Top 5 errors CPAs — or their providers — are making when calculating the ERC
By Rick Meyer, CPA, MBA, MST
February 7, 2023
Last year, many of the businesses I spoke to were unaware they even qualified for the Employee Retention Credit. Now, it seems that many businesses are getting improper guidance and are being advised to overclaim or claim without properly documenting and substantiating their qualifications.
This is a really powerful incentive that is helping Minnesota businesses and every business owner should be considering this credit, but I want to make sure our CPAs are aware of the erroneous information their clients might be receiving by third parties.
My colleague, Rick Meyer, is an expert on the topic and I think his insights will be invaluable to you this tax season. Should you have any questions, feel free to reach out to either of us.
Erik Paulsen
Former Congressman Minnesota Third District
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About a year and a half ago, I wrote an article about "
The 10 biggest myths (missed opportunities) of the Employee Retention Credit.” I mentioned that many of us CPAs were either missing this credit, not properly educating clients about it or were doing the calculations wrong.
Now it’s time for an ERC report card. Let’s lay out the good news, the bad news and the top five errors that CPAs — or their providers — are making today when it comes to the Employee Retention Credit (ERC).
Report card
The good news: More CPAs and their clients are aware of the value of the ERC, which is excellent.
The bad news: Misinformation has gone the other way and many businesses are being told that everyone can claim the credit for the maximum amount.
Many businesses owners are being led to believe they are eligible for the full $26,000 credit, per employee, by any number of “here today, gone tomorrow” third-party providers. As a result, you may have heard that the IRS recently issued
IR-2022-183. The notice warns against third parties who are often improperly computing the credit; advising businesses to claim when they may not qualify; not gathering, applying and documenting the facts correctly; and not providing business owners with complete information about the ERC.
The IRS has even issued a
72-page training guideline for its examiners on the credit and is requiring its auditors to complete a 56-hour training course.
Now, you may be saying to yourself that CPAs can’t be responsible if clients engage a third party. Wrong! Remember that the AICPA Code of Professional Conduct requires a CPA to do due diligence to determine whether the third party has the appropriate expertise in the area relied upon by the CPA. So, if you are signing the tax return, you better do your due diligence.
The new top 5 ERC errors
As misinformation persists, let’s review the top 5 errors that businesses are hearing about the ERC.
Error No. 1: “If you were affected by COVID, you qualify for ERC.”
This is an overgeneralization. There are two paths that could lead to ERC eligibility: revenue decline and impact on the business. However, it is widely and incorrectly believed that any COVID-19-related complications qualify a business for the ERC.
Merely adjusting operations in response to COVID-19 is not enough to qualify for the ERC. There are two things employers must show to be eligible under the business impact test:
- You need to show that a specific COVID-19-related government order or mandate (federal, state, local) caused the impact to your business.
- You need to show the extent and duration of that impact. In short, you need to prove that the order had a “more than nominal” effect on your business. A best practice is to document the specific government order, for the relevant time period, and detail and document the impact to your business.
Error No. 2: “Any government guideline qualifies you for ERC.”
This is also incorrect. There are varying levels of COVID-19-related government orders and guidelines and not all of them qualify. For instance, some folks are telling businesses that CDC and OSHA guidelines qualify a business for the ERC, but that’s not always true.
First, an order has to be “an order.” There’s a big difference between government orders that say a business must or shall do something versus a guideline that recommends that a business should take some action. The latter do not qualify for the ERC.
As noted in
IRS Notice 2021-20, a mayor giving a speech encouraging residents to practice social distancing is not an order. Further, as the IRS guidance makes clear, it also must be an order that limits commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19. Finally, it must be a government order that has jurisdiction over the employer’s operations and the order must have a more than nominal impact on the business’ operations. So, be mindful of which orders may qualify your client for the ERC.
Error No. 3: “A qualifying mandate that caused an impact to your business means you qualify.”
Not so fast! Even if a qualifying order affected your business, you still may not qualify. IRS Notice 2021-20 requires that there be a “more than nominal” impact on the business to be eligible. Unfortunately, the “more than nominal” test too often goes unmentioned — but it is a critical part of the ERC calculation analysis.
A suspension of a more than nominal portion of a business’ operations is a very technical calculation for CPAs or their providers based on IRS Notice 2021-20 and it needs to be well documented.
Error No. 4: “You get $26,000 for every employee.”
Come on, really? Calculating the eligible ERC amount can be quite complicated and CPAs or their providers should exercise extreme caution. It’s wrong to assume an employer can multiply how many employees they have times $26,000 and claim that total on Form 941-X.
There are three major factors that impact the refund: wages paid, duration of impact and other incentives already claimed.
The credit is calculated as 70% of qualified wages paid to an employee in a given quarter, up to $10,000. So, let’s say your client paid an employee $7.25 per hour for working 60, eight-hour days in the quarter. That means their wages would be about $3,480 for the quarter. Multiplying that by 70% gives a maximum credit of $2,436.
However, this assumes the qualifying government mandate lasted for the whole quarter. Not only do wages paid matter, but also the length of time the mandate was in place. For instance, let’s say those same workers qualified due to a social distancing order but that order was only in effect for half of the quarter. You would then only get half of the maximum credit.
Error No. 5: “If you received Paycheck Protection Program loans you can still qualify for the full ERC amount.”
Somebody did not do their homework! Interplay with other COVID-19 incentive and relief programs is where most CPAs or their ERC providers are miscalculating the ERC. While you can claim Paycheck Protection Program (PPP) and ERC together, they will have interplay between themselves and any other incentives your business may have taken, such as the restaurant revitalization grant.
IRS Notice 2021-20 says, “... the law now allows employers who received PPP loans to claim the Employee Retention Credit for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.” To state it another way, no double dipping! The ERC cannot be calculated using payroll costs that are taken into account for purposes of PPP loan
forgiveness.
Be prepared
So, there you have it. While the ERC is a fantastic tax incentive — a cash infusion booster shot in the arm for qualifying companies that suffered economically from the effects of COVID-19 — it can be complex and difficult to navigate. As businesses turn to CPAs, be prepared to educate and spread awareness of the proper ways to qualify for and claim the credit.
Rick Meyer, CPA, MBA, MST is a longtime member of the Illinois CPA Society and has served on various tax committees over the past 40-plus years. He is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives. You may reach him at rick.meyer@alliantgroup.com.
