Employee Retention Tax Credit Update: Evaluate Your Eligibility Now – There’s Still Time!

About the Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) is a valuable tax credit that provides businesses an opportunity to receive significant refunds for qualified wages paid to employees during the COVID-19 pandemic. With the application deadline for one eligible year of the credit quickly approaching, it is important to evaluate whether your company qualifies for the credit.

Background

The Employee Retention Credit is a refundable payroll tax credit introduced to provide financial assistance to businesses affected by the COVID-19 pandemic. It allows eligible employers to claim credits for qualified wages paid to employees, including certain health insurance costs. The ERC was initially established under the CARES Act in 2020 and has since undergone modifications and extensions through subsequent legislation.

How to Qualify

To qualify for the ERC, businesses must meet specific eligibility criteria. Generally, employers that experienced partial shutdowns due to government orders limiting commerce, travel, or group meetings, or those that witnessed significant declines in quarterly gross receipts compared to 2019, are considered eligible employers. However, there are variations in qualification requirements based on the year and specific legislative provisions.

Eligibility Periods and Application Deadlines

The ERC eligibility periods and application deadlines differ for each year. For the 2020 ERC, businesses can claim the credit for qualified wages paid between March 13 and December 31, 2020. In 2021, the eligibility period extends from January 1 to September, with specific quarters having different deadlines. It is crucial to be aware of these periods and deadlines to ensure timely application for the ERC.

The deadline to apply for the 2020 ERC, via a 941-X filing, is April 15, 2024. The deadline to apply for the 2021 ERC is April 15, 2025.

July 2023 Update – AM 2023-005

On July 20, 2023, the IRS released Chief Counsel Advice Memorandum AM 2023-005, a memo providing much needed guidance for determining if an employer qualifies for the Employee Retention Credit (ERC) due to a full or partial suspension of operations related to a supply chain disruption.

Supply chain disruption has been a leading argument for qualification used by many unscrupulous providers, or “ERC Mills”. The Memo addresses whether a supply chain disruption satisfies the full or partial suspension test and provides further detail on what documentation should be kept to substantiate the claim. The most important piece of the full or partial suspension test is that the claim must start with an appropriate federal, state, or local governmental order. A mere supply chain issue, without causing an actual suspension of the employer’s business operations, would not warrant qualification for the tax credit.

While there is no doubt the COVID-19 pandemic had a significant impact on supply chain and supply costs, it can be challenging to match the effects in a manner that satisfies the IRS guidance. The IRS guidance states that a supplier of critical goods must have been subject to an appropriate governmental order that suspended their operations. This is a hard test to meet, as most manufacturers were declared to be essential businesses and allowed to continue operations during the pandemic.

The memo provides additional examples in the form of 5 distinct scenarios where employers are asserting their eligibility for ERC under various supply chain issues.  These scenarios call further attention to the specific documentation that an employer would need to collect as support for their ERC claim. Those documentation items include the following:

• A copy of the specific government order that impacted the supply chain;
• Evidence that illustrates how the government order directly caused challenges for the supplier, resulting in a suspension of their operations;
• Documentation that the employer was unable produce critical and necessary supplies (or find reasonable substitutes) due to the issues faced by the supplier; and
• Finally, clear documentation showing how the supply chain issued led to a full or partial suspension of the employer’s own business operations.

Generic Legal Advice Memorandum AM 2023-005, July 21, 2023 https://www.irs.gov/pub/lanoa/am-2023-005.pdf

How Can VonLehman Assist You?

Potential Benefits

Below is a table showing the potential benefits offered by the credit, as well as some examples of the credit in practice from our clients:

VonLehman can provide expert advice while working with you to determine your qualifications, calculating the potential benefits of the credit, and amending the applicable payroll tax returns in order to claim the credit. To date, VonLehman has assisted over 150 companies in navigating the ERC process and claiming over $50 million in refunds to help support continued business operations during recovery from COVID-19.

If you are interested in evaluating your ERC qualification, please reach out to Ross Walker at rwalker@vlcpa.com or 800.887.0437.