Veterinary Hospital ERC Claims – Too Good To Be True?
Over the past few months, you may have received a phone call or seen an advertisement encouraging you to take advantage of the Employee Retention Credit (ERC) program. The ERC was initially created in 2020 to provide relief to taxpayers who suffered an economic impact and continued to pay their employees throughout the pandemic. While these marketing methods explain that veterinary hospitals could receive a potential tax credit of up to $26,000 per employee, they often fail to include the eligibility requirements that hospitals must meet to claim the credit.
In order to file an ERC claim, a business is required to satisfy one of the following tests:
- The business must have suffered a reduction in gross receipts during a quarter in 2020 and/or 2021 compared to the same quarter in 2019. For 2020, a business needed to have a reduction of over 50% of gross receipts in a quarter versus the same quarter in 2019. This threshold was reduced for 2021 to only require a 20% reduction in gross receipts.
- The business must have suffered a full or partial suspension due to a government order. If a government order was in place, the business is then required to demonstrate how the order(s) had a more than “nominal” impact on business operations.
Being that many veterinary hospitals saw an increase in gross receipts in 2020 and 2021, practices would need to qualify for the ERC under the second test – proving that the business was more than nominally impacted due to a government order. To support this test, hospitals should maintain records of the state and local government orders in place, the dates of these orders, and details regarding the specific operations that were impacted. The Centers for Disease Control and Prevention guidance or minimal impacts due to supply chain problems, working from home, or other similar issues may be subject to extensive review and additional IRS scrutiny.
As the IRS has processed ERC claims, they have found that many taxpayers have submitted inaccurate or even fraudulent refund claims. Because of this, the IRS has issued numerous warnings and even imposed a moratorium beginning on Sept. 14, 2023, that is expected to last through Dec. 31, 2023, at least. Any claims submitted during this time will be held and will undergo additional analysis before refunds are issued.
Relief Programs for Taxpayers With Dubious Claims
In addition to the moratorium and enhanced compliance reviews, the IRS also announced it is finalizing two programs to provide relief for taxpayers who have filed dubious ERC claims:
- The IRS will soon offer a withdrawal option for taxpayers with unprocessed claims. With this option, taxpayers who have come to doubt the validity of their unprocessed ERC claim will be able to withdraw it rather than go through the process of filing a new set of amended payroll tax returns.
- For taxpayers with improper claims that have already been paid, the IRS intends to offer a settlement program that will ease the burden of repaying the amount received.
The IRS initiatives are meant to protect businesses from predatory and aggressive marketing tactics by unscrupulous actors, often referred to as “ERC mills.” One such tactic involves ERC mills claiming that many businesses are eligible due to a supply chain disruption. However, the IRS has clearly explained in a Generic Legal Advice Memorandum (GLAM 2023-005) that it would be very unusual for a business to qualify due to a supply chain disruption. The business would have to show that a supplier was suspended due to a government order and that the business was unable to obtain those critical goods required to continue operations from an alternate supplier.
All businesses that have filed ERC claims should carefully review their eligibility. The IRS has published guidance on eligibility and updated its ERC FAQs, which now offer a list of red flags that could indicate a taxpayer may have been the victim of an ERC scam.
To determine if your business truly qualifies for the ERC program, reach out to your KSM advisor or complete this form.
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