The Employee Retention Tax Credit (ERTC) was established in March 2020 under the CARES Act in response to the COVID-19 pandemic. The refundable credit was intended to keep employees on a company’s payroll during the economic shutdown. It has since been expanded under other legislation and most recently under the American Rescue Plan Act, H.R. 1319, enacted first quarter 2021.
To qualify for the ERTC, a company had to experience disruption to the business as a result of COVID-19. One of two scenarios must have occurred for a company to qualify for the credit:
- Operations must have been fully or partially suspended by an appropriate government authority limiting commerce due to COVID-19.
- The company had a 50% reduction in 2020 gross receipts compared with the same calendar quarter in 2019 or a 20% reduction in 2021 gross receipts compared with the same calendar quarter in 2019.
On the surface, the eligibility requirements and calculation seem relatively straight forward. However, in application they are complex; ERTC eligibility is determined based off of the facts and circumstances of each financial institution, as well as the different government shutdown orders across the country.
Pop-up ERTC mills
The lucrative appeal of a refundable tax credit has caused an uptick in the number of boutique consulting firms approaching financial institutions with aggressive and sometimes inappropriate positions on eligibility for the employee retention tax credit.
Generally, these companies will calculate the credit in exchange for a contingent fee based on the amount of the credit. Before engaging with a company that promises a large credit with assured eligibility, make sure you are doing your due diligence to ensure you are working with a reputable advisor. Some questions to consider:
- Is this a new startup firm?
- Will they be around in the future?
- Will they support you if you are audited by the IRS?
While there is no guarantee that a financial institution’s ERTC claims will or will not be audited by the IRS, scrutiny over the funds is increasing. The Treasury Audit Report from August 31, 2022, indicates that the IRS took corrective action to identify and prevent fraudulent employer tax credit claims.
The corrective action included an update to an identity theft fraud filter, intended to identify suspicious Forms 941 with credit claims meeting certain criteria. If you make the claim and are subsequently audited and it is determined you were ineligible for the refundable credit, penalties and interest could be significant.
Many of the misconceptions associated with the credit are discussed in an article from the Association of International Certified Professional Accountants. The eligibility rules and calculation of credits are more complex than many organizations realize.
The ERTC can provide a great benefit to financial institutions that qualify. Due to the complexity involved and the individualized facts and circumstances that go into the credit calculation, it’s critical to do your due diligence before engaging with a boutique firm to complete the calculation. Make sure you are working with a reputable firm, and read the fine print of the engagement letter before signing.
How Wipfli can help
If you believe you may be eligible for the ERTC or would like to discuss your unique circumstances, reach out to Wipfli for input about whether and how to proceed. We can help you determine your eligibility for the ERTC credit and whether it makes sense for you to apply. Contact us to learn more about the significant benefits of the credit for employers.
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