Not considering Employee Retention Credits? You could be leaving money on the table.

Experts say companies that don't consider Employee Retention Credits could be leaving money on the table.

Chicago Business Journal

The abrupt shutdown of the Paycheck Protection Program has left millions of borrowers in limbo. Those seeking relief through the Small Business Administration's Targeted EIDL Advance initiative are grappling with location requirements that could leave an entrepreneur just a few blocks away from being eligible for funding. 

Despite those frustrations, accountants and advisers who are helping businesses navigate Covid-19 relief options say many companies aren’t capitalizing on potentially lucrative Employee Retention Credits — potentially leaving thousands of dollars per employee on the table.

They say the relatively low utilization rate stems from a mix of myth and lack of awareness, but they anticipate increased interest as funding for other relief programs is exhausted.

As we’ve noted, the Employment Retention Credit allows businesses that were required to close or partially suspend operations during Covid-19, or saw business fall by 50% or more, to get a credit of up to 50% of qualifying wages of employees up to $5,000 per employee in 2020. In December, Congress passed legislation that increased the credit to 70% of qualifying wages up to $14,000 per employee through June 30, 2021.

Experts say one of the biggest myths about ERCs is that companies that previously received PPP loans aren’t eligible for the retention credits.

Late last year, Congress ended a prohibition on businesses that received a PPP loan from claiming the tax credit, opening up the tax credit to more than 5.2 million previously ineligible businesses. But the myth of ineligibility for PPP recipients has persisted for months, leading many eligible businesses not to pursue the credits. 

After seeing little interest in the program last year as businesses focused on PPP, Marc Valerio, a CPA and partner at Rochester, New York-based Bonadio Group, has started to see more interest in the program. 

But he said a lack of awareness persists, as a previously discussed public-awareness campaign didn’t materialize. 

Valerio said much of the interest in the program is being generated by payroll companies recommending the option to businesses.

When clients are encouraged by payroll companies to pursue ERCs, experts recommend they also talk it over with their accountant, attorney or adviser to ensure they are eligible and that guidance is followed.

“I talked to someone last week who wanted me to review their ERC [paperwork]. I talked to him and pretty quickly realized they were not eligible,” he said. 

While that’s rare, Valerio said filing forms for the ERC isn’t the same as filing for a loan from a bank. It’s subject to an IRS audit.

“With PPP, right or wrong, you got some peace of mind knowing you were going to give it to a bank, and they were going to review it. Then, they were going to send it to the SBA, and they were going to review it, and everyone’s going to kind of give their blessing,” Valerio said. “With the ERC, you’re claiming it on Form 941. It gets a lot of people uneasy.”

When the May 17 tax deadline passes, Valerio anticipates increased interest in the program as accountants are able to turn more of their attention to ERCs. 

Aaron Tamaddon, founder of Phoenix-based Stenson Tamaddon, said the change that allows businesses to secure both PPP and ERC could be a lifeline for many businesses — especially those shut out from the latest round of PPP or programs like the Restaurant Revitalization Fund, which is expected to quickly exhaust its funding. 

But Tamaddon also acknowledged the awareness issue as well as the complexity of the program as reasons why utilization hasn't been high.

“There are complex payroll calculations you have to do versus [for PPP] going to your banker and being able to apply in a streamlined fashion,” said Ryan Louis, a member at Stenson Tamaddon.

Tamaddon said there’s also the expectation that a business needs to have been devastated by the pandemic to qualify for ERCs, something that also isn’t true. 

“They think their business needs to be crushed. Most of the time, they think if they weren’t completely shut down or they didn’t have a huge drop in revenue, then they can’t access any of the funds,” Tamaddon said.

In reality, experts say the formulas are fairly generous when it comes to qualification levels.

However, companies do need to be aware of the rules around the interplay between PPP and ERCs to remain in compliance and maximize benefits.

For example, wages attributable to PPP loan forgiveness are encumbered and cannot be used towards ERC credits, Tamaddon said. He encourages companies to work with advisers who can help them navigate those complexities.

While many of the myths surrounding ERCs focus on eligibility, Tamaddon does offer one word of caution for those who are excited about the potential of the program: It’s not necessarily the fastest form of relief.

Tamaddon said there’s a processing lag when the files are mailed to the IRS that delays the process. 

“Patience is a virtue. This isn’t like PPP,” he said. “Those took at little bit of time. This takes a little bit more time.”