Though the pandemic becomes more of a memory each year, some related incentives such as the Employee Retention Credit (ERC) remain in the spotlight.

The ERC is a COVID-era refundable payroll tax credit intended to provide support for small businesses, including both for-profit and not-for-profit organizations, who kept employees on payroll during the pandemic. It’s based on wages paid between March 13, 2020, and December 31, 2021, and has caught the attention of many due to how quickly the credit can add up. Below we discuss the latest ERC updates.

Time Remains For 2021

While the clock has run out on claiming a 2020 credit, time still remains for 2021. The statute of limitations allows for a payroll tax refund claim to be filed up until:

• April 15, 2024, for a 2020 credit, and
• April 15, 2025, for a 2021 credit.

The Tax Relief for American Families and Workers Act of 2024 proposed to end the ERC early on January 31, 2024, but stalled out in Congress. At this time, despite the bill’s strong bipartisan support and initial fanfare, it does not appear to have a path forward. However, it’s possible elements of this bill could see their way into a larger tax reform deal after the election.

Repayment Programs

Due to rampant fraud in the ERC space by aggressive promoters, the IRS created two repayment programs for those who determine after filing that they do not qualify. The Withdrawal Program and Voluntary Disclosure Program (VDP) both provide penalty relief but differ in eligibility and availability, as described below.

• The Withdrawal Program is still open and available for ERC applicants who have not yet received a refund or have received but not cashed their refund. Penalty relief is available for those who apply; however, repayment is 100 percent of the credit. Over 1,800 entities have withdrawn $251 million to date. More information on this program can be found HERE.
• The VDP was available through March 22, 2024, for those who had received and cashed their refund. This program offers a significant incentive to apply by allowing applicants to repay only 80 percent of the ERC claimed, among other things. The IRS received over 1,300 VDP applications and has stated this program may reopen in the future. More information on this program can be found HERE.

Those who don’t qualify for either the Withdrawal or VDP can still amend their payroll tax return for a 2021 quarter to repay improperly claimed credits.

Processing Delays

In addition to repayment programs, the IRS imposed a processing moratorium on ERC refund claims submitted on or after September 14, 2023. A goal of this delay was to better implement fraud detection analytics and processing functions. The pause is said to be ending soon, but the IRS has not offered further details. IRS Commissioner Werfel recently stated that despite the moratorium, an average of 20,000 new ERC refund requests are received weekly.

Claims submitted prior to the moratorium continue to be processed, but at a much slower rate. As of December 9, 2023, the IRS reported over 1 million amended payroll tax returns to process, many of which likely contain ERC refunds. It’s not uncommon for businesses to wait over a year for their refund.

Substantiation

Numerous program changes during the pandemic and limited IRS guidance leave room for error when evaluating the ERC. Employers should work with a qualified tax professional to determine and substantiate eligibility and credit calculations. Be prepared to support your claim by keeping on hand (at a minimum) the following documentation, if applicable:

• Records used to determine a decline in gross receipts.
• Governmental orders that suspended operations.
• Records used to determine that governmental orders impacted a more than nominal portion of operations and/or had a more than nominal effect.
• Payroll records supporting qualified wages and health plan expenses.
• Determination of whether the employer is a member of an aggregated group treated as a single employer.
• Copies of any completed Forms 7200, Advance Payment of Employer Credits Due to COVID-19, submitted to the IRS.
• Copies of employment tax returns previously submitted to the IRS for quarters claimed.
• Payroll Protection Program (PPP) and any other relevant wage-based credits that may impact the ERC.

The IRS suggests that employers keep this information available for IRS inspection for at least 4 years after the date the tax becomes due or is paid, whichever comes later.

If you’d like to explore the ERC or have questions, please contact your RubinBrown representative. 

Related:

Employee Retention Credits in Higher Education

Focus on Taxation: Employee Retention Credit
 

Published:05/08/2024

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