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Small businesses are facing a barrage of ads, phone calls and emails aimed at helping them claim a pandemic-era tax credit. However, experts strongly advise entrepreneurs to have their eligibility checked by a qualified tax advisor.
The tax credit — known as the Employee Retention Credit (ERC) — was introduced in 2020 to support small businesses during the Covid-19 pandemic and is up to $5,000 per employee in 2020, or $28,000 per employee in 2021.
Although the credit is for tax year 2020 or 2021, there is still time for entrepreneurs to amend their tax returns and take advantage of the credit, which has led to a flood of adverts from companies offering to help.
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“The calls and requests are brutal,” said certified financial planner Craig Hausz, CEO and managing partner at Dallas-based CMH Advisors. In addition, he is a certified public accountant. “Our customers get a lot of it and it just bombards them.”
While Hausz’s company submitted at least 100 amended applications for customers to claim the employee retention credit, it also notified customers when they were not eligible.
“ERC mills” emerged, charging small businesses up to 25% to 30% for the credit they received, said Kristin Esposito, director of tax policy and advocacy at the American Institute of CPAs.
“There’s a huge financial incentive,” she said.
It’s a real drain on many customer relationships.
Kristin Esposito
Director of Tax Policy and Advocacy at the American Institute of CPAs
Esposito said ERC mills could promise business owners they qualify or charge more credit than owners were told by their CPA. “It’s a real drain on a lot of customer relationships,” she said.
After warning business owners in October that “third parties” were promoting the employee retention credit, the IRS included the issue in its annual list of “Dirty Dozen” tax fraud cases for 2023.
“While credit is a financial lifeline for millions of businesses, there are promoters who mislead people and businesses into believing they can take advantage of these credits,” IRS Commissioner Danny Werfel said in a statement in March.
How to qualify for the employee retention credit
One of the challenges in claiming the employee retention credit is the complexity, as Hausz says the rules changed between 2020 and 2021.
The credit was introduced to keep workers on the payroll during the quarters affected by the Covid-19 pandemic. While eligibility was originally valid from March 13 to December 31, 2020, the period has been extended to Q3 2021 for most companies.
To qualify in 2020, businesses required a government-ordered full or partial closure or a “significant decline” in revenue at “less than 50% of gross revenue” compared to the same calendar quarter in 2019, according to the IRS. For the year In 2021, revenue thresholds dropped to “less than 80% of the same quarter” in 2019.
“Some we’ve done for customers who have had downtime and others who have had a downturn in sales,” which is easier to calculate, Hausz said.
In addition, the credit was extended from 2020 to 2021 and originally covered 50% of qualifying wages (capped at $10,000 per year per employee), resulting in a maximum credit of $5,000 per employee in 2020. For 2021, the loan jumped to 70% of wages ($10,000 quarterly per employee), worth up to $7,000 per quarter or $28,000 per year.
Why it is important to work with a tax professional
One of the difficulties with claiming the employee retention credit retrospectively is that business owners must change other declarations as well, Esposito said.
As the process begins with Form 941-X — the adjusted payroll tax return — the changes flow into income tax returns for businesses and individuals, “causing a cascading effect,” she said.
Hausz said the “big problem” with newer companies that claim to help companies obtain that single loan is that they may not sign the amended statements to avoid future liability. “Don’t submit this unless the people helping you are willing to put their name on the submission as a paid creator,” he warned.
In the March statement, IRS Commissioner Danny Werfel warned that taxpayers are “ultimately responsible for the accuracy of the information on their tax returns” and the agency is stepping up enforcement of those claims.
Hausz added that taxpayers “should speak to a qualified professional,” such as a chartered accountant, registered agent, tax attorney or financial advisor. “There are literally hundreds of companies that I know personally that would take the loan and sign their name on it.”
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