Kenneth Dettman, CEO of Sagemont Tax, was featured on the podcast “Grow Money Business” with host Grant Bledsoe. Here are some highlights from their conversation:
The CARES Act, the “double-dip” rule, and why there is bad behavior in the ERC space
“Initially, under The CARES Act, you had to choose either the Payroll Protection Program (PPP) or Employee Retention Credit (ERC). Towards the end of 2021, Congress realized the pandemic was going to last a lot longer than they thought it would so they decided to add another round of PPP and extend the Employee Retention Credit, along with retroactively changing the rule that you had to take one or the other.
The government also said that we’re not going to give business owners a credit on wages covered by the PPP. This resulted in a complicated and poorly defined “no-double dip rule”, as it’s been called, that basically says you can’t take the benefit of both the PPP and the ERC on the same wages as Part of the Consolidated Appropriations Act enacted in December of 2020.
From March of 2021 until the middle of 2022, the Employee Retention Credit was a little-known, and often misunderstood, payroll tax credit. This lack of knowledge significantly contributed to bad players and a lot of bad behavior in the ERC space. However, there are a lot of businesses that are truly eligible for this credit, for which this has been an absolute lifeline.”
The fundamental difference between PPP and ERC
“With the Payroll Protection Program, the government was essentially making forgivable loans to businesses which could be applied to payroll and certain non-payroll tax expenses. The Employee Retention Credit can be thought of as a rebate, basically cash back, on the remaining payroll wages, not covered by PPP funds, that existed during the eligibility period.”
How to determine eligibility under the ERC’s two tests
“The first test is formally known as the substantial decline in gross receipts test. This test looks for a 50% decline in revenue, comparing any quarter in 2020 to the same quarter in 2019. In this case, the organization has gotten absolutely rocked from a financial statement perspective. We typically only see this in the second quarter of 2020, which was Ground Zero, full shutdown period for most businesses. For the first 3 quarters of 2021, the percentage of decline in revenue required for eligibility is only 20% when compared to the same quarters in 2019.
The second test is a full suspension or a partial suspension of operations. While a full suspension is intuitive, a partial suspension is a fact and circumstances-based test and exists when an organization is subject to restrictions or modifications under governmental order that had a more than nominal effect on the business’s operations.
What is considered a more than nominal effect on business operations? The IRS defines it as the interruption of an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent. However, the IRS does not provide any details on what (or how) exactly to measure or quantify the reduction in an employer’s ability to provide goods or services. Sure, revenues, service hours, widgets produced, meals served, etc., are all potential proxies. However, the absence of a defined numerator and denominator often makes this safe harbor far less objective than one may desire, especially for an in-house CPA. This is why it is prudent for a business that suffered any type of operational disruption during the COVID-19 pandemic, regardless of how meaningful it was to the financial performance of the business, to seek professional advice from a tax attorney that is well-versed in the evaluation of an FPSO.”
How much guidance on ERC filing audits does the IRS provide? What’s so important about an Information Document Request (IDR)?
“There is not much in terms of formal guidance or inferences we can take from documented audits, given the short history of the ERC program. There’s certainly no case law out there. Therefore, we must rely on anecdotal evidence based on what we hear from other providers. If you are audited, the IRS sends you something called an information document request, or IDR, which is their standard list of what they want you to provide and prove out with respect to your claim. We are carefully watching the evolution of how that IDR is becoming more and more specific, particularly in regard to partial suspension.”
What is the takeaway on audits?
“Based on what we have seen to date, audits are happening but not on a large scale. The two primary areas of focus we’re hearing about are the partial suspension of operations reliance and large employer credit, which allows large companies to take the credit only on wages paid to people while they weren’t working. The latter credit has been subject to quite a bit of abuse, but we are hearing a lot of the auditors admit that this is new to them too. As these things are taking a while to evolve, we’re not really clear on what type of hard lines are going to be drawn.”
How does a business owner vet a firm or professional for help with filing an ERC claim?
“First and foremost, they should work with tax professionals; people who have bona fide experience in accounting, taxes, law, and payroll. Make sure that the firm is the one responsible for executing the work, not external contractors, and that they’re also signing prepared claims. Look at the leadership of the firm to assess credibility and a historical track record of success. Seasoned leaders and professionals will care about their reputation coming into the firm and also care about their reputation once the ERC program ends.”
Who is responsible for what’s on the return/filing? Is that shared with the paid preparer alongside the client?
“The IRS just released their fourth warning about the Employee Retention Credit telling business owners to beware of ERC scammers. There’s something called the reasonable cause standard, which basically says that as a non-tax expert, you are permitted to rely on the advice, counsel, and guidance of a third party whom you deem to be or whom you perceive to be an expert in their field. However, there are diligence requirements to understand whether the provider you’re using actually possesses the expertise that you seek. The liability does not shift from the taxpayer or employer all the way over to the paid preparer, there is shared liability. Now if a paid preparer is doing bad knowingly, they can be penalized separately and apart from the penalty that’s going to arise from an improper credit claim.”
What is in the future for Sagemont Tax after 2025 and the end of filing Employee Retention Credit amended returns?
“We are actively building out a practice dedicated to the Worker Opportunity Tax Credit, an incentive for employers to hire disadvantaged classes of employees, and we are laying the groundwork to build out a Research and Development Tax Credit practice. Rolled out with the Inflation Reduction Act and the Infrastructure Bill in 2021, we are extremely interested in the new features related to Energy Tax Credits. One of the most important and exciting new rules is that certain types of energy credits are now freely transferable.
The Sagemont Tax team also has some relatively confidential technology in the works that will bring data directly to businesses. As part of the Employee Retention Credit, it is critical for us to know that the returns we filed are with the IRS and be able to notify our clients when their refunds are coming. We’ve used a lot of technology to get that data in real time and now we’re going to use that more broadly to bring data directly to taxpayers.”
