The ERC Story: From Double Benefits to IRS WarningsTax Planning
The Employee Retention Credit (ERC) had a humble beginning inside the CARES Act in March 2020.
At inception, you had to make a choice: claim the ERC of up to $5,000 per eligible employee, or take out a forgivable loan under the Paycheck Protection Program (PPP). You could not take both—but that changed in December.
December 27, 2020
Goodbye ERC-or-PPP choice. Hello double benefit. What happened? Lawmakers enacted the Consolidated Appropriations Act, 2021 (CAA) on December 27, 2020.
- The CAA retroactively allowed the 2020 ERC for those who opted for the PPP, thereby enabling both benefits for 2020, but not on the same wages.
- Next, the CAA expanded the ERC to the first two quarters of 2021 and increased the possible tax credit to $7,000 per eligible employee per quarter. With this change, the ERC maximum credit was $19,000 per eligible employee. But this possible maximum credit increased a few months later.
- The CAA also created a second-draw PPP that allowed you to use both the new PPP and the ERC, but not on the same wages.
March 2, 2021
On March 2, 2021, in Notice 2021-20, the IRS5
- explained how to retroactively claim the ERC for 2020;
- provided extensive examples on how to apply the ERC to federal, state, and local shutdown order; and
- added the ability to claim the ERC under (a) the nominal effect safe harbor and (b) the ability to provide goods and services safe harbor.
The rules in this notice were written for 2020, but they equally apply to 2021.
March 11, 2021
The American Rescue Plan Act of 2021 (ARPA) enacted March 11, 2021, added the ability to claim the ERC for quarters three and four, making $33,000 the combined 2020 and 2021 maximum ERC for each qualifying employee. But unfortunately, this was short-lived.
ARPA also created special ERC rules for newly defined Recovery Startup Businesses—businesses that started after February 20, 2020, and whose average annual gross receipts did not exceed $1 million.
August 4, 2021
In Notice 2021-49, the IRS declared that owner-employees of corporations did not qualify for the ERC if they had a defined living relative. Many tax professionals thought this contradicted prior guidance.
In this notice, the IRS explained that the recovery start-up business determines its ERC qualification on a quarter by- quarter basis for purposes of the $50,000 ERC limitation.
August 10, 2021
In Revenue Procedure 2021-33, the IRS explained how to exclude certain monies from quarterly gross receipts for purposes of the ERC, such as excluding receipts from PPP loan forgiveness.
November 15, 2021
Bad news, bad lawmakers. On November 15, 2021, the Infrastructure Investment and Jobs Act became Public Law 117-58 and retroactively took away the ERC for the fourth quarter of 2021.
After this change, the maximum ERC for most qualifying employers was up to $26,000 per qualifying employee—still a goodly sum, but only 79 percent of what it was before its retroactive beatdown.
And to make matters worse, many businesses had their fourth-quarter claims already in process, including some that had their fourth-quarter ERC monies already in hand. Those monies became an almost immediate problem on December 6, 2021.
December 6, 2021
On December 6, 2021, in Notice 2021-65, the IRS said employers that originally qualified and claimed the ERC for the fourth quarter of 2021 now had erroneous refunds that had to be repaid on a timely basis, or those employers would be penalized using the failure-to-pay rules under tax law’s IRC Section 6651.
March 7, 2023
On March 7, 2023, the IRS Office of Professional Responsibility (OPR) issued a notice to tax professionals stating that they have Circular 230 responsibilities with respect to their clients’ ERC claims, including those claims the tax professional did not prepare.
In this notice, the IRS states that if the tax professional cannot reasonably conclude that the client is or was eligible to claim the ERC, then the tax professional should not prepare an original or amended return that claims or perpetuates a potentially improper ERC.
Additionally, if the practitioner learns that a current client did not comply with the ERC requirements in a prior tax year, the practitioner must, under Section 10.21, promptly
- inform the client of the non-compliance, error, or omission and
- inform the client of any penalty or penalties that may apply.
In capsule form, the IRS notice reminds tax professionals that they likely have some ERC oversight responsibilities.
That obviously has a dampening effect on the ERC. But that was simply the beginning the IRS’s saber-rattling.
March 20, 2023
On March 20, 2023, the IRS added the ERC to its Dirty Dozen list to highlight the possibility that small businesses could be scammed into improperly claiming the ERC.
May 2, 2023
In its May 2, 2023, IRS National Small Business Week advice, the IRS included a section titled “Employee Retention Credit: Claim it if eligible but avoid ERC scams.”
In this notice, the IRS
- pointed out that eligible employers who overlooked the ERC could still claim the ERC by filing amended payroll tax returns for 2020 and 2021, and
- cautioned businesses to not fall victim to scams that could cause them to file improper claims.
September 15, 2023
In its e-News for Tax Professionals dated September 15, 2023, the IRS published the following four articles on the ERC:
- “IRS orders immediate stop to new ERC processing amid surge of questionable claims, concerns from tax pros”
- “Client not convinced they’re ineligible for Employee Retention Credit? New IRS Q&A document may help”
- “Beware of warning signs of aggressive promotions that can mislead businesses into improper ERC claims”
- “IRS looks to hire 3,700 employees nationwide to help expand compliance for large corporations, complex partnerships” (this article says that the new employees will also audit ERC claims)
October 19, 2023
On October 19, 2023, the IRS issued a news release explaining how you can withdraw your improper ERC claims by
- using your payroll company if the ERC claim was prepared by them;
- returning the uncashed ERC check;
- faxing your withdrawal request to the new IRS special fax line; or
- sending the withdrawal request to the IRS examiner who is auditing your claim (or if no examiner has been assigned, responding with your withdrawal request to the audit notice).
Lawmakers and the IRS have taken the ERC on a wild ride.
Origin of the ERC. Initiated within the CARES Act in March 2020, the Employee Retention Credit began as an alternative to the forgivable PPP loan.
Evolving benefits. The CAA and ARPA expanded and enhanced the ERC’s reach, at one point allowing for up to $33,000 in credits per qualifying employee.
Regulatory adjustments. The IRS issued multiple notices over the years, clarifying rules, defining eligibility criteria, and offering guidelines on ERC claims.
Retroactive changes. November 2021 saw a setback with the Infrastructure Investment and Jobs Act retroactively reducing the maximum ERC, highlighting the fluid nature of the credit’s legislation and its interpretations by the IRS.
Alerts and cautions. By 2023, amid concerns of scams and improper claims, the IRS included the ERC in its Dirty Dozen list and issued other notices emphasizing the importance of ERC due diligence.
Professional responsibility. The IRS issued a notice to tax professionals reminding them of their Circular 230 responsibilities regarding ERC claims and explaining that the responsibilities can apply whether or not the professional prepared the ERC claim.
Claim it if you qualify. The ERC remains a possible big tax credit—up to $26,000 per qualifying employee. You should apply for the ERC if you meet the requirements. And with all the attention paid to the ERC, you know to make sure you have the supporting documents that prove your claim.