A preview excerpt from the update to The Employee Retention Credit Guide

Alan Gassman

The Employee Retention Credit Guide is available for purchase through Leimberg Information Services. Early purchasers will receive the IRS Notice 2021-20 update when published.

PLANNING FOR THE ERC

The following are planning techniques that can help assure qualification for the Employee Retention Credit or increase the amount the employer would receive.

1. If the business does not qualify when the fourth quarter of 2020 is compared to the fourth quarter of 2019, under the first test above, then steps can be taken to help assure that gross receipts for the first quarter and second quarter of 2021 are 80% or less than the corresponding gross receipts for the first and second quarter of 2019, in order to fulfill the second test.

Here are some ways that this might be accomplished:

a. Postpone sending invoices and reminder notices to customers who can be expected to pay for its products services at a later time if the business is on the cash method of accounting for income tax reporting purposes.

b. If any customers or third parties are owed refunds that would cause a reduction in gross receipts, make sure that the refunds are given.

c. Some businesses may even consider closing down nominally profitable or loss operations if this will reduce gross receipts in an amount sufficient to allow for qualification for the credit.

2. If the primary revenue generator is a service provider or salesperson, consider taking a long-deserved vacation during a quarter that may otherwise not qualify for the credit. 

3. Certain businesses must include costs and advances that they pay for customers in gross receipts.  These businesses can request that the customers purchase these items on their own so that they will not be included in gross receipts for purposes of the credit calculation.

For example, construction firms that buy appliances and major components of a building concerning a renovation may request that customers purchase these items directly so that the amount included thereof will not be included in gross receipts.

Law firms may request that clients pay directly for deposition services, title insurance, trustee services and related items.

4. The wages of children, siblings, and certain other relatives of more than 50% owners are not eligible for the wage credit. 

The statute does not indicate when the ownership should or should not exist to qualify.

Therefore, it may be appropriate to transfer ownership to get individuals below 50% ownership if there are working relatives of the owner that fall under this rule before an application is filed, or at least on or before the first day of a calendar quarter where the wages may qualify.

5. Employers may also pay increased wages or compensation for services rendered in the past when merited. While the rules for the 2020 Employee Retention Credit provide that wages exceeding historical compensation for an employee will not be counted as eligible for the credit, the 2021 rules do away with this limitation.

Given that 70% of the first $10,000 paid to each employee for a qualifying quarter will be reimbursed, it would make sense to grant the employee a bonus as compensation for prior services rendered, or a pay raise as merited since these payments will be subsidized by the government.

It is vital to note that there should not be any “under the table” understandings that monies paid will be considered as a prepayment for future services.

How aggressive can the above planning be? Judge Learned Hand stated in the famous Tax Court case of Helvering v. Gregory that “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” The same standards of conduct and practice have historically applied for tax litigation and IRS controversy work with respect to tax credits. Nevertheless, given the extreme budgetary issues that our country is facing and that this program is intended to benefit employers impacted by COVID-19, this may not be the best time to be as aggressive as some taxpayers and tax advisors may want to be in normal income tax planning.

In particular, it is not acceptable to take checks that have been received in the mail in March and simply deposit them in April due to the doctrine of constructive receipts or to return money to a customer any amount they have recently paid, and ask them to pay it again later.

The American Rescue Plan Act: Important New Updates for Small Business Owners

Barry Portugal, Alan Gassman, and Brandon Ketron

Free LIVE Stream April 7th

5:30 PM to 7:00 PM 

Register Now

This free LIVE stream will cover important topics to small business owners regarding: 

1. The American Rescue Plan Act (ARPA) signed by the President in March. Learn how the latest stimulus bill includes more funds for PPP loans, EIDL, EIDL Advance and related employer/employee issues. 
2. The Employee Retention Tax Credit Act allows up to $10,000 in tax credit per employee for eligible businesses. 
3. The recently announced $28.6 billion in grants for the Restaurant Revitalization Fund and the soon to be available $2 billion Shuttered Venue Operator Grants. 

Find out if your business qualifies for any of the above grants and loans and how to apply to receive them. You can also direct your questions to the most prominent experts in this field.