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LS Carlson Law Featured in Daily Journal: "Maximizing Employee Retention Credit for Businesses"

By: LS Carlson Law, Esq. January 5th, 2024

We are thrilled to announce that LS Carlson Law has been featured in the prestigious Daily Journal, where we shed light on the complexities of the Employee Retention Credit (ERC). This recognition underscores our commitment to providing clarity and guidance on vital financial incentives like the ERC, especially crucial during the challenging times of the COVID-19 pandemic. In this blog post, we'll summarize the key points from the article to give you an insight into navigating the ERC.

LS Carlson Law in the Spotlight
Our feature in the Daily Journal highlights the intricacies and importance of the ERC, a refundable payroll tax credit designed to help businesses retain their employees during the pandemic. With our expertise, we aim to dispel misinformation and guide business owners through the stringent requirements for claiming this credit.

Understanding the Employee Retention Credit:
The ERC offers up to $26,000 per employee for eligible businesses, but understanding its eligibility criteria is crucial:
• Wages Paid to Employees: The credit is for wages paid in 2020 or 2021, excluding payments to certain individuals like independent contractors or majority owners and their relatives.
• Business Operation Dates: For businesses that started before Feb. 15, 2020, eligibility applies to wages paid after March 12, 2020, through Sept. 30, 2021.
• Eligibility Based on Business Impact: Eligibility hinges on either a full or partial suspension due to Covid-19 governmental orders or a significant decline in quarterly gross receipts compared to 2019.

Criteria for Suspension and Supply Chain Issues:
The article delves into the specifics of what constitutes full or partial suspension of business operations. It also addresses the "supply chain exception," a narrow but critical aspect for some businesses.

Gross Receipts and Recovery Startup Businesses:
The criteria for a reduction in gross receipts vary between 2020 and 2021. Additionally, the article discusses the unique provisions for "Recovery Startup Businesses."

Navigating Other Covid-19 Relief Programs:
Our feature emphasizes the importance of understanding how the ERC interacts with other relief programs, like the PPP, and highlights the limitations imposed to prevent double benefits.

Tax Implications and IRS Moratorium:
Claiming the ERC has tax implications that vary based on individual circumstances. The IRS has also implemented a moratorium on new ERC claims, a critical point covered in our feature.

Our feature in the Daily Journal is a testament to our expertise in navigating complex tax credits like the ERC. We encourage businesses to understand these stringent requirements and consult with professionals for guidance.

Download the Original Daily Journal Article

Or, you can read the content below.

Original Article Content

The Employee Retention Credit (ERC) is a refundable payroll tax credit enacted to provide financial incentives to businesses that retained employees amidst the Covid-19 pandemic. The credit’s popularity unwittingly resulted in an uptick of ERC scamming companies that persistently misinform taxpayers of the very strict requirements that must be met in order to claim the credit. This article was written to provide business owners with an overview of these strict requirements and some key points to consider when filing the credit.

Eligibility Overview
Businesses that meet all necessary requirements may be eligible to claim up to $26,000 per employee retained in 2020 and 2021 if:
• The employer paid wages to employees in 2020 or 2021 (payments to independent contractors or majority owners and their relatives generally do not qualify);
• If the business began operating prior to Feb. 15, 2020, its eligibility for its credit will be limited to wages paid after March 12, 2020 through Sept. 30, 2021.
• Such businesses will be eligible for the credit if they sustained at least one of the following:
A: A full or partial suspension of operations due to a governmental Covid-19 order; or
B: A significant decline in 2020 or 2021 quarterly gross receipts compared to 2019.
• If the business began operations after Feb. 15, 2020, it may be eligible to claim the ERC as a “Recovery Startup Business.” Such businesses may only claim the ERC for wages paid after June 30, 2021 through Dec. 31, 2021.

Eligibility Based on Full or Partial Suspension
Whether your business or organization was fully or partially suspended depends on your specific situation. Suspension generally arises if a Covid-19 governmental order prohibits or limits the business’ operations fully or partially. For example, in March of 2020, several government orders were issued that required non-essential businesses to close their doors or limit their hours of operation. These limitations are examples of suspension. Businesses that continued operating but had to undergo modifications may also be eligible if they incurred partial suspension. Such a suspension occurs when a Covid-19 governmental order(s) has “more than a nominal effect” on business operations. The IRS considers “more than a nominal effect” to be at least a 10% reduction in the business’ ability to provide goods or services in the normal course of its business.

