In this episode, Tom Wadelton, our host and Summit CPA Group's virtual CFO along with Dave Danic, our Director of Tax; sit down with Randy Crabtree, co-founder and partner of Tri-Merit Specialty Tax Professionals to talk about Employee Retention Credit (ERC).As a specialist in this area, Randy shares the nitty gritty of this credit and how your business can qualify.
"It's not everybody qualifies and I'll say that a hundred times today. Maybe not a hundred, because I hear people being promised, these credits that don't exist. Now, that being said, there's plenty of taxpayers that qualify for this that have not taken advantage of it yet" - Randy Crabtree
The finer details of this episode :
Episode resources
Tom Wadelton: Welcome to The Cleared Diagnostics Tax Podcast. I am Tom Wadelton. I'm one of the Virtual CFOs here at Summit CPA Group. I'm joined by Dave Danic, who is our Tax Director at Summit CPA Group. And then also Randy Crabtree. Randy works at Tri-Merit Specialty Tax Services. So to our speakers welcome today. So Dave, what's our topic today?
Dave Danic: Today is the employee retention tax credit. This has been a very popular credit since the pandemic has started. And it's been a great opportunity for our clients to get some pretty massive tax benefits. It’s one that can be easily confused. So, at Summit CPA Group, with our capacity issues with the growth that we've had, we've decided to bring in specialists such as Randy's firm and other firms to help us navigate this so we can quickly get these credits turned around. Randy, thanks again for all you do. If you could please introduce yourself really quick and then let's just jump right into it.
Randy Crabtree: Tom, Dave, thanks for having me. I really appreciate this. I can talk ERC all day, so you basically have to cut me off at some point. Now just a little background on me. I am a CPA. I came out of public accounting 15 years ago and started Tri-Merit. We support CPAs. Typically our business comes from CPAs. We support CPAs like you guys, with bringing them specialty tax areas. Traditionally, we started as an R and D tax grip firm. We now have six services, employee retention, credit being a very significant one in the last year.
Dave Danic: Very good. Just a quick story. When, when I first saw these credits come through, we had a client and we worked through it and their credit was like $130,000. For not that huge of a company. And I'm like, is this for real? They were like, is this for real?
Randy Crabtree: I mentioned the R and D tax credit. That was the same thing we would get 15 years ago. Is this for real? I mean, this can't be true. We're not getting this bigger refund and ERC has been the same way and so what you just mentioned $130,000, you can have five employees. And if you qualified for the entire period of the credit, that's what the number would be as $130,000. And it adds up quickly, but not everybody qualifies. So it adds up quickly from if you do qualify. From a standpoint 2020 was a nice credit. It blows the 2021 credit out of the water and that's how it can grow so fast. It's s a 70% credit of the first $10,000 of wages eligible wages per employee per quarter. So we get to look at this every quarter in 2021, we're in 2020, it was a 50% credit of the first $10,000 of eligible wages. For the year and the year was March 13th, or as soon as you qualified until the end of the year. And so, yeah it really has ramped up the potential dollars there.
Dave: So, do I get the credit just by nature of having an employee? How do I even sign up for this?
