End of the Employee Retention Credit: Insights & IRS Repayment Strategies for Painting Biz Owners

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This is Daniel, the founder of Bookkeeping for Painters, and this is Richard, tax director with Bookkeeping for Painters. And this episode's a little special because Daniel and I are actually together. We're here in Chattanooga, Tennessee for the APPC conference. Uh, looking forward to it, but we had a little bit of, uh, breaking news over this last week about the ERC, and we thought it was important to go ahead and get this out as quickly as possible because it's probably going to affect some of our listeners. The big news out of ERC is that it's probably going to be ending early. The bill in Congress has not yet been signed as of today, but there is a strong indication that ERC is going to come to an end on January 31st, 2024. So if you have not applied for ERC, your deadline to do so is probably going to be passed by the time you listen to this.

Yeah, and a lot— I think a lot of folks might have— if you're not familiar with it already, you've probably seen it in some way, especially if you're business owner, which you probably are if you're listening to this, getting, you know, solicited to apply for the Employee Retention Credit. And we actually did a prior podcast on this to cover what it is and how you might apply. A lot of folks have been going after this credit, and a lot of times they don't actually qualify. And so we want to make sure that, you know, one, that if you have applied or you're thinking about applying, that you actually know what the requirements are. And then 2, if you applied and you actually realized retrospectively like, oh, I actually probably didn't actually qualify for this, there's actually a voluntary repayment program that the IRS has as well that you can actually get amnesty basically for giving back the money um, at least a portion of the money, and, you know, not having to worry about getting caught in an audit.

Yeah, it's a really pretty good program. Uh, unfortunately, is there is a time frame on it, and what we're going to definitely talk about that more. Uh, so if, if you've ever, you know, thought, well, should I have gotten as much ERC as I did? Should I have gotten it all? We're just going to kind of COVID the basics as to how you can know for sure And then, like Daniel mentioned, what you can do if you think that you need to pay some of that back. You know, I just want to say, like, the marketing on this has been absolutely aggressive. It is one of the most aggressive marketing campaigns I have seen. I mean, you know, Daniel and I are accountants, and we are getting letters in the mail. I have gotten text messages on my phone from ERC firms saying that I qualify for $26,000 per employee. I'm like, I don't even have employees. I don't, I don't really even have a business. So, you know, the IRS understands that this has just blown up and that there are certain, you know, less than reputable firms out there trying to take advantage of this government money and giving misinformation. So this is really about trying to clear things up and helping folks who want to do the right thing, who may have gotten caught up in something, uh, that, that really isn't their fault. So to start with, you know, I thought we'd hit like 5 kind of misunderstandings about ERC, uh, and, and try and clear the air a little bit. So the first one I have is, you know, not every business qualifies for ERC. Regardless of what you've gotten in the mail or heard on your voicemail, you know, there are criteria for whether you can, you can get this money. The easiest criteria, the most straightforward one, is a 50% reduction in your gross revenue during 2020 or a 20% reduction in your gross revenue for 2021. Now, to kind of clarify, it's not the entire year of 2020 or 2021, but it's done, uh, on a per-quarter basis. So second quarter 2020, third quarter 2020, fourth quarter— if you have a 50% reduction in gross revenue during one of those quarters, you probably qualify. For 2021, it's Q1, Q2, Q3. If you have a 20% reduction during one of those quarters one or more, then you probably qualify.

And the more complicated one is the government shutdown. That's the other— if so, if you don't qualify for the reduction in your gross revenue, you can qualify under the government shutdown, you know, having a government shutdown order that impacted a portion or your business generally, or a significant portion of your business. And so this one is the the one that has been kind of abused, I think, most because it's a little gray, but it's not as gray as what some folks think it is. So basically, you need a government order in your hand from your state or municipality that shows that your business was impacted, shut down during a period in 2020, 2021. Due to, to COVID. So you need to actually have a government order on hand. And, you know, it could be impacted your supplier, but you can't have had a material that would have replaced. So for example, like, let's say that Sherwin-Williams was shut down, and so you didn't have access to Sherwin-Williams paints, but you had a, you know, you could go to Home Depot and get Behr. So that that's comparable. So you wouldn't be able to, uh, you know, get the ERC because of that, because you had a replacement, you know, that was comparable. So basically, the folks that have legitimately, um, applied for the ERC, they had a government order, like states like Pennsylvania, California, the folks that had those actual shutdowns. And it, you know, there's usually a a state letter where the governor is saying, hey, we're shutting down these types of businesses, and they'll list them out. And basically you identify, okay, painting businesses were not allowed to do business, either interior or exterior. And so that if you had, you know, a significant part of your business shut down, you, for that period of time, you'll be able to qualify for the ERC.

