Congress introduced new eligibility for the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) employee retention payroll tax credit (ERC). One of the biggest changes deals with the intersection of the Paycheck Protection Program (PPP) and the ERC. If your business had a PPP loan at any point, you now also could be eligible for the ERC. The process of determining and documenting the ERC is complex. Maximizing the ERC (and other payroll relief, including PPP forgiveness) requires a deep understanding of and specialization in compensation and benefits tax law as well as payroll tax rules. Here are three key things you don’t want to miss.
1. Document the entire process
Many companies create spreadsheets to determine their amount of the credit, but, in reality, they must substantiate in detail each step taken toward claiming the credit (including, but not limited to, eligibility, eligibility period, and qualified wages).
There are two paths to eligibility – either you must meet certain rules relating to suspending operations during the pandemic, or your business had to have had a certain level of decline in gross receipts. Either case requires robust substantiation, but if your eligibility is based on a full or partial suspension of operations due to government COVID-19 shutdown orders, the substantiation requirements include a facts and circumstances analysis against applicable law and guidance. Businesses deemed “essential” might find it more difficult to prove eligibility, but they’re not necessarily ineligible.
In all cases, the amount of substantiation and documentation you need to keep is significant. The IRS has signaled that examinations of claimed ERC are high on its radar. The American Rescue Plan Act (ARPA) extends the statute of limitations for IRS assessment from three to five years for the 2021 3rd and 4th quarter ERC, which gives the IRS extra time to investigate each claim. In recent guidance, the IRS also clarifies that substantiation is required – which means having the right documentation is essential to withstand any potential examination.
As a side note, if you are trying to claim the ERC during a PPP loan’s covered period, the PPP lender and the Small Business Administration also will want documentation that any PPP payroll costs being claimed for forgiveness are not also ERC qualified wages.
2. Understand your aggregated group
Aggregated group rules apply when determining various items, including, but not limited to, calendar quarter gross receipts and full-time employee count. These are not based on consolidated group rules (they are more expansive and include, for example, foreign entities as well as completely unrelated entities). IRC Sections 52(a) and (b) (parent-sub, brother-sister, and combined groups) and IRC Sections 414(m) and (o) lay out specific requirements, but their complexity requires analysis by a compensation and benefits tax specialist who understands the unique background that is not readily available in the related law and regulations.
3. Understand the interactions between the various types of payroll relief
The basic rule is that you cannot “double dip” from different areas of payroll relief. This rule means you are not allowed to claim benefits under multiple relief options on the same payroll costs or wages on which you have already obtained relief – whether under previous relief options (in the CARES Act, the Families First Coronavirus Response Act, or the Consolidated Omnibus Budget Reconciliation Act) or new forms of payroll relief in the ARPA. This restriction is not limited to payroll tax credits and other payroll relief programs under pandemic relief, but to other payroll tax credits as well as income tax credits based on wages under prior law. And all of it requires proper substantiation.
When addressing ERC-qualified wages and PPP payroll costs during the same time period, be aware that the definitions do not align. Understanding what overlaps and what does not is key to compliance and proper substantiation, and to maximizing your benefits between the two forms of relief.