Randy Crabtree: Not everybody qualifies and I'll say that a hundred times today. Maybe not a hundred, because I hear people being promised these credits that don't exist. Now, that being said, there's plenty of taxpayers that qualify for this that have not taken advantage of it yet. To take advantage of it, to qualify, to be eligible, to receive these refunds. And that's what it is. It's a refund check to be able to qualify for that. The qualification activities changed from 2020 to 2021. There's a Safe Harbor in each year. And really in each quarter of each year, there's a safe Harbor rule that says, if I meet this drop in revenue, I automatically qualify. No questions asked if I meet the drop in revenue. And so for the year 2020, if a company has a 50%, 5% drop in revenue in a quarter, when I compare that same quarter in 2019, it's a Safe Harbor. I qualify let's start quantifying the credit in the year 2020. One, everything got better. You know, we already said 50% went to 70%, went from an annual to a quarterly. Now every quarter we get to look at this. So it's 70% of the first $10,000 in wages. I'm sorry backtrack qualification. That's the part where I can go everywhere in that ERC and I will cause my mind's a hundred miles an hour to qualify. In the year 2021 you only have to show a 20% drop in revenue in any quarter and again, compared to 2019. So we're comparing to pre pandemic year. So, that's how you qualify. That's the Safe Harbor. And if I can go on for a few more minutes, let me tell you the secondary way to qualify, because this is where there's some confusion. So, if I don't meet the Safe Harbor drop in revenue, I can still qualify. If I can show that my business was affected by some government mandate, some government order, some government restrictions put in place due to COVID. It can't just be, you know, it has to be due to COVID. If I can show that there's something in place that has affected my business, either from my ability to conduct my business in general, my ability to have group meetings, my ability to travel, maybe even my ability to get my supplies. Supply chain has been affected, which is tougher one. And we can go into that if you want. But if I can show that my business has been affected by this government mandate I can qualify for whatever term I'm affected by.
Dave Danic: Can you give an example of that?
Randy Crabtree: The perfect example is the restaurant business, theater, business bar, business, gyms, they were under a mandate that for a long time. The country, most of the country, nobody come inside. So they can say a mandate has affected me, you know, maybe I can do something different, but I am restricted from doing business the way I was doing it before because nobody can come in. Yes, you could still do pick up. You could still do delivery. You could still do drive through. But nobody could come inside. So, the IRS says you're affected. If that indoor dining was more than 10% of your overall 2019 revenue. So, we have to show that there's an effect to it, even then when the restaurant was okay, you can open now, but you're restricted to 50% capacity, let's say, okay, they're still under a mandate. They're still affected. Let's say they can open that back up to a hundred customers but a six feet requirement of spacing in between tables. And if that reduces their capacity they're still under a mandate. So that's an easy one. It gets hurt, or when you're looking at other industries that gives you an idea of a mandate that has affected a business.
Dave Danic: Sure. That's interesting. Back to your percentages, like a 20% revenue drop, like in a given quarter for some companies. That's a big drop, but it also might just be a timing issue. I had some clients that delayed some billings that got pushed into a further quarter. Does that timing issue still allow me to still claim this credit?
Randy Crabtree: We've had businesses that I think have been affected still, they had a great 2019, they had a huge project. And then in 2020, they just don't have those same projects. So yeah, no, to answer your question. It's the drop in revenue. We do not have a requirement to say we need to equate that to COVID.
Tom Wadelton: That's great. Then just to complete kind of the basics, Randy, process-wise lots of the clients are like, okay. My understanding is amended 9 41 is filed, claiming the credit. If it's a past period, and then you're getting the credit back as a direct check payment from.
Randy Crabtree: Yup. Yeah, it is and at this point we are past the qualified period. So everything, if we did something now is amended, you know, the credit ended for most businesses at the end of the third quarter of 2021. Some startup businesses can take the fourth quarter as well. And, you know, I can define what that is at some point if we want, but right now we're amending the 9 41s. Unfortunately we're sending them paper files because that's the way the IRS wants it all into one location. And unfortunately it's a very long processing time on the IRS. At this point it's been, you know, we've been probably averaging nine months for refunds and we're hearing rumblings that that's going to get extended longer, potentially as high as 16 months. Probably partly because of tax season.
Dave Danic: Yeah, that's good to know for our listeners, I think is that it's easy, it's fun for us practitioners to talk about how much you can get back in this tax credit, but there's still that secondary angle of saying do you think the actual money is out of our control or out of your practitioner's control or your CPA's control? Really like the backup at the IRS is real and it's pervasive across the IRS on income tax, payroll, tax credits. So, it will come, you just have to temper expectations, thinking you're going to be able to go buy your Corvette two weeks out.
Randy Crabtree: Nope. That's not the intent of the credit, but oh yes. I know what you're saying, but you could get $130,000 and buy a pretty nice Corvette. So, yeah, that would be a nice Corvette for sure.
