The pandemic presented unprecedented challenges for all sectors of the economy. But small businesses suffered the most. Prolonged lockdowns and restrictions took a significant toll on in-person retailers, manufacturers, and hospitality and service providers. Recognizing the dire employment situation these local businesses faced, Congress created the employee retention tax credit (ERTC) to provide financial relief. This credit allows eligible businesses and nonprofit organizations to apply for payroll tax refunds of up to $26,000 per employee, amounting to hundreds of thousands of dollars for some organizations.
Eligible businesses deserve to benefit from this financial support. Many are still contending with the economic consequences of the pandemic, including supply chain backlogs and inflated costs. Amid these challenges, the ERTC enables them to continue growing and hiring, which contributes to the prosperity of their local communities.
However, navigating the complexities of the ERTC application process is daunting — and time is running out to submit your claim, with staggered deadlines set for April 15, 2024 and 2025.
The IRS is responsible for administering the ERTC program, and the agency has established comprehensive parameters to guard against fraudulent applications. These measures are designed to maintain the integrity of the program, protecting the intended beneficiaries and maintaining fairness in the process.
Unfortunately, the IRS rules also create administrative hurdles for eligible businesses attempting to claim the refunds they’re owed. There are two ways to qualify for the ERTC, but many traditional tax accounting firms only tell you about one. So it’s crucial to have a reputable and knowledgeable consulting partner by your side to make sure you receive the funds you rightfully deserve without encountering issues.
Who is eligible for the ERTC?
Your small business may be eligible for the ERTC if you:
- Experienced a suspension of operations (either fully or partially) due to government-issued COVID-19 restrictions limiting commerce, group meetings, travel or the ability to obtain critical goods from suppliers OR
- Experienced a significant decline in revenue compared to 2019 during 2020 and/or the first three quarters of 2021
As you can imagine, that describes a lot of small businesses. But applying for ERTC refunds isn’t as simple as ticking the boxes. That’s because the onus is on you to prove eligibility based on the criteria above and calculate the payroll tax refund you’re owed for each full- or part-time W2 employee. It requires time-consuming detective work to painstakingly document how your business operations were impacted by specific local and state-level government mandates — which are difficult to track down — and hours spent wading through payroll documents.
Furthermore, if you received a Paycheck Protection Program (PPP) loan, it adds another layer of complexity. Businesses that received PPP funds to pay employee wages are still eligible for an ERTC refund — but you can’t claim those PPP wages as part of your employee retention tax credit. You’ll have to determine which payroll cycles were tied to your PPP loan and exclude them from your ERTC claim.
How to apply for ERTC funds with the right partner or consultant
As a small business owner, you’re already working 24/7 — you don’t have time to invest in research and calculations. But that doesn’t mean you should write off the opportunity to receive the employee retention tax credit you’re owed.
Although the ERTC program is only a few years old, there are reputable consultants and advisors who have experience helping small businesses with the due diligence required to assemble a thorough ERTC application. These firms employ or contract CPAs to sign off on every document.
Unfortunately, bad actors also exist. These unscrupulous agents misrepresent their clients’ eligibility, leaving them vulnerable to IRS scrutiny, and the IRS has warned small businesses to beware of these tax credit mills. These bad actors existed before the ERTC program and will exist after. But it shouldn’t prevent you from identifying a reputable consultant to evaluate your eligibility — and many will do it at no risk to you.
So, how can you ensure you are partnering with a reputable firm that has the expertise required to help you maximize your refund without violating the rules? Here’s what you need to know:
1–Consult multiple advisors. The ERTC is administered by the IRS, so your accountant may seem like the natural place to start. But unlike filing your income taxes, ERTC applications aren’t clear-cut cases of debits and credits — they involve shades of gray, requiring you to build a case with supporting documents beyond financial statements. That work falls outside the expertise of most accountants. Even if your accountant suggests you may be ineligible for the ERTC, it’s worth seeking advice from multiple sources before deciding whether to apply. Professional firms will cooperate — rather than compete — with your existing tax preparers.
2–Engage a consultant who understands your industry. Business consultants possess the industry knowledge to unravel the intricacies of how pandemic restrictions impacted local organizations — and your business in particular. Search for a consultant who is available to speak with multiple people on your team and willing to do the detective work necessary to trace operational pauses and lost business back to the relevant government mandates. They should ask questions to understand how your operations were impacted by travel, occupancy, group meeting and service delivery restrictions on a day-to-day basis.
Your partner should also have the ability to protect your sensitive data in a secure (SOCII) database and the financial expertise to delve into your payroll documents, calculate your tax refund, and file the necessary forms with the IRS — which must be done using paper copies. They should also be prepared to demonstrate how they will keep you updated on the status of your claim.
3–Be wary of bad actors. With the deadline to file ERTC claims drawing closer, unethical firms are promising small businesses quick and easy refunds based on little to no due diligence — and some will offer you high interest loans to get your money faster. A reputable firm will demonstrate knowledge of your industry, and take the time to get to know you and your business before promising you a number. Remember, it typically takes months, not minutes, to complete the complex application and approval process.
Don’t wait to start the process of claiming your ERTC funds
It’s crunch time. The deadline for submitting 2020 ERTC claims is less than a year away, and the complexity of the application process means you can’t afford to put it off.
Congress created the ERTC so small businesses like yours could weather the pandemic’s economic fallout while keeping workers employed, stabilizing and strengthening your local community. With the assistance of a reputable industry partner, you can maximize the refund you’re owed while avoiding legal and compliance issues.
Mike Grosberg is president of Boston Growth Partners (BGP), a management consulting firm that helps middle-market businesses drive growth, which he has led since 2018. Prior to BGP, his career spanned consulting and C-suite roles with both emerging ventures and global Fortune 100 enterprises. His expertise covers manufacturing, distribution and global supply chains in a variety of industries. He earned his CPA in 1996 and worked as a Big 4 auditor.