FAQs about the Employee Retention Credit, ERC Tax Insurance, and IRS Substantiation Requirements

In March 2020, the Employee Retention Credit (ERC) was established to assist businesses that suffered economic impact, financial losses, or operational disruption during the COVID-19 pandemic.

Are you curious about how these credits could benefit your business? Here are some common questions employers have about the program, requirements, and other aspects of the ERC.

Am I eligible for the Employee Retention Credit?

There are two methods to determine ERC eligibility:

• A substantial decline in gross receipts (financial statement test)
  This method is considered to be the objective test to determine eligibility. To meet this qualifying condition, your gross receipts must have declined by 50% in each quarter of 2020 when compared to the same quarter in 2019. Next, compare the first three quarters of 2021 with the corresponding quarters in 2019. These gross receipts need to demonstrate a decline of 20% as well.
• Full or partial suspension of operations test
  This method presents a more subjective legal analysis. In this process, your organization must demonstrate that the ability to provide goods or services was restricted or modified by a COVID-19 executive order. If you meet this condition, you must also show that your company could have provided 10% of additional goods or services had these pandemic-related executive orders not been enacted. The key is measuring the ability of the employer in light of restrictions and modifications.

As our CEO and founder Kenneth Dettman says, “We typically aren’t seeing full suspension of operations outside of that core shut-down period of March, April, May of 2020. The overwhelming majority of the analysis we are looking at today are mainly dealing with a partial suspension.”

How Much Can a Company Claim?

When the CARES Act was signed into law at the end of March 2020, the Employee Retention Credit was a major component of the act. At the time, the most a company could receive was $5,000 per W2 employee. This was expanded for the 2021 tax year through additional legislation, which allowed a qualified employer to receive up to $26,000 per W2 employee.

What is Tax Insurance?

According to Willis Towers Watson, a firm that helps clients with tax concerns, “Tax liability insurance is designed to transfer a known but uncertain risk arising in your transaction, fund or business to an insurer’s balance sheet. The insurance indemnifies the policyholder from financial loss arising from a successful challenge from a tax authority, removing uncertainty around potential tax liabilities.”

And with the Employee Retention Credit, Dettman says there’s a high-risk profile for claimants that attempt to file without experienced tax and legal professionals, especially for the uninsured. “We believe that tax insurance is a solution that can transfer risk. By going through the tax insurance and underwriting process, you can feel more secure in your claim and limit the amount of risk that your organization would assume.” With an appropriate protective policy emplaced, tax insurance shifts the audit risk from the taxpayer to the insurance company, limiting exposure to liability, fines, and other repercussions.

Because of Sagemont Tax’s exceptional credentials and extensive industry experience, an A+ rated global insurer entrusts us to refer preferred-ERC-claimants to their ERC tax insurance program, provided that the ERC exceeds $500,000.

Why Tax Insurance?

Simply put, tax insurance transfers the risk and counteracts the IRS warnings and ERC Mill narratives. It gives you financial security and peace of mind to redirect your focus where it really should be—on your business operations.

What does ERC Tax Insurance cover?

How exposed to risk are you by the complexities of the ERC? It is important to understand how you could leverage the benefits of insurance when analyzing the risk associated with Employee Retention Credits.

Some of these considerations include:

• Partial suspension. If the modifications you had to make for your business due to governmental mandates had more than a nominal impact on your operational capacity, relative to pre-COVID, you may be eligible for the ERC. But partial suspension is often difficult to substantiate.
• Aggregation/full-time employee position. Did the employer properly apply the controlled group rules as the IRS has established them?
• M&A considerations. If a merger occurred during the life of the ERC, how should the program’s eligibility tests be applied?

IRS Substantiation

In order to successfully secure an Employee Retention Credit, it is wise to have thoughtful and well-documented substantiation and eligibility reports. The framework for the documentation needed to satisfy an audit/review has been clearly laid out by the IRS:

• IRS Notice 2021-20 states, “An eligible employer will adequately substantiate eligibility for the Employee Retention Credit if the employer creates and maintains records…”
• IRS Form 4564 (IDR) notes, “the following are items necessary to determine if you are eligible for the Employee Retention Credit requested on Form 941-X and if it was computed correctly.”

Partial suspension substantiation is a more nuanced process when filing for the ERC. We have developed five takeaways to consider when substantiating a partial suspension. These include:

• Define the “more than nominal portion” of the business affected to more than a nominal extent.
• Reference the COVID mandate that affected the “more than nominal portion.”
• Document a 10% quarter-over-quarter decrease in specific metrics.
• Document the changes to operations KPIs that were required for the mandates.
• Establish a logical and objectively measurable KPI to document the “more than nominal portion’s” ability to provide goods and/or services.

Want to learn more? Download the Practical Guide to Navigating an Employee Retention Credit.

What makes a Good Candidate for Employee Retention Credit Insurance?

Like any taxation policy, there are good candidates and bad candidates for Employee Retention Credit insurance. Here’s a quick guide to determine if it might be beneficial for you to explore the process.

• Good candidates. Typically the larger the candidate, the larger the credits, and thus, the most likely to face risk from taxation or enforcement. These are the traditional holders of tax liability insurance, with an average size policy between three and eight-million dollars, or more. But businesses with ERC claims above $500,000 can be great candidates as well.
• Not The Best Candidates would include employers with smaller credits (say less than $500,000) and businesses that had smaller suspensions that can’t be substantiated by KPIs and other metrics. Finally, businesses that self-filed ERC benefits or some of the fly-by-night ERC Mills that sprung up to capitalize on the benefit. These filings often do not meet the requirements for a good policy. You should reach out to us so that we can advise you on the best path forward.

How has Sagemont Tax helped Businesses with the ERC?

Sagemont Tax has assisted a multitude of companies with their ERC tax liability concerns. A few brief examples include:

• A community health network with 300 FTEs and 1,000 w2 employees. As a non-profit with a $7.3 million ERC award, there were numerous key risks that left them open to taxation enforcement.
• An in-person salon with 7,5000 FTEs across the nation realized a $50 million ERC. With so many employees and such a large wage base, insurance was a fallback for a potential sale.

If you have more questions about how your business might benefit from receiving the Employee Retention Credit, check out the FAQ on our website.

Sagemont Tax comprehensive Employee Retention Credit advisory services all under the same roof.

Sagemont Tax has pioneered a streamlined program to provide employers with access to A+-rated tax liability while also delivering lower minimum coverage amounts and reduced premiums on your ERC claims.

Contact us and let us know how we can help you!

For more information on the ERC, tax insurance, and IRS substantiation, watch the following webinar.