Many business owners are still waiting for their employee retention credit checks from the IRS to arrive and all anyone can tell you is to just be patient. Sound familiar?
Or perhaps you have received all your refund checks but you have not been properly advised of the tax consequences for claiming this specific tax credit. Should you set some aside for taxes or is this money tax free?
In the sections below, we will outline answers to these top questions surrounding this extremely frustrating and complex tax law change.
Brief history
The Employee Retention Credit (ERC) – sometimes called the Employee Retention Tax Credit or ERTC – is a refundable tax credit for certain eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic.
The requirements are different depending on the time period for which you claim the credit. The ERC is not available to individuals.
The ERC was designed to help certain businesses continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. It was generally available to eligible businesses for qualified wages paid from March 12, 2020 through Sept. 30, 2021 and for recovery startup businesses for qualified wages paid from October 1 to Dec. 31, 2021.
ERC today
Unfortunately, aggressive marketing tactics and bad actors have led to numerous fraudulent claims which caused the IRS to initiate a moratorium on September 14, 2023 where all new claims would be closely reviewed and the IRS would seek additional input from Congress. This has caused month-long delays in processing time. However, since the moratorium was enacted, 28,000 claims worth $2.2 billion have been processed and more than 14,000 claims worth over $1 billion have been denied.
Recently, from Washington, the IRS issued IR-2024-169, June 20, 2024 stating that after a detailed review to protect taxpayers and small businesses, the Internal Revenue Service today announced plans to deny tens of thousands of improper high-risk Employee Retention Credit claims while starting a new round of processing lower-risk claims to help eligible taxpayers. IRS Commissioner Danny Werfel stated “We will now use this information to deny billions of dollars in clearly improper claims and begin additional work to issue payments to help taxpayers without any red flags on their claims.”
What should you do?
There is an organization called the Taxpayer Advocate Service which acts as a liaison between taxpayers and the IRS. They can investigate your case, communicate with the IRS on your behalf, and potentially help resolve your ERC claim issue more quickly. Additionally, the IRS Commissioner has recently indicated that the IRS is willing to work with the Taxpayer Advocate Service to help businesses facing hardship due to ERC delays. All local TAS phone lines remain open. They can be reached at 877-777-4778 or visit Taxpayer Advocate Service – Contact Us to find your local TAS office phone number. They can determine if you qualify for getting your ERC claim expedited.
I received my ERC refund checks, now what?
You may have been told that the ERC refund is not taxable income. Although this is technically correct, the ERC will affect what payroll deductions you can claim. Businesses that receive the ERC must reduce their payroll expense deduction by the amount of the credit. This is so that a taxpayer cannot “double dip.” To account for this, the IRS requires a retroactive reduction of payroll expenses claimed by the amount of the ERC received.
To illustrate, let’s use simple numbers. If you received a total of $150,000 in tax year 2023 from the ERC and $50,000 was for tax year 2020 and $100,000 was from tax year 2021, rather than accounting for it in the year received, 2023, the IRS requires you to amend both your 2020 and 2021 tax returns to reduce the payroll deductions by $50,000 and $100,000, respectively. As a result, the net taxable income will increase. If your business is a pass-through entity such as a Partnership or S-Corporation, you would be required to amend your personal tax returns as well. Working with a qualified tax professional could help you avoid making costly mistakes. Contact GCK Accounting LLC to speak with our experts today.
July 31, 2024
Jonathan Geever, CPA