We have all heard the ads that say, “You are missing out getting paid up to $26,000 per employee, contact us to calculate your employee retention credit!” However, it is not that simple. The employee retention credit (ERC) is a temporary refundable credit against payroll taxes claimed for qualifying quarters from 2020 and 2021. It is currently available to certain employers whose operations were fully or partially suspended due to COVID-19 related government orders. That IRS announcement greatly expanded eligibility for the ERC from just those employers whose gross receipts declined substantially due to the pandemic.
The ERC is claimed via form 941 or 941-X that employers are required to file each quarter to determine and report federal payroll tax liabilities. The initial gross receipts test for eligibility for the ERC was easy to calculate. The amount was based on comparing the employer’s revenues in 2020 and 2021 to the same quarterly pre-pandemic revenues of 2019. If the revenues declined by a certain percentage, then the employer was eligible for the ERC. When the eligibility for the ERC was expanded to include businesses that were more than “nominally effected” by a pandemic related governmental order, congress opened the door for abuse. Arguably, all businesses were affected by a pandemic related governmental order. Thus, many “promoters” or “ERC mills” opened for business overnight with heavy advertising budgets. The IRS has issued warnings to the public about the misleading advertisements.
The ERC mills are charging employers a contingency fee based on the percentage of the credit refunded to the employer. Such a fee structure incentivizes ERC mills to throw caution to the wind and maximize the refund and their fee accordingly. The ERC related fraud and abuse has caused the ERC to be listed on the IRS “Dirty Dozen” tax scams list and the statute of limitations permitting taxpayer examinations related to claiming the ERC has been extended from three years to five years. Unfortunately for many employers, many of the ERC mills will be defunct in five years leaving the employer holding the bag, because the taxpayer is generally responsible for its tax returns.
There are essentially three tests for eligibility for the ERC:
- Decline in gross receipts test;
- Governmental Orders test; and
- PPP loan forgiveness test
As stated above, the gross receipts test is relatively straight forward, black and white. The governmental orders test that includes effects on company operations is a grey area where the IRS has provided some guidance on what qualifies as “more than a nominal effect.” Good examples include, a reduction in occupancy, business hours, or other operations as a result of a pandemic related governmental order. The payroll protection program (PPP) loan forgiveness test is the last hurdle to overcome. If the employer received PPP loan forgiveness, then the qualified wages used to calculate the PPP loan cannot be counted again for the ERC, regardless of the employer passing the gross receipts test or the governmental orders test.
The best practice when considering claiming the ERC is to (1) use your regular accountant to calculate the credit and (2) document all facts and assumptions used to determine your eligibility for the ERC. Assume you will be examined and keep any documentation that will help answer any questions an IRS Revenue Agent may ask about your organization’s eligibility for the ERC.
Deduction for Business Meals
The Tax Cuts and Jobs Act (TCJA) modified the law permitting the deductibility of meals and entertainment expenses. Entertainment expenses are no longer deductible except under certain conditions. The TCJA altered section 274 to make a clear distinction between deductible meals and deductible entertainment expenses, when both had been treated as identical expenses for many years.
If a food and beverage expense is incurred during an entertainment event, then the food and beverage expenses must be separately stated on the invoice or receipt. If the food and beverage expense is separately stated, then the business may deduct 50% of the food and beverage expense. If the cost of the food and beverage is not separately stated, the entire amount is a nondeductible entertainment expense.
The Consolidated Appropriations Act of 2021 provides a temporary exception to the general 50% meal expense limitation. For 2021 and 2022 only, a taxpayer can deduct 100% of the cost of a business meal that is provided by a restaurant regardless if it is consumed on company premises.
As with any deduction of credit taken, the taxpayer must be able to substantiate the business purpose of the deduction or credit if requested to do so during an IRS examination.