by Zain Jaffer
Life is hard these days. Even foundations and nonprofits are affected in their fundraising. Recessions and hard times spare no one except for a few niche industries and companies.
During the COVID pandemic, many places around the world prevented their citizens from working and forced them to stay at home to prevent the spread of the disease. Hence a lot of companies had no work and revenue, and employers had no money to pay their employees.
Realizing this, the US Government enacted the CARES Act, and also the Employee Retention Credit, a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected during the pandemic. Employers who had to pay employees could claim a tax credit. Many of them are entitled to get several thousand dollars from the US Government through the credit, which is given per employee in the payroll.
Right now the US is facing a possible recession in 2024, either a mild one or a destructive one. No one really knows. Savings rates for individuals and families are low. Many are overdrawn on their credit cards, or are paying high interest on car, house, and business loans. Those who can’t quite keep up end up defaulting or giving up.
Many companies have been helped by the Employee Retention Credit. Unfortunately this is sometimes being taken advantage of by fraudsters and scammers. Many of them are approaching companies and even individuals left and right, offering to help them get the ERC in exchange for a percentage. The IRS is actually warning the public about these people, but the combination of hard times and another dole out from the Government is too hard to resist for some. The IRS has said it will audit those who avail of the ERC, and if anyone is caught misusing it, they will be subject to the full force of the law.
Exactly who is qualified to get the ERC. Real employers who had to pay salaries during the pandemic years are qualified. Individuals with no employees are not qualified. Startups that had just started to operate during those years may be qualified to receive a smaller amount, subject to certain guidelines. Unfortunately these people who are trying to convince your company to avail of it are operating with a revenue quota, and so they are trying to reel in even those who are not qualified.
According to the IRS, the eligibility for the ERC will depend on your specific situation. Eligible employers can claim the ERC on an original or amended employment tax return for valid wages that they paid during the pandemic period between March 13, 2020, and December 31, 2021. The IRS requires that:
- The business was affected by a full or partial suspension of operations because of an order from an appropriate governmental authority limiting business, travel or meetings because of COVID-19 during 2020 or the first three quarters of 2021;
- It had a significant decline in gross revenues in 2020 or the first three quarters of 2021; or
- Was a recovery startup business for the third or fourth quarters of 2021.
Companies who were still able to operate because of videoconferencing meetings, were not forced to stop operations, or shutdown voluntarily, are not eligible. Individual taxpayers who are not business owners, retirees, people who do not have employees, household employers, employers who didn’t pay wages to employees during the qualifying time periods, employers who experienced supply chain disruptions but did not experience a full or partial suspension of operations by a qualifying order, and government agencies are NOT qualified to receive or apply for the ERC, despite claims from these fraudsters.
For now, the IRS has paused the processing of these ERC credits until the end of 2023. But given the impending recession we seem to be headed into, it is highly likely that they will resume this.
However, despite the fact that we are headed toward hard economic times, and debt and financing is tough, be careful about availing government financing if your Company is not qualified. If you are qualified, go ahead and take the lifeline. But if you are not, you may end up losing more than what you gained.
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