Yeah, and I also want to point out that this reduction in revenue and government order, this is an either-or thing. So if you have the reduction in revenue but you don't have the government order, you're okay. Same, same way if you have the government order but maybe you didn't have the reduction in revenue, that's okay too. You don't have to have both, you just have to have one. The second kind of misunderstanding is, uh, you know, you, you probably can't claim the full $26,000 per employee. And we have seen some firms do this where they say you've got X amount of employees, multiply that by $26,000, that's the kind of money you're going to get. And it doesn't, it doesn't quite work that way. This is where those affected periods come into play. You know, there's 6 quarters that may have qualified for ERC that we talked about, you know, the last 3 quarters of 2020 and the first 3 of 2021. Each quarter has to be affected, and the amount that you can get per employee is based on the quarter. So 2020, it is 50% of the first $10,000 you paid your employee. So if you pay him $10,000, you can get $5,000 ERC if you have an affected period. In 2021, that number jumps to 70% of the first $10,000. So now you're looking at $7,000 per employee. So if you can prove that you were affected for all 6 quarters, you've got $5,000, $5,000, $5,000, then $7,000, $7,000, $7,000. That's $26,000. That's the max, but you have to show that you qualified for each period. and you have to have paid that employee at least $10,000 or more during those affected quarters to get that max. You know, the, the third point is that not every COVID impact qualifies a business, and we, we kind of touched on that earlier. Maybe your business was partially impacted by COVID, but like Daniel mentioned, you know, you were able to find a comparable material someplace else. One that comes up a lot is, uh, mask mandates. Uh, yes, masks are annoying, no doubt, and it is hard to paint wearing a mask. However, having to wear a mask is not considered to be a restriction on your business. So if you could do your work while wearing a mask, they're going to say that that does not qualify you for ERC. Another one that may not apply so much for painting business owners, but if you could do work virtually, maybe you had some office staff or some sales staff and they were able to, you know, use Zoom to do their work from home, that would not be an impact on your business. You have to be able to show that, that your business was restricted. And that you didn't have an alternative way of doing business. A fourth point is that not every government mandate is a shutdown order. So, you know, during COVID I think every state issued at least some kind of mandates or some kind of guidance. And there is a big difference between we recommend people stay home We recommend businesses, you know, work from home, and we are issuing a government order that requires people to stay home. One is, one is a mandate and one is kind of like a suggestion, and unfortunately suggestions or, you know, guidance does not count towards that shutdown order. One that we've seen a lot is You know, there may have been a shutdown order or stay-at-home order in your area, but there's usually businesses that are exempted. And sometimes construction services, including painting and refinishing services, were considered to be essential businesses. And so they were actually exempted from the overall shutdown order. If that's the case, then you don't have a government order that shut down your business.

Yeah, and the bottom line here is that you just got to go back and look at the government order. Like, there's some websites that have kept like a database of all the states and the different orders that went out, and so you can basically search your state and then find the order. They look through the orders to see if your business was actually mandated not to be open. And that's the real— to get to the ground truth, that's what you'll need to do.

