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Many businesses are still recovering from the aftermath of the pandemic and the Employee Retention Credit (ERC) has been proven to be a vital lifeline for many of them. Unfortunately, there are several misconceptions and myths about the ERC that may prevent some businesses from taking advantage of this program. Here are the top ten myths about the ERC, and the realities behind them:
MYTH #1: You will get $26,000 for every employee.
FACT: Calculating your ERC credit can be extremely complicated and business owners should exercise caution when doing so. If you hear that you can simply multiply how many employees you have times $26,000 and then place that number on your 941-X, you should be very skeptical of the advice that you are getting. There are 3 major factors that impact your refund: wages paid, duration of impact, and other incentives already claimed.
MYTH #2: If I’ve already claimed PPP (or have had my PPP loans forgiven), I can’t qualify for the ERC.
FACT: This is no longer true. The Consolidated Appropriations Act (CAA) of 2021 changed the rule on claiming one or the other, meaning you can now claim both PPP and ERC.
MYTH #3: I am not eligible because my company did not have a drop in gross receipts of 50% or more.
FACT: The CAA has changed the qualifications so that a reduction of 20% now qualifies. However, there is also another way to qualify for the ERC – if your business has been subject to a partial or full suspension due to a government order.
MYTH #4: I can’t claim the ERC because my company was not shutdown during the pandemic.
FACT: Even a partial suspension order by the government (federal, state, or local) of your business could potentially qualify. For example, a partial shutdown, limited capacity, reduction in services offered, reduction of hours to accommodate sanitation, a disruption in your business, inability to access equipment, shutdowns of your supply chain or vendors, shut down of some locations and not others, and shutdowns of some members of a business are all scenarios that could still potentially qualify for the ERC.
MYTH #5: My business has grown during quarantine, so I do not qualify for the ERC.
FACT: A revenue increase during 2020 and 2021 doesn’t automatically disqualify your business. Even if your company’s revenue increased during COVID, it could still be eligible to receive the ERC if it experienced commerce, group meeting, and/or business travel limitations or was subject to a partial or full suspension due to a COVID-19 government order.
MYTH #6: My company was deemed an essential business, so I do not qualify because of business suspension
FACT: Even if your business is deemed essential, an impact or change in your business may still qualify you. For example, even if you were open but your vendors were closed down or you can’t go to a client’s job site, you may still qualify. Or alternatively, if part of your business was considered non-essential and was impacted by a government-ordered suspension – you may also qualify. The scenarios discussed above in Mistake 3 could apply here as well.
MYTH #7: My organization is a nonprofit, so it is not eligible for the ERC.
FACT: The ERC can provide significant benefit to charities such as churches, nonprofit hospitals, museums, etc. From suspended operations to limited commerce, travel, or group meetings due to the pandemic, tax-exempt organizations may also qualify for a payroll tax refund.
MYTH #8: I have fewer than 5 employees, so I am not eligible.
FACT: This myth is particularly frustrating because it’s been heavily perpetuated by many commission-based sales reps with generally no accounting background. Let’s think about it – say you qualified for the maximum credit amount for four employees ($26,000 x 4), your company would potentially receive over $100,000! This amount is clearly material to most small businesses of this size but would result in a “trivial” commission amount for these sales reps. For this reason, many well-deserving business owners have been told they can't claim the ERC.
MYTH #9: The IRS does not have the time or resources to properly check documents.
FACT: Don't fall for this myth! The IRS is actively reviewing ERC claims and expects businesses to provide contemporaneous documentation from counsel that will properly and fully document how they qualify for the ERC.
MYTH #10: It’s too late for my company to claim the ERC.
FACT: Your business can still file a claim to receive the ERC, but the clock is ticking, so it’s important for companies to jump on the opportunity now as the ERC landscape could change at any time. Fortunately, there are many ERC companies with highly qualified professionals who are skilled in the ERC’s nuances, which can help your business navigate the process as easily as possible.
Despite the misconceptions surrounding the Employee Retention Credit, one point remains clear: it is a great tax opportunity that should be explored by every company. Get in touch with one of our tax credit specialists to find out if your business qualifies for the ERC.
The information provided in this blog is intended for general information only, and is not meant to constitute tax advice.
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