Employee Retention Credit – Huge Benefit For Many Manufacturers

• June 6, 2022
• Allyson Baumeister

Many manufacturing companies suffered large revenue declines or business closures during 2020 and 2021. Most of these businesses took advantage of the PPP loans to assist in retaining key employees. Originally, if a company took advantage of a PPP loan, they were not eligible for the Employee Retention Credit. That rule was later revised, and there is now a huge opportunity for many to go back and claim this lucrative credit for 2020 and 2021. However, caution should be taken when calculating and claiming this credit.

The Good

The good news is that the Employee Retention Credit (ERC) remains available for employers to claim on amended payroll tax returns for qualifying periods assuming they met the eligibility criteria and paid eligible wages during those times.  Depending on the year, the legislative construct allowed for employers who experienced a significant decline in gross receipts or who were subject to either a full or partial suspension by a government order to claim a credit on eligible wages up to a maximum amount of either $5000 per employee in 2020 or $7000 per employee per quarter for the first three quarters of 2021.  This remains available to employers to claim by amending their payroll tax returns for three years after the original filing deadline.  Because of this, employers can rest easy knowing that there is still time to amend those returns to capture the credit.  In order to do so, key considerations MUST be made as part of the decision, and these considerations MUST be documented in order to protect and potentially defend the claim in the event of an IRS audit. Those considerations include, but are not limited to:

• Ability to prove that the employer experienced a significant decline in gross receipts or that they were subject to a full or partial suspension of operations.
• If under a full or partial suspension of operations, the IRS also requests:
  • a. A copy of the governmental order which caused the full or partial suspension of operations defined by Notice 2021-20 and others; and
  • b. Records used to determine whether the order had a more than nominal effect on the employer’s operations.
• Computation of the average number of full-time employees in 2019.  This will show whether the employer was a large employer subject to limitations of available wages.
• Credit computations including wage amounts, and how qualified health plan expenses were computed.
• If a member of an aggregated group, computations and calculations that determined there was an aggregated group and how aggregation affected the determination and allocation of the ERC.
•  If a PPP loan was received, calculations allocating wages to the PPP loan forgiveness and ERC.

The Bad

There is some bad news regarding the ERC, starting with the fact that there is still limited guidance related to how an organization can prove that it falls into the safe harbor of partial suspension of operations of at least 10 percent.  Additionally, the IRS is still taking at least 9-12 months or longer to process amended 941X forms to claim the credit and to issue the refunds.  Finally, there seems to be no working around the fact that Federal Income Tax returns must be amended to add back the credit amount to the wage expense in the year the credit was generated, rather than in the year the credit was claimed and/or received.  Finally, although employers have three years to amend returns to claim the credit, the IRS has FIVE years to audit and potentially disallow the refund. At that time, if it is determined that the employer is ineligible for the credit, they will have to repay it along with interest and penalties.

The Ugly

Unfortunately, in these uncertain times, there remains an “ugly” factor to address beyond the pandemic itself and the decline in revenue and ability to pay wages that were the genesis of the credit.  Employers need to be aware of bad actors, especially now.  There are many vendors approaching employers suggesting that the ERC is “easy money” that “everyone is entitled to claim” without regard to considerations around eligibility, IRS Notices and Revenue Procedures, or wages paid as a large employer.  These actors may not have the ability to appear before the IRS, may not retain documentation to support the credit, and may not have prepared the credit while taking into account the risk of an uncertain tax position needing to be reported in the financial statements of an organization. 

In closing, what can employers do?  Proceed with caution and work with a qualified advisor to understand the factors impacting eligibility for the credit and the wages that may be used to compute the credit accurately.  Understand that there are risks to claiming the credit even with the support of a qualified advisor because there remain gaps in the guidance from the IRS.   Remember that there is a lot of opportunity for employers to revisit eligibility for the credit and to still file a claim for a refund.  CLA’s national team of subject matter experts can assist your organization with the good, the bad and the ugly of the ERC. Schedule a consultation with Jennifer Rohen, our Business Incentives Consulting Practice Leader, today!

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