Myths about the ERTC
Dissecting ERTC Myths and Realities
The Employee Retention Tax Credit (ERTC) was introduced to protect jobs and keep businesses afloat during the trying times of the COVID-19 pandemic. However, the nascent nature of this relief credit has resulted in several myths clouding its very intent and purpose.
Origin and Intent of the Employee Retention Tax Credit (ERTC)
The ERTC is a component of the CARES Act, enacted in the thick of the pandemic’s ravaging spree in early 2020. This tax credit was designed to incentivize small businesses to retain their workforce, despite the economic downturn registering an unprecedented nosedive.
Common Misunderstandings Surrounding ERTC Qualification
Let’s unleash some hard-hitting truths around ERTC qualification:
- PPP loan recipients – Contrary to the popular myth, businesses with PPP loans can indeed claim ERTC, thanks to the amendments introduced by the 2021 Consolidated Appropriations Act (CAA).
- Government-ordered shutdowns – Not all forced shutdowns qualify for the ERTC. Only shutdowns specifically ordered by the government can qualify businesses for the ERTC.
- Documentation – While you must thoroughly document your eligibility for ERTC, it is the increase in IRS audits that makes this crucial, not the ERTC requirements per se.
- Supplier shutdowns – Qualifying for the ERTC based on supplier shutdowns is neither straightforward nor universal. It requires adherence to specific IRS guidelines.
Demystifying the PPP-ERTC Relationship
Can Businesses Claim Both PPP and ERTC?
Many businesses and aspiring entrepreneurs erroneously believe that one cannot receive both PPP and ERTC benefits. This couldn’t be farther from the truth!
The CARES Act has made it abundantly clear that businesses can qualify for and receive funds from both PPP and ERTC, perk up their revenues, and stay afloat through the pandemic.
PPP Debt Forgiveness vs ERTC Eligibility – The Distinctions
Another proprietary myth that continues to float around is the supposed conflict between PPP Debt Forgiveness and ERTC eligibility. Here’s the deal –
- You can secure both a PPP loan and the ERTC as a small business.
- The amount of PPP loan forgiveness does not impact ERTC eligibility.
- It’s not about profits but about cascading revenues! Even businesses that failed to turn a profit can qualify for ERTC.
Government-Ordered Shutdown: Does it Guarantee ERTC Qualification?
Understanding What Constitutes a Government-mandated Shutdown
A government-mandated shutdown, as far as ERTC eligibility is concerned, refers to specific closures or caps on businesses ordered by the government.
The Impact of Partial Business Restrictions on ERTC Eligibility
What happens when the government orders partial restrictions instead of a total shutdown? Does it qualify your business for the ERTC? The answer, in simple terms, is yes. But only if the partial restrictions extend beyond a ‘nominal’ portion of the business.
The Integral Role of Proper Documentation for ERTC
Why Documentation is a Pre-requisite for ERTC Claims
The process of claiming the ERTC isn’t as simple as raising a hand and getting a check. It requires an in-depth documentation of a business’s eligibility. This is purely to shepherd businesses safely through the looming IRS audits.
Remember, the documentation needs to be as detailed and comprehensive as possible because in case of an audit, documented proof will be your best defense.
Implications of Inadequate Documentation – The IRS Audit Perspective
Failing to provide adequate documentation, unfortunately, is more common than you’d expect. The repercussions? You may have to pay back the credit, with interest, and might also incur penalties.
Unraveling the ERTC-Supplier Shut Down Connection
Can You Qualify for ERTC if Your Supplier Shuts Down?
A frequently uttered rhetoric in the small business circle is: “If my supplier shuts down due to the pandemic, does it make me eligible for the ERTC?” Yes, but the criteria are strict.
Understanding IRS Caveats Around Supplier Shutdowns and ERTC
- The supplier must be ordered to shut down by the government.
- You must demonstrate that you are unable to source alternative supplies.
ERTC and Small Businesses
ERTC Provision in CARES Act For Small Businesses
The CARES Act offers relief to small businesses through two primary channels: the PPP and the ERTC. While the PPP is a loan, the ERTC offers businesses tax credits that, unlike loans, don’t need to be repaid.
Navigating ERTC and PPP – Expert Assistance Requirement
It is recommended for small businesses to partner with a tax professional or an experienced accountant to navigate the nitty-gritty of both the ERTC and PPP eligibility and benefits. Do not risk jeopardizing your business’s survival because of avoidable mistakes or oversights.
ERTC Scams and Fraud: The IRS Perspective
Employee Retention Credits on the IRS Dirty Dozen List
ERTC has made its way onto the IRS’ annual ‘Dirty Dozen’ list, warning people and businesses about the prevalent malpractices and fraudulent claims. The IRS has stepped up enforcement action, making it clear that these are not simple misdemeanors, but punishable offenses.
The IRS’ Action Plan Against ERTC Fraud and Tax Scams
In its pursuit to protect taxpayers from scams and schemes, the IRS has ramped up its vigilance, and set in place guidelines to ensure that conscientious taxpaying businesses stay informed, beware of third-party promoters, and understand how to claim the ERTC properly.
ERTC Qualification Criteria: Revenue Drop Vs Profit Drop
How Much Revenue Reduction Qualifies a Business for ERTC
Many businesses misunderstand ERTC qualification – assuming profit drops are the yardstick for ERTC eligibility. However, it is the reduction in revenue that counts. The ERTC qualification threshold is a revenue drop of just 20%!
Dispelling the Minimum Profit Drop Myth in ERTC Eligibility
The ERTC is not profit-driven but revenue-driven. Contrary to popular belief, businesses can qualify for the ERTC regardless of their profit or loss margins.
ERTC in 2021 and Beyond
Retroactive Update to the ERTC: What’s New in 2021?
In the 2021 Consolidated Appropriations Act, the ERTC saw several updates designed to expand eligibility and increase the credit amount. An important addition is the inclusion of businesses that took PPP loans in the list of ERTC-eligible businesses.
The Future of ERTC Amid Continued Economic Disturbances
Experts project that the ERTC will continue to play a pivotal role until at least calendar quarter 2, 2023, to help businesses rebound from the economic downturn caused by the COVID-19 pandemic.
Frequently Asked Questions
Can I Claim ERTC if My Business Suffered a Profit Drop in 2020?
Yes. Businesses with a revenue drop of 20% or more qualify for ERTC, regardless of their profit margins.
Is Hiring a Tax Expert Necessary For Navigating ERTC and PPP?
While not a mandate, hiring a tax professional to navigate ERTC and PPP is highly recommended.
Will Inadequate Documentation Affect My ERTC Claim?
Absolutely! Inadequate or inaccurate documentation can trigger an IRS audit, which could lead to the repayment of the credit with interest and added penalties.
How Can My Business Benefit From The 2021 ERTC Update?
The 2021 ERTC update expanded its scope to include businesses with PPP loans, thereby helping them strengthen their revenue cycle and secure their financial continuity.
What Legal Penalties Does the IRS Enforce on Fraudulent ERTC Claims?
Fraudulent ERTC claims can result in substantial fines, penalties, and even criminal investigations.
In summary, the ERTC continues to be a valuable tool for businesses affected by the COVID-19 pandemic. Despite the misconceptions and misunderstandings, debunking the myths and understanding the qualification criteria is paramount to maximize the benefits of this critical tax credit.