The Good and Bad with the Employee Retention Credit
With almost all of the COVID relief programs having run their course and a new landscape ahead for businesses recovering from the experiences of the past 26 months, some owners are still losing sleep at night wondering how they’re going to rebuild, whether they claimed all funds that were made available by the various legislative acts and whether they made the right decisions related to capturing opportunities.
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.
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. 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.
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 transportation companies 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 bad actors may not have the ability to appear before the IRS, may not retain documentation to support the credit, and may not have taken into account the risk of an uncertain tax position needing to be reported in the financial statements of an organization while preparing the credit.
From all of the transportation companies we’ve looked at regarding the ERC, people transportation companies (busing, airlines, trains) have mainly been able to qualify under the revenue reduction tests, but also had a chance to qualify under the partial shutdown rules (depending upon the jurisdiction). However, trucking companies have been much tougher to qualify. A majority of trucking companies we looked at weren’t able to meet the revenue reduction tests, and it’s hard to argue they qualify under the partial shutdown rules given the trucking industry was one of the truly essential industries over the last few years. We’ve seen the argument from some of the bad actors mentioned above that trucking companies may qualify because their drivers had to wait an additional 15 minutes at each stop, adopting new protocols, or experiencing delays in supply chain. This isn’t to say that trucking companies can’t meet the partial shutdown rules, but rather a warning that not every solicitation claiming your company qualifies for ERC is legitimate.
In closing, what can transportation companies 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. Ask that advisor to document each step in the process to the best of their ability and to provide a comprehensive narrative related to the shutdown where appropriate. 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. And finally, choose your advisor wisely.
Andy is a CPA and trusted advisor with 15 years of experience providing tax, accounting, assurance, and consulting services to transportation industry owners and operators. He is a tax principal with CLA in the Minneapolis, MN office. He also consults with high net worth individuals and owners of closely-held transportation businesses on all aspects of tax planning, estate planning, and retirement planning. Andy is also the tax leader for transportation industry across CLA.
Comments are closed.