How do you know if your business qualifies for the employee retention tax credit?

Small businesses are facing an onslaught of ads, phone calls, and emails to help them claim a tax deduction in the age of a pandemic. However, experts urge business owners to review eligibility with a qualified tax professional.

Tax exemption – known as Staff retention creditor ERC – enacted in 2020 to support small businesses during the Covid-19 pandemic, with a value of up to $5,000 per employee for 2020 or $28,000 per employee in 2021.

While the credit applies to the 2020 or 2021 tax year, business owners still have time to adjust returns and claim the credit, prompting a torrent of ads from companies offering help.

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“The calls and RFPs are brutal,” said certified financial planner Craig Hausz, CEO and managing partner at CMH Advisors in Dallas. He is also a Certified Public Accountant. “Our clients get a lot of this stuff and it just bombs them.”

While Hausz has completed at least 100 amended files for clients to claim the employee retention credit, it has also notified clients when they no longer qualify.

“ERC factories” have sprung up, charging small businesses up to 25% to 30% of the credit received, said Christine Esposito, director of tax policy and advocacy at the American Institute of Certified Public Accountants.

“There is a huge financial incentive,” she said.

Esposito said ERC factories may promise business owners they qualify or charge more credit than the owners have been told by the CPA. “It really puts a strain on a lot of customer relationships,” she said.

Yet warn business owners about “third parties” promoting employee retention credit in OctoberThe IRS has added the problem to file annual list of the 2023 “Dirty Dozen” tax scams.

“Although credits have provided a financial lifeline to millions of businesses, there are promoters that mislead individuals and businesses into thinking they can claim these credits,” said IRS Commissioner Danny Werfel. March statement.

One of the challenges of claiming an employee retention credit is complexity, as the rules have changed Between 2020 and 2021According to Hausz.

The credit was enacted to keep workers on the payroll during quarters affected by the Covid-19 pandemic. While eligibility was initially from March 13 through December 31, 2020, the timeline has been extended through the third quarter of 2021 for most companies.

To qualify in 2020, businesses needed a government-mandated total or partial shutdown, or a “significant drop” in revenue, according to tax authoritywith “less than 50% of total revenue,” compared to the same calendar quarter in 2019. For 2021, revenue thresholds have fallen to “less than 80% of the same quarter” in 2019.

“We’ve done some business for clients who’ve gone out of business, and we’ve done some business that has resulted in lower revenue,” Houses said, which is easy to calculate.

Further, the credit was expanded from 2020 to 2021, originally covering 50% of eligible wages (limited to $10,000 annually per employee), up to a maximum of $5,000 per employee in 2020. For 2021, the credit jumped to 70% of Wages ($10,000 per quarter per employee), amounting to $7,000 per quarter or $28,000 per year.

One of the difficulties with retroactively claiming an employee retention credit, Esposito said, is that business owners must also adjust for other returns.

While the process starts with Form 941-X – Revised payroll tax return – The changes trickle down to personal and corporate income tax returns, “creating a chain effect,” she said.

Houses said that the “big problem” with new companies that claim to help companies obtain this individual credit is that they may not sign off on adjusted returns, in order to avoid future liability. “Don’t offer this unless the people helping you are willing to put their name on file as the paid preparer,” he warned.

In the March statementIRS Commissioner Danny Werfel has warned that taxpayers are “ultimately responsible for the accuracy of the information on their tax return” and the agency is stepping up enforcement of these claims.

Houses added that taxpayers should “go talk to a qualified professional,” such as a certified public accountant, registered agent, tax attorney or financial advisor. “There are hundreds of companies that I know personally that would extend credit and sign their name on it.”