However, not all modifications may qualify as suspension of business operations. For example, if you changed business practices to alter behavior, such as making store aisles one-way or requiring customers or employees to wear masks, the IRS won’t consider that change to have had a more than a nominal effect on your business operations.

Be Wary of Eligibility Based on Supply Chain Issues
The IRS also provided a narrow and very limited exception in cases where a business was not fully or partially suspended but their supplier was affected. This is called the “supply chain exception” and will only apply if all of the following conditions are met:
• The business was absolutely unable to operate without the supplier’s product;
• The business could not obtain the supplier’s goods or materials elsewhere - regardless of cost; and
• The supplier was fully or partially suspended.

The IRS has notified taxpayers that very few businesses are likely to qualify under this exception.

Eligibility Based on a Reduction in Gross Receipts
Generally, this test is met by comparing the gross receipts of the calendar quarter in which you would like to claim the ERC to the gross receipts of the same respective quarter in 2019. For example, if you are determining whether you are eligible in Quarter 2 of 2021, you would need to compare the gross receipts from Quarter 2 of 2019 to determine whether you meet the reduction requirement. The reduction requirements are different for 2020 and 2021 quarters.

• For 2020 credits, the quarterly gross receipts must be less than 50% of the gross receipts for the same quarter in 2019.
• The quarterly gross receipts for 2021 credits must be less than 80% of the gross receipts for the same quarter in 2019.
• Businesses that have a reduction in gross receipts in any 2020 or 2021 quarter may also be eligible for additional quarters.

Recovery Startup Businesses
In order to be eligible as a Recovery Startup Business the business must have:
• Began carrying on a trade or business after Feb. 15, 2020;
• Had average annual gross receipts of $1 million or less for the three years preceding the quarter for which they are claiming the ERC; and
• The business must not be eligible under the full or partial suspension test or the gross receipts test.

Recovery Startups are also the only businesses that may claim the ERC in Quarter 4 of 2021. However, their claims are limited to $50,000 per quarter and they can only claim the ERC in Quarters 3 and 4 of 2021.

Coordination With Covid-19 Relief Programs Including PPP Forgiveness
The credit is limited for businesses that received other Covid-19 relief programs such as Shuttered Venue Operators Grants, Restaurant Revitalization Grants, or Paycheck Protection Program Loans (“PPP”). Below is an explanation of how the credit works in coordination with the most popular form of Covid-19 relief - PPP forgiveness.

The ERC’s Double-Benefit Limitation
Taxpayers that received PPP forgiveness are not automatically disqualified from claiming the credit. However, wages claimed as eligible payroll costs when seeking PPP forgiveness cannot be used to claim the ERC. This is due to the double benefit rules that disallow a taxpayer from receiving the “double benefit” of claiming the ERC and receiving PPP forgiveness on the same wages.

Claiming the ERC Against Wages That Were Paid During Your PPP Forgiveness Period
The calculation of eligible wages during a business’s covered period (usually 8 or 24 weeks after the date the loan was issued) is based on your PPP forgiveness application. If all your wages were allocated to forgivable PPP wages, your ERC may be limited during that period. Excess wages that didn’t qualify for PPP forgiveness or non-payroll costs disclosed to the SBA may increase your ERC eligible wages. For example, if a business with a $100,000 PPP loan incurred $100,000 in payroll costs during their forgiveness period, and the business did not report other non-payroll expenses as part of their forgiveness such as utilities, rent, etc. - the business cannot claim the ERC during their forgiveness period even if they are eligible for the credit. However, if the wages paid during the covered period were $150,000, the employer may potentially use the excess $50,000 wages to claim the credit.

Tax Implications of the Employee Retention Credit
The ERC will give rise to federal and state tax implications that vary depending on each taxpayer’s business and individual income tax returns. It is imperative that any employer that claims the credit consult with their tax preparer regarding any necessary reporting requirements.

The IRS’ Moratorium on ERC Claims Filed After Sept. 14, 2023
The IRS announced a moratorium on newly filed ERC claims commencing Sept. 14, 2023, until at least the end of the year. For previously filed claims, the processing time will be delayed due to the new safeguards the IRS has implemented to prevent future abuse. Although the IRS has not provided an estimated time on the processing of claims submitted after Sept. 14th, eligible taxpayers should continue to submit their applications for immediate consideration after the moratorium is lifted.

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