Yeah, I would just, for your own record keeping and own peace of mind, if you are claiming ERC based on a government shutdown order, try to have a copy of that order or at least a reference that you can point back to, and that will really strengthen your position there. The fifth point has to do with the PPP loan forgiveness that was going on during COVID So, you know, you can get a PPP loan forgiven and ERC. They're, they're not, you know, mutually exclusive. But what you can't do is you can't use wages for PPP loan forgiveness and then use the same wages towards ERC. The IRS hates double dipping, so they say if we gave you money for wages on PPP, You can't come back and get the same money later on. Now, the good news is, is that PPP loan forgiveness is not dependent solely on wages. There's a lot that can qualify you for PPP forgiveness. So go back to your documents, your loan forgiveness documents, and see how that calculation was figured. You know, what portion of that loan forgiveness was based on wages paid out? and that will know, that will help you understand if you're trying to double dip, if you have to, you know, not use some of those wages towards your ERC credit. So those are the big 5 that we see, and unfortunately these are the types of things that some, you know, ERC firms will not tell you about. The reputable ones are going to be looking at your books, they're going to be asking the questions, to make sure that you only apply for what you qualify for. So what do you do if you think that you may have received money that you shouldn't have? Maybe, you know, part of your money, uh, should— you shouldn't have received, or even all of it. Well, this is where the, uh, the amnesty comes in. Um, IRS Announcement 2024-3 is the IRS Voluntary Repayment Program. And this is a program that allows you to pay back 80% of the ERC money you received. If you received interest from, from the IRS on that money, you don't have to pay that back either. So you're able to keep 20% of the money plus the interest. And if you voluntarily sign up for it and agree to pay back the 80%, the IRS will not pursue any kind of penalties, interest, they will not audit you. It's kind of a, I don't know if get out of jail free card is the right way to put it, but it's a pretty good program and it is based on the idea that the IRS understands just how aggressive and how, you know, less than honest some of these firms have been and they're trying to give, you know, honest people a way out of this mess. Now, there is a couple caveats. Uh, you do need to sign up for the program, and you need to provide the names and addresses of any firms that may have helped you apply for ERC. Now, this doesn't mean that the IRS is going to be pounding at their door necessarily, but if they see a pattern of some really egregious claims coming from the same place It will help the IRS know where to direct their efforts to try and figure out who's abusing the system. Uh, there is a deadline for this. The deadline is March 22nd, 2024. So that's not a lot of time. Uh, if you feel like, like you want to take advantage of this, uh, my recommendation is, is jump on it as quickly as possible because after March 22nd, 2024, this program will not be available. And that means if you do get audited after that time and the IRS decides that you did not qualify for some of this ERC, then you will be required to pay back 100% of it plus penalties plus interest. So, uh, you know, not, not something that we want to wait around on.

Yeah, so if you're not sure, definitely look into it. If you got a bunch of money from the ERC and you, you don't feel confident in your position definitely look into it or have someone else look into it for you to make sure that you're good to go, because you do have that period of basically amnesty until March 22nd, 2024. So if folks don't, uh, are like, realize that they don't know, they, they shouldn't have taken the ERC, do they just Google IRS Voluntary Repayment Program for ERC?

Um, that's a great question. Uh, I would say talk to your tax professional. I mean, Google, Google's a great additional resource, right? And then there's always talk to your tax professional. It's not, from my understanding, it's not a complicated process. It's basically signing a letter of intent that says, you know, we will pay back the money and we will provide those names and addresses in exchange for the IRS not pursuing any action towards us. Uh, yeah, check out irs.gov, talk to your tax professional. And one more thing I wanted to mention is, you know, a lot of times this money was received and spent. It's probably not sitting in your bank account or under your mattress, you know, ready to go back to the IRS. If that's the case, there are payment programs available. The IRS has said that they will consider installment agreements to get that 80% paid back. So, uh, you know, if, if you're in a situation where you may not have the cash, don't panic. This is still something you're going to want to pursue if you received money that you shouldn't have.

Yeah, and obviously if you, you did have a legit claim to ERC and you feel confident, you don't have to worry about any of this. Uh, you know, if you have a government order in hand and you abide by the rules, you'll be good to go.

Yeah, yeah, we just, you know, we want to make sure everybody dots their i's, crosses their t's, has their paperwork in order, because, you know, normally the IRS has about 3 years if they want to go back and change something on your tax return. With ERC, that has been extended to 5 years, and there's talk about pushing it out to even longer. So this is something that they're going to be examining and auditing for years to come. This is kind of our window if we're not quite sure. So I would say, you know, try to act right away. And if you do have a legitimate claim, then you deserve the money. I'm glad that you got it. Just have that, you know, either that, that bookkeeping that shows that reduction in revenue or that government shutdown order. And understand how your claim was based so that you can defend it in case of an examination.

Yep. Awesome.

Yeah. If you have questions, we have the Facebook group. By all means, drop your questions in there.

Yeah. Go to Grow Your— go to Facebook, type in Grow Your Painting Business and join us and let us know your thoughts, questions, ideas for future episodes. Love to hear from you. Yeah.

Appreciate you listening and we'll see you on the next episode.