The Employee Retention Credit (ERC) was a lifeline for many businesses during the pandemic, but now the IRS is closely examining these claims. If you’re a business owner who applied for the ERC, it’s crucial to make sure everything is in order to avoid penalties and other issues. Here’s a straightforward guide to help you understand the new warning signs the IRS has flagged and how to keep your ERC claim on the right track.
New Warning Signs for ERC Claims
The IRS has recently identified five new issues that could indicate an incorrect ERC claim. Here’s what you need to look out for:
Essential Businesses Claiming ERC Without Being Affected: If your business was considered "essential" during the pandemic (like grocery stores or hospitals) and stayed open without significant interruptions, you probably aren’t eligible for the ERC. For example, if you ran a grocery store that was open every day, claiming the ERC might not be correct unless you can show that a government order affected your operations.
Not Enough Proof of Government Impact: You need to provide evidence that a government order really affected your business. Suppose a local government issued a mask mandate, but your business continued as usual with no significant changes—this likely doesn’t qualify for the ERC.
Claiming Wages for Family Members: If you paid wages to your spouse, children, or other close family members and included these in your ERC claim, this could be problematic. For instance, if you’re a small business owner and claimed ERC for wages paid to your spouse who helps out in the business, this claim might not be valid.
Using Wages Covered by PPP Loans: If you received a Paycheck Protection Program (PPP) loan and used those wages to qualify for loan forgiveness, you can’t use those same wages for the ERC. Imagine you used PPP funds to pay your employees and got the loan forgiven—those wages can’t be counted again for the ERC.
Large Employers Claiming ERC for Active Employees: If your company had over 100 employees in 2020 or 500 in 2021, you can only claim the ERC for employees who weren’t working during the eligible periods. For example, if you had a large office and claimed ERC for wages of employees who were working from home, this might be incorrect.
Other Common Issues
Here are some additional pitfalls the IRS is watching for:
Claiming ERC for All Quarters: It’s rare for a business to qualify for ERC in every quarter. If a promoter told you to claim ERC for every single quarter, double-check if this applies to your situation.
Non-Qualifying Government Orders: Not all government orders qualify. For instance, if you closed your business voluntarily or due to non-COVID-related reasons, that doesn’t count for ERC purposes.
Incorrect Calculations: Make sure you’re calculating the ERC correctly. If you used the same amount for every employee or every quarter, this might not be right.
Supply Chain Issues: If your supplier faced issues, this alone doesn’t qualify you for ERC. You need to show how the supplier’s issues were tied to government orders affecting your business.
Claiming ERC for the Entire Quarter: You can only claim ERC for the periods when your business was actually suspended, not the whole quarter. If your business was only partially closed during a quarter, you should only claim ERC for those specific periods.
What You Should Do
Double-Check Your Claims: Review your ERC claims carefully to ensure there are no mistakes. If you’re unsure, it might be worth consulting with a tax professional who understands ERC rules.
Consult a Tax Professional: Find a tax advisor who can help you make sense of the ERC guidelines and check if your claim is accurate.
Consider Withdrawing Your Claim: If you realize there’s a mistake, the IRS has a Withdrawal Program that lets you retract your claim without penalties or interest. This is better than facing an audit later.
Amend Incorrect Claims: If you’ve already received the ERC but found an error, you can amend your claim to correct it. This will help avoid future problems with the IRS.
Example Scenarios
Scenario 1: Grocery Store Owner: Jane owns a grocery store that stayed open throughout the pandemic. She heard from a promoter that she could claim ERC for every quarter. Jane should check if her business was affected by any government orders and whether she was eligible for ERC in those specific quarters only.
Scenario 2: Restaurant Owner: Tom's restaurant received a PPP loan and used it to cover his employees' wages. He then tried to claim ERC for those same wages. Tom should know that he can't use those wages for ERC if they were covered by PPP forgiveness.
Scenario 3: Construction Company: Lisa’s construction company had a government order that affected her operations for a few months. She claimed ERC for the entire quarter. Lisa needs to adjust her claim to reflect only the periods affected by the government order.
By understanding these warning signs and common issues, you can better navigate the ERC process and ensure that your claim is accurate and compliant with IRS guidelines. For more detailed information, visit the IRS website or talk to a tax professional.
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