Businesses impacted by the COVID-19 pandemic have been relying on the Employee Retention Credit (ERC) for much-needed relief. However, many CPAs and employers are making mistakes when claiming this credit, leading to misinformation at record levels.
Third-party providers are improperly computing the credit and advising businesses to claim it when they may not or do not qualify.
To avoid these common errors surrounding the ERC, it is crucial to understand its eligibility criteria, demonstrate its impact, calculate it correctly, and consider its interplay with other relief programs.
Proper claiming of the ERC is vital as it can provide significant benefits for businesses struggling during these challenging times.
In this article, we will discuss in detail common mistakes to avoid when claiming the Employee Retention Credit and provide guidance on how to avoid them.
We would recommend using an ERC tax expert to help you work through the process. Clicking on the image below takes you to our recommended ERC tax expert. Go through the questions which are aimed at quickly finding out if you qualify for ERC or not, not everyone is eligible.
ERC Eligibility Criteria
You may already know that misinformation about the Employee Retention Credit (ERC) is rampant, but did you know that not all COVID-19-related consequences automatically qualify a business for the credit?
To be eligible for the ERC, a business has to demonstrate that it suffered either revenue decline or “more than nominal”impacts due to COVID-19. Simply adjusting one’s operations in response to the pandemic isn’t enough; employers must show that a specific government order or mandate caused the impact.
A qualifying government mandate must limit commerce, travel, or group meetings because of COVID-19 and come from a jurisdiction with authority over the employer’s operations. Additionally, proving suspension of more than a nominal portion of a business’ operations is a technical calculation requiring proper documentation. Furthermore, there is no double-dipping allowed between PPP forgiveness and ERC claiming.
It’s easy for CPAs and employers to get led astray when it comes to ERC eligibility as interplay with other COVID-19 relief programs can make things complicated. However, spreading awareness about proper ways to qualify and claim the credit is critical.
The burden falls on CPAs to ensure their clients understand what qualifies them for this fantastic tax incentive and cash infusion for businesses impacted by COVID-19-related consequences.
Demonstrating the Impact
When it comes to claiming the ERC, it’s crucial to show how a specific COVID-19-related government order or mandate has affected your business. This means that employers must demonstrate that a qualifying government mandate has limited commerce, travel, or group meetings due to COVID-19. The employer must also prove that the order came from a government with jurisdiction over their operations and lasted for the entire quarter.
Demonstrating the impact of a specific COVID-19-related government order or mandate on your business requires detailed documentation and calculations. It’s important to note that merely adjusting one’s operations in response to COVID-19 isn’t enough to qualify for the ERC. A suspension of a more than nominal portion of a business’ operations is required, which is a very technical calculation that needs proper documentation.
To avoid common mistakes when claiming the ERC, CPAs should emphasize the importance of demonstrating the impact of a specific COVID-19-related government order or mandate on their clients’ businesses. They should encourage their clients to keep thorough records and calculate eligible amounts accurately while avoiding double-dipping with other COVID-19 relief programs.
By following these guidelines, businesses can successfully claim this valuable tax incentive and cash infusion during these challenging times.
Calculating the ERC
Calculating the ERC can be a complicated process due to various factors that impact the potential amount. One of these factors is the wages paid to an employee in a given quarter, which determines how much of those wages are eligible for the credit.
The duration of the COVID-19-related impact on the business is another factor that affects the calculation. Other incentives already claimed by a business may also have an impact on their potential ERC amount.
For example, if a business received PPP forgiveness, it could affect their eligibility and potentially reduce their ERC amount. It’s crucial to carefully analyze all incentives received and calculate the eligible ERC amount accurately.
Overall, CPAs must ensure they are well-versed in calculating and claiming the ERC accurately for their clients. This includes understanding all factors that affect its calculation and staying up-to-date with any updates or changes related to COVID-19 relief programs. By doing so, they can help qualifying businesses receive valuable tax incentives and cash infusions during this challenging economic time.
Interplay with other Relief Programs
Understanding how other COVID-19 relief programs interact with the ERC can be critical for ensuring your business receives all eligible benefits. Many employers and CPAs mistakenly believe that if they claim funds from the Paycheck Protection Program (PPP) or other relief programs, they’re not eligible for the ERC. This isn’t entirely accurate.
While there are restrictions on double-dipping, businesses can still qualify for both programs under certain circumstances. For example, if a business received PPP funds but was still forced to suspend more than a nominal portion of its operations due to a qualifying government mandate related to COVID-19, it may still be eligible for the ERC.
However, wages paid with PPP funds cannot also count as qualified wages for the ERC calculation. Additionally, any wages used in calculating the Work Opportunity Tax Credit or Paid Family Leave credit cannot also count towards the ERC calculation. It’s crucial to understand these nuances when claiming multiple relief programs.
