ERC in a nutshell
The ERC is a refundable tax credit intended for businesses, including nonprofits, that 1- continued paying employees while they were shut down due to the pandemic, or 2- suffered significant declines in gross receipts from March 13, 2020, to September 30, 2021. The 2021 credit generally is worth up to $7,000 per qualifying employee per quarter and up to $5,000
per qualifying employee per year in 2020, and its refundable nature makes it valuable for nonprofits (which normally don’t have significant tax liabilities). Specifically, an eligible employer must have:
1. Sustained a full or partial suspension of operations because of orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
2. Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts in the first three quarters of 2021, or
3. Qualified as a recovery start-up business — which could claim the ERC for up to $50,000 total per quarter, without showing suspended operations or reduced receipts — for the third or fourth quarters of 2021 (qualified recovery start-ups are those that began operating after February 15, 2020, and have annual gross receipts for the three previous tax years of less than or equal to $1 million).
Importantly, for any quarter, the ERC couldn’t be claimed on wages that were reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.
IRS scrutiny
It’s worth noting that being selected for an audit doesn’t mean your organization did anything wrong. But if you did claim the ERC improperly, you’ll likely be required to repay the credit, as well as penalties and interest.
And the ERC did come with several potential tripwires for employers. For example, the IRS may look closely at your eligibility for the credit (including your calculation of your average number of full-time employees in 2019 and subsequent quarters), determination of gross receipts, calculation of the credit amount, and application of the complicated aggregation rules.
Now is the time to review your analyses and ensureyou have all assumptions and related supportinginformation documented. You’re required to maintain adequate documentation for at least four years after the related employment taxes became due or were paid, whichever was later. Documentation may include:
› Payroll journals,
› Health plan expenses,
› Tax forms,
› Employee rosters,
› Copies of governmental suspension orders,
› Records showing declines in gross receipts for each relevant quarter,
› Documents related to PPP loan forgiveness and allocation of wages between your ERC and PPP wages, and
› Federal employment tax returns.
Don’t wait to receive an examination notice from the IRS. Make sure you have the proper documentation now.
Final word of caution
If you relied on outside advisers when claiming the ERC, don’t assume you’re on solid ground. The IRS has warned employers to be wary of advisors that charged large upfront fees or fees based on the amount of the refund, or that encouraged ineligible organizations to claim the ERC. The alert highlights the importance of working with experienced and reputable tax experts.
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