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The arrival of the pandemic was so unexpected and jarring that many were caught off guard when restrictive government orders were issued. Many small to medium sized businesses were forced to shut down while others could only operate in a limited capacity. Financial conditions for many business owners were dire, but desperately need help came in the form of federal COVID-19 relief programs through the Small Business Administration (SBA). One of the most popular has been the Employee Retention Tax Credit (ERC) which has provided both tax relief and refund payments throughout the pandemic. In other words, it has been an essential lifeline for those struggling to survive. In fact, in 2021 alone, more than 30,000 small businesses claimed more than $1 billion in credits. Although most focus on eligibility, calculations, and the filing process, it is important not to forget about documentation. As the program comes in December, it is expected the IRS will step up enforcement efforts against fraudulent claims. To help clients, prospects, and others, Wilson Lewis has provided a summary of key considerations below.

ERC Risk Profile

Like many of the other Small Business Administration (SBA) relief programs, the ERC has undergone several changes since being introduced as part of the CARES Act. When first introduced there was very little guidance available from the IRS, leaving businesses to make subjective decisions about eligibility, qualifying wages, and quarterly credit calculation. Matters become more complicated when the ERC was updated for 2021 extending eligibility to even more companies, offering a larger credit amount, and even creating new business classifications to provide even greater savings. While beneficial to struggling companies the change also introduced a new set of rules and regulations to follow.

In addition, there is an even higher risk associated with ERC advances. This permits a qualifying company to receive an advanced refund before quarterly payroll tax filings are submitted and paid. In many cases, the advance was received in a few short days. Errors in eligibility, calculations, filing, and even the failure to reimburse advances, can open the door to IRS scrutiny.

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