Employers should work closely with their CPAs to navigate these complex interactions between relief programs and ensure proper claiming of available benefits. Failure to do so could result in missed opportunities or even potential penalties down the line. The key takeaway is that while businesses can’t double-dip into different relief programs using the same wages, there may still be ways to maximize benefits by utilizing various incentives available under different programs.
Importance of Proper Claiming
Properly claiming the Employee Retention Credit (ERC) is crucial for businesses to maximize available benefits and avoid potential penalties. To ensure proper claiming, CPAs must be diligent in their calculations and documentation. Here are four important factors to consider when claiming ERC:
- Businesses must demonstrate that a specific COVID-19-related government order or mandate caused the impact on their operations.
- The ‘more than nominal’ test is critical in determining eligibility for ERC. This requires a technical calculation and well-documented evidence of suspension of a significant portion of the business’s operations.
- Calculating eligible ERC amounts can be complicated, impacting by wages paid, duration of impact, and other incentives already claimed.
- It’s essential to demonstrate the impact of COVID-19 related consequences on businesses while avoiding overgeneralizations.
CPAs play a crucial role in helping businesses claim the ERC properly. They should spread awareness about the proper ways to qualify for and claim this credit. By doing so, they can help businesses maximize available benefits while remaining compliant with existing guidelines and regulations.
Top 3 ERC Errors
Hey, did you know that many CPAs and employers are still getting tripped up by the ERC? Here are the top five errors to watch out for!
First, make sure you can demonstrate that a specific COVID-19-related government order or mandate caused an impact on your business. Merely adjusting operations in response to COVID-19 isn’t enough to qualify. The qualifying order must limit commerce, travel, or group meetings due to COVID-19 and come from a government with jurisdiction over your operations.
Secondly, be careful when claiming the ERC alongside other COVID-19 relief programs. There’s no double-dipping allowed, so make sure you’re not claiming more than what you’re actually eligible for. Third-party providers may advise businesses to claim the credit when they may not or do not qualify. As such, it’s crucial for CPAs to verify their clients’ eligibility before making any claims.
The third mistake is failing to calculate the correct amount of eligible ERC. The ERC is calculated as 70% of qualified wages paid to an employee in a given quarter, up to $10,000. However, this amount can be impacted by various factors such as wages paid and incentives already claimed. To avoid mistakes in calculating the eligible amount, it’s essential for businesses and CPAs alike to understand how all these factors impact their ERC claim accurately.
Value and Benefits of ERC
You may be surprised to learn about the significant value and benefits the ERC can provide for eligible businesses impacted by COVID-19. This tax incentive is designed to help companies keep employees on payroll, even during times of economic hardship.
Here are some of the key advantages a business can gain by claiming the ERC:
- Cash infusion: The ERC provides a dollar-for-dollar reduction in payroll taxes owed, which means that qualifying businesses can receive a substantial cash infusion that can be used to cover various expenses.
- Flexibility: Unlike other COVID-19 relief programs, such as PPP loans, there are no restrictions on how businesses use the funds they receive from the ERC. This means that companies have more flexibility in determining how best to allocate resources.
- Retroactive benefits: Even if a business did not claim the credit earlier in 2020, they may still be able to retroactively apply for it and receive benefits for previous quarters.
It’s important to note that not all businesses will qualify for the ERC and that proper documentation and calculations must be provided when claiming it. However, for those who do qualify, this tax incentive can provide critical relief during an uncertain time.
We would recommend using an ERC tax expert to help you work through the process. Clicking on the image below takes you to our recommended ERC tax expert. Go through the questions which are aimed at quickly finding out if you qualify for ERC or not, not everyone is eligible.
Conclusion
In conclusion, the Employee Retention Credit has been a crucial lifeline for many businesses trying to stay afloat during the pandemic. However, with misinformation and improper claiming at record levels, it’s important for CPAs and employers to understand the common mistakes surrounding this credit.
Firstly, eligibility criteria must be carefully considered and demonstrated through financial impact.
Secondly, calculating the ERC can be complex and requires attention to detail.
Thirdly, understanding how the ERC interplays with other relief programs is critical to avoid errors.
Proper claiming of the ERC ensures that businesses receive maximum benefits while avoiding penalties and audits. By avoiding common errors such as misinterpreting eligibility criteria or improperly calculating credits, businesses can make full use of this valuable program.
Ultimately, proper claiming of the Employee Retention Credit allows businesses to focus on recovery and resilience in these challenging times.
If you would be interested in getting professional assistance with Employee Retention Credit then check out our post https://lowdownertc.com/getting-professional-assistance-with-the-employee-retention-credit/
