The economic effects of the pandemic are still taking shape. CFOs need to navigate record inflation, supply chain issues, and a recession – all of which are changing constantly and making it very difficult to plan for the future.
However there is another challenge that directly affects company finances which CFOs need to address as well. That is the employee retention credits from the pandemic. These retention credits be very confusing as each organization is in a different situation and the technical aspects can be quite difficult to navigate. Although they were created to help companies, the repercussions of not getting them right can cause a big headache for companies well into the future.
Employee Retention Credit
The Employee Retention Credits originated from the CARES Act in the beginning of the pandemic in March, 2020. It provided a refundable employment tax credit to encourage businesses to keep their staff employed. Essentially it was a refund – not a loan, and businesses were not expected to pay it back.
In the first Act (CARES), businesses could receive a maximum credit of $5,000 per employee. Then, the Relief Act of 2021 increased the maximum per-employee credit to $7,000 per employer per quarter. Later in 2021, the American Rescue Plan Act added an additional potential $50,000 credit per quarter for eligible recovery startup businesses.
Overall, the 3 Acts throughout 2020 and 2021 handed out trillions of dollars in employee incentives. In the short term (notwithstanding the long term inflationary and other effects it caused), it likely saved millions of jobs during a time of very high economic uncertainty. But now that the pandemic has subsided, CFOs have the challenge of navigating the Employee Retention Credit incentive and its after effects.
Although Employee Retention Credit is no longer available, businesses that were negatively impacted by the pandemic may still file refund claims retroactively. However, many CFOs are overwhelmed by who is eligible, how to apply for it, and other important things to consider. Let’s make some sense of it:
Employee Retention Credits Challenges
1) Confusion from the Federal government
Due to the unprecedented speed in which the Acts were drawn up and signed, there was a lot of uncertainty and confusion involved. Dealing with this amount of money in a time of high pressure when government offices were overwhelmed and employees were concerned about keeping their jobs was a recipe for confusion.
Making it even more difficult was the amount of changes the federal government kept making every time it passed a new piece of legislation. Sometimes, the updates even contradicted each other as was the case with the Infrastructure Act of November 2021. This Act said that businesses couldn’t claim the credit in Q4 of 2021, even though the previous American Rescue Plan Act said that credit was available all throughout 2021.
2) Questionable advisory firms
Crises bring economic opportunities and there are always those who are ready to jump in to take advantage of these opportunities. Sometimes they involve helpful solutions that provide value, while other times (including in this case) they involve people looking to make a quick buck with less helpful solutions.
As soon as the ERC were announced, hundreds of financial advisory firms started popping up all over the country claiming they can help companies navigate the complicated legalities and paperwork involved in Employee Retention Credits. In reality, the vast majority of these firms were not certified accountants or lawyers and didn’t know much more about the intricacies of the ERC than anyone else. These firms complicated the confusion even more, so much so that the IRS sent out warnings about them.
3) Suspicious ERC filings
The Treasury Inspector General for Tax Administration, an independent watchdog for the IRS, released a report saying that there have been more than $2 trillion in ERC returns that they identify as suspicious. This report only covers returns through March, 2022, which means that this number is probably even higher. The IRS is on full alert for those who took advantage of the ERC benefits and this can affect companies who made completely unintentional mistakes due to the complicated rules.
How does all of this effect CFOs
First and foremost companies need to be aware of the high probability of being audited if their ERC is labeled as suspicious. The IRS received billions of dollars in funding with plans to hire 80,000 new agents as part of the Inflation Reduction Act, and they have made it clear that they are trying to crack down on funds that were distributed to the wrong people during the pandemic. CFOs should launch a more aggressive compliance campaign in order to make sure that everything was done correctly, especially in regards to pandemic relief programs.
For companies that are still considering applying for the ERC, CFOs should make sure that their organization and everyone involved in the process fully understands the rules in place before making a claim.
For companies that already filed a claim, CFOs should gather all the necessary paperwork needed to prove ERC eligibility… and then some. This includes all the documentation including paid time off, medical leave, payroll forms and any other documents that already support the existing claims.
CFOs need to have appropriate support to make sure they are compliant with the credit taken on their returns. If the CFO or management doesn’t feel comfortable putting their stamp of approval on it, then it is better to proactively fix everything necessary rather than waiting for the IRS to confront the company – which is always a bigger headache.
The keyword here is proactive. Being prepared and organized in regards to the ERC puts the CFO and the organization at ease, makes sure the company receives the maximum funds available, and most importantly ensures that the company is prepared for any IRS audit should they ask for more information. CFO’s that don’t have all the documents in order, now know where to start.