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Financial
Mar 17, 2023

Beware of ERC Credit Mills

Sponsored Content provided by Adam Shay - Director of VCFO Services, Red Bike Advisors

Most business owners are aware of the Employee Retention Credit (ERC) - a payroll tax credit for continuing to pay employees during times of revenue drop or Covid impacts to a business in 2020 and 2021.  Most marketing of this credit is not coming from the business owners’ tax advisors, but from online ads, text messages, LinkedIn messages, emails, etc. that are pushing for them to get their share of government money.  Unfortunately, most of the companies that are aggressively promoting these services are encouraging business owners to claim the ERC credit when they are not eligible—they just want to generate their fees and let the business owner deal with the fallout.  There’s not a week that goes by where a marketer (apparently unaware of my occupation) sends me some sort of message.   

What is the Employee Retention Credit (ERC)?

ERC is a payroll tax credit for employers impacted by drops in gross revenue (50% Q2-Q4 2021, 20% Q1-Q3 2022).  There is also the potential to claim the credit based upon government order shutdowns or supply chain issues from government shutdowns.  The same wages cannot be used for Paycheck Protection Program (PPP) forgiveness and the employee retention credit.  Owner or relative wages generally don’t qualify for ERC.

When you claim the credit you must reduce your payroll expense income tax deduction. This typically means that previously filed income tax returns need to be amended.

What is it not?

ERC is not a blanket credit or government handout for every business owner because of Covid impacts and shutdowns.  The IRS has recently made it clear that they intend to focus enforcement efforts on the ERC and especially on ERC credit mills that are playing fast and loose with the qualification rules.

What happens if I claim an invalid credit?

You may have to pay back the credit plus penalties.  In the worst case scenario you have to pay back the ERC credit and lose wage deductions on your income tax return.

What should I do if I receive an ERC Audit?

Engage a firm, like ours, that is well versed in both ERC and Tax Issue Resolution.

Our goal today was to educate you about the Employee Retention Credit as well as the risks associated with it.  If you are seriously interested in ERC, discuss it in detail with a tax advisor that can evaluate the specifics of your situation.  You should not be afraid to take the credit if you qualify but you also should approach a company you don’t know promising you thousands of dollars in credits with your eyes wide open.

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