Top 5 Errors CPAs (or their Providers) Are Making When Calculating the ERC

by Rick Meyer, CPA, MBA, MST

Over one year ago, I wrote this article, and I mentioned that many of us CPAs were either missing this credit, not properly educating and helping clients with this large, refundable credit, or doing the calculations wrong.

Well, it’s now time for an ERC report card! Let’s lay out the good news, the bad news and the top five errors that CPAs, or their providers, are making today on the ERC.

Report Card

The good news: More CPAs and their clients are aware of the value of the ERC. Excellent! 

The bad news: Misinformation has gone the other way and many businesses are being told that everyone can claim the credit for the maximum amount. Many business owners are being promised the full $26,000 credit, per employee, by any number of “here today, gone tomorrow” providers (but hopefully not from their CPAs). As a result, you may have heard that the IRS recently issued IR-2022-183. The notice warns against third parties who are often improperly computing the credit; advising businesses to claim when they may not qualify; not gathering, applying and documenting the facts correctly; and not providing business owners the full story about the ERC.

The Service has even issued a 72-page training guideline for its examiners on the credit and is requiring its auditors to complete a 56-hour training course.

Now, you may be saying to yourself that CPAs can’t be responsible if clients engage a third party. But, remember that the AICPA Code of Professional Conduct requires a CPA to do due diligence to determine whether the third party has the appropriate expertise in the area relied upon by the CPA. So, if you are signing the tax return, you better do your due diligence.

The New Top 5 Employee Retention Credit Errors

We’ve had to deliver the bad news to many businesses that they don’t qualify. After all, the facts are the facts. So, let’s review the top five errors that businesses are hearing about ERC:

Error: “If you were affected by COVID-19, you are qualified for ERC!”

CPAs, or their providers, know by now that there are two paths that their clients could take to qualify for the ERC: revenue decline and impact on the business. But many believe – wrongly – they can qualify for any complications their business had with their operations due to COVID-19.

However, merely adjusting operations in response to COVID-19 is not enough to qualify for the ERC. There are two things you need to show to be eligible under the business impact test:

1. You need to show that a specific COVID-related government order or mandate (federal, state, local) caused the impact on your business; and
2. You need to show the extent and duration of that impact – in short, to show that the order had a “more than nominal” impact on your business (more on that below). Best practice is that you need to document the specific government order for the relevant time period and detail and document the impact as to your business.

Error: “Any government guideline qualifies you for ERC!”

There are varying levels of government orders and guidelines and not all of them qualify. Some folks are telling businesses that things like CDC and OSHA guidelines qualify a business. That’s not always true.

First, an order has to be “an order.” There’s a big difference between government orders that say a business must or shall do something versus a guideline that recommends or says a business should do something. The latter do not qualify!

As noted in IRS Notice 2021-20, a mayor giving a speech encouraging residents to practice social distancing is not an order. Further, as the IRS guidance makes clear: It also must be an order that limits commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19. 

Finally, it has to be a government order that has jurisdiction over the employer’s operations and the order must have a more than nominal impact on the business operations (discussed next). So, be careful what orders you or your ERC advisor are relying on for your qualifications.

Error: “A qualifying mandate that caused an impact to your business means you qualify!”

Even if a qualifying order affected your business, you still may not qualify. IRS Notice 2021-20 requires that there be a “more than nominal” impact on the business to be eligible. Unfortunately, the “more than nominal” test too often goes unmentioned – but it is a critical part of the ERC calculation analysis.

If you otherwise qualify, but the effects of an order on your business were mostly minor inconveniences, then you may not be eligible. A suspension of a more than nominal portion of a business’s operations is a very technical calculation for CPAs or their providers based on IRS Notice 2021-20 and it needs to be well documented.

Error: “...You get $26,000 for every employee!”

Calculating your ERC credit can be quite complicated and CPAs or their providers should exercise extreme caution. If you hear you can simply multiply how many employees your client has times $26,000 and tell you to put that number on the 941-X, then... wow, that’s extremely bad advice!

There are three major factors that impact the refund: wages paid, duration of impact and other incentives already claimed.

The credit is calculated as 70% of qualified wages paid to an employee in a given quarter, up to $10,000. So, for some simple math, let’s say your client paid an employee $7.25 an hour and they worked an 8-hour day for 60 days in the quarter. That means their wages would be about $3,480 for the quarter. Multiplying that by 70% gives a maximum credit of $2,436.

However, this assumes the qualifying government mandate lasted for the whole quarter. Not only do wages paid matter, but also the length of time the mandate was in place. For instance, let’s say those same workers qualified due to a social distancing order but that order was only in effect for half of the quarter. You would then only get half of the maximum credit.

Error: “...If you claimed PPP (Paycheck Protection Program) you can still qualify for $26,000 per employee!”

Interplay with other incentives is where most CPAs or their ERC providers are miscalculating the ERC.

While you can claim PPP and ERC together, they will have an interplay between themselves and any other incentives your business may have taken, such as the restaurant revitalization grant.

Again, in IRS Notice 2021-20: “...the law now allows employers who received PPP loans to claim the Employee Retention Credit for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.” To state it another way, no double dipping! The ERC cannot be calculated using payroll costs that are taken into account for purposes of PPP loan forgiveness.

So, there you have it. As I previously said, the ERC is a fantastic tax incentive, a cash infusion booster shot in the arm for qualifying companies that suffered economically from the effects of COVID-19. Let’s just make sure we, the CPAs and trusted advisors (or third-party providers), are doing it the right way to avoid shooting ourselves in the foot.

About the Author

Rick Meyer, CPA, MBA, MST is a long-time member of the Illinois CPA Society and has served on various tax committees over the past 40+ years. He is a director for alliantgroup, a national firm that works with businesses and their CPAs to identify powerful government-sponsored tax credits and incentives. He could be contacted at rick.meyer@alliantgroup.com.