If you have attended a continuing education conference in the past year or opened your business’ mail since 2021, you have likely heard that you might be eligible for a tax credit of up to $26,000 per employee! While that might be true, eligibility for the Employee Retention Tax Credit is more nuanced than the advertisements you’ve seen may lead you to believe.
Every day we see the strain COVID has had, and will continue to have, on the dental profession. We understand the Employee Retention Tax Credit (ERTC) can be incredibly helpful when you are facing increased supply and labor costs. As trusted business advisors, we believe we are obligated to fully inform any dentist considering the ERTC about the eligibility requirements, common pitfalls, and the significant exposure dental practices face for improperly claiming the ERTC. You should consider all of this before making any plans for how to spend your ERTC money.
Qualifications for Employee Retention Tax Credit
Let’s start by reviewing: how do businesses qualify for the Employee Retention Tax Credit (ERTC)?
There are two ways to qualify for the credit. To qualify, you only have to meet one of the tests for a quarter. Since qualification is determined by quarter, you may qualify under the first test for some quarters and the second test for other time periods.
The first way to qualify is through revenue reduction, with different reduction thresholds for each year.
- The 2020 credit requires a reduction in gross revenue for the quarter of 50% or more as compared to the same quarter in 2019.
- For the 2021 credit, a revenue reduction of 20% or more for the quarter is required as compared to the same quarter in 2019.
For the revenue calculation, be sure to exclude any non-taxable income received during the periods – many practices received forgiveness on their paycheck protection plan loans during that time period, which qualifies as non-taxable income.
Many dental practices also received HHS provider relief funds – this is included in revenue for the quarter and therefore may reduce the likelihood you will qualify for the ERTC for that period.
For businesses that did not exist in 2019, there are special rules to determine qualification based on revenue reduction.
The second way to qualify is through direct government mandates that more than nominally changed the way in which you were able to conduct business. The key with this qualifier is that the change was necessary due to a government order, and it effectively suspended some portion of your operations. While ‘’more than nominal” impact is somewhat grey, there are specific guidelines that address the most common scenarios we see with dental practices. More than nominal is generally considered 10% or more in labor hours or revenue affected by a government order.
Common Myths about the Employee Retention Tax Credit
In order to dispel some myths around the credit, let’s look at several of the common myths.
If you received money through the Paycheck Protection Plan (PPP), you are not eligible for the ERTC.
Initially the ERTC was only available to employers who did not take advantage of the PPP; however, that changed at the end of 2020 and employers were able to take advantage of both the ERTC and the PPP. The caveat for receiving both is that employers cannot use the same payroll costs for both the ERTC and the PPP forgiveness.
Because of the closure of dental practices in March 2020, we have seen a number of dental practices that experienced a significant revenue reduction in quarter 2 of 2020. However, many of these practices received the PPP loans and used them to cover payroll costs during that time period. You cannot use the payroll expenses for forgiveness for your PPP loan and then claim the credit on the same wages.
The money received from the two programs is treated differently for tax purposes. The funds from PPP are non-taxable; however, the funds received from the ERTC are taxable. The ERTC also requires amending your income tax return and your payroll tax filings for the year or years you claim the credit.
If you had to change processes in your business, you qualify.
This might be true, but the change in process had to be mandated by the government – not based on your comfort level or your patient’s comfort level.
Voluntary changes to your business operations also do not qualify. For example, if you reduced hours due to reduced demand for services, that would not qualify. However, if a government order required you to close for a period of time during normal working hours, that may qualify.
I couldn’t get supplies from my preferred vendor, so I qualify.
In order to qualify based on supply change issues, all three things had to be true:
- Vendors were unable to deliver your supplies due to a government order,
- You were unable to purchase the needed supplies from another vendor,
- As a result of not having supplies, your business experienced more than nominal decline.
My regular tax advisor says I’m not eligible for the ERTC, but an outside tax credit company says I am eligible. I should go ahead and claim the credit and hope I don’t get caught. What’s the worst that can happen?
New tax legislation inevitably leads to gray areas – that’s simply what happens when you have to take the relatively limited language of legislation and apply it to the nearly infinite, and frequently complex, ways businesses operate in the real world.
However, the ERTC is different from what we typically see with new legislation and gray areas in the law. The differences are significant and worth noting because they all signal improper claims for the ERTC have a high risk of being caught in audit, could lead to significant penalties, and the liability exposure may go beyond the amount of credit claimed by the practice.
Claiming the ERTC also impacts your income tax returns, so there could be a significant domino effect from improper ERTC claims.
Additionally, if you lose any of your ERTC under audit, you may also permanently lose an income tax deduction related to those credits. So, you run the risk of losing the payroll tax credit while also paying more in income taxes than you should have. And, to add insult to injury, you may have already spent all the ERTC money and don’t have the funds available to pay an assessment that happens years later.
Finally, the IRS has done something unusual to signal its intent to aggressively target fraudulent ERTC claims. We typically know when something is going to be an IRS target. However, what we don’t typically see is an announcement by the IRS to specifically warn taxpayers about fraudulent tax credit providers while also providing detailed instructions, including a form you can file, to report fraudulent ERTC activities.
It is within the realm of possibilities that if a fraudulent tax credit provider is identified, somewhere in the audit and legal process, the fraudulent credit provider will have to hand over its client list, which is how you could end up on the government’s radar.
All the signs say improper ERTC claims are high risk, and we would be remiss if we did not fully inform you about that exposure.
At our core, minimizing your taxes and helping you save money is what we do. The ERTC is an incredibly valuable way to achieve both those goals and help dentists with the strain caused by the COVID-19 pandemic. Certainly, we recognize and appreciate the strain related to the cost increases of supplies and payroll for dentists, however that is not the deciding factor for credit eligibility. If you would like to speak with a healthcare Employee Retention Tax Credit expert, please reach out to your local Blue & Co. Advisor or a member of our Dental Tax Group listed below. We would be happy to discuss the particulars of your scenario.
Jill Moore, CPA, Tax Senior Manager
Tabitha Tolliver, CPA, MAcc, Tax Director
Interested in more Blue & Co. Employee Retention Tax Credit resources? Check out these articles:
On-Demand Webinar: Understanding the Employee Retention Credit (ERC): What You Need To Know, Published on February 4, 2021
Employee Retention Credit Relief and Impact on Taxpayers Continues: Published on August 13, 2021
Employer Retention Credit (ERC) Ends Early – But Opportunities Remain: Updated on December 14, 2021