, businesses needed a full or partial government shutdown or a “substantial decrease” in revenue, according to the IRS, with “less than 50% of gross receipts” compared to the same calendar quarter in 2019. Revenue thresholds for 2021 fell to “less than 80% of the same quarter” in 2019.

“We’ve done some work for clients that have closed and we’ve done some work that has decreased revenue,” Hausz said, which is easier to calculate.

In addition, the credit has been extended from 2020 to 2021, initially covering 50% of qualified wages (capped at $10,000 per employee per year), to a maximum of $5,000 per employee in 2020 credit is given. In 2021, the credit increases to 70% of wages ($10,000 per employee per quarter), up to $7,000 per quarter or $28,000 per year.

One of the challenges of claiming the employee withholding credit retroactively is that business owners have to turn in other income as well, Esposito said.

While the process starts with Form 941-X — an amended payroll tax return — the changes flow to business and personal income tax returns, creating a “cascading effect,” he said.

Hausz said the “big problem” with new companies that claim to help businesses get that single loan is that they don’t sign adjusted returns to eliminate future liability. “Don’t document it unless the people helping you are willing to put their name on the document as a paid developer,” he cautioned.

In a March statement, IRS Commissioner Danny Werfel warned that taxpayers are “ultimately responsible for the accuracy of information on their tax returns,” and the agency is stepping up enforcement for those claims.

Hausz added that taxpayers should “talk to a qualified professional,” such as a CPA, enrolled agent, tax attorney or financial advisor. “There are hundreds of firms that I know personally that will lend and sign their name.”