Tom Wadelton: So when you mentioned, you know Dave, part of the reason we have gone out is because of some of the complicating factors. Can you talk about that? I think of things like don't overlap with PPP and there's some family relationship to the business things you have to consider. So in case people are looking and thinking, this sounds great. It sounds like a pretty simple application to put in.
Randy Crabtree: Originally, when the ERC was defined, if you took a PPP, you could not get the employee retention credit. So that's why that whole interaction was defined early. Nine months after a year it was defined. They changed that rule and allowed you to take the ERC. If you qualified, even if you took a PPP. So we've got that interaction. If there's some interactions with FCRA and these other Corona virus employment credits, if some people have been out sick there's a work opportunity. There is even potentially the idle loans could play. Now there's not a big effect, but it's spelled out that way. Yes, you have to make sure you're not doing this. There are certain benefits, like the restaurant revitalization grants where for a certain period of time, you don't have to worry about double-dipping for another period of time. You can't double dip. And then there's some really interesting. I'm a tech geek, I guess, but there's some really exciting, interesting stuff that came out recently on the interplay between the R and D tax credit and the employee retention credit. And we always knew there was an interplay there where we had to segregate out of the dollars. The IRS just clarified the instructions for form 67 65, which is the R and D tax credit form. That interplay is handled differently. The first 6 months of 21 compared to the second 6 months of 21, which is really confusing. And so, you know, we did a webinar on this recently, but just that interplay makes no sense. It's the way they wrote things, but you have to analyze all of these things. So that interplay with other credits and incentives maybe even some state grants are out there and you just have to make sure you're not double-dipping on those things.
Dave Danic: Wow. Okay. So what I heard there is that you probably need people smarter than us who can dive into the details. I was following Twitter and people were talking about ut.
Randy Crabtree: It was an interesting thing to follow because everybody wanted it immediately, but it was really ever evolving and still is. Tom touched on this briefly before when he asked me a question if I'm an owner of a business can I be using the credit and the answers yes or no, just depends on your ownership percentage. But then if I have any relatives that work for me can they be using the credit? And the answer is yes or no, depending on your ownership percentage, or if you are deemed to own the business through some relationships. So, the whole thing was exciting for me, following this stuff. I probably educated 30,000 CPAs last year on the employee retention credit. I was just constantly reading and finding out. It was exciting. Again makes me geeky, I guess, but it was exciting.
Dave Danic: Yeah, if you're a CPA listening, you've got to be checking in with your clients to make sure that they're not missing this opportunity.
Tom Wadelton: Yeah. I've found with my clients everyone had heard of the PPP loan. I mean, it was front page of newspapers and people you wouldn't expect had heard about this and they were excited and they were skeptical. Dave, to your part with the complications, us going outside it was very valuable. I also didn't get any pushback from clients when I said hey, this isn't our specialty. There's going to be a fee. It's about this much of what you have in the ERC and what I especially want to avoid is if we try to do it and let's use the $130,000. If they came back later and said hey, you were wrong. It was really only a $100,000. I don't want the client a year and a half from now writing a check for $30,000, right? Yes, $100,000 was still worth it but that's a miserable experience for everyone involved when it's all gone out of their account. And now you're like oh, sorry, you owe some back because we made a small mistake. I'd rather use an expert to do it.
Randy Crabtree: Yeah, I am very fortunate that the last year all I concentrated on was this I'm also spoiled because I can choose to do that, but it was that's all I concentrated on. So, yeah it's definitely an interesting area.
Dave Danic: Very good. So, we're wrapping up. I know how we could talk about ERC all day but I don't think our listeners want to hear about it. So Randy, what are some steps? Do you think that a CPA should take working with their clients? What do you think they next step should be?
Randy Crabtree: That's good, because what I've said is that every taxpayer needs to look at this because every situation is unique. Now, not every taxpayer is going to qualify. And you guys know every single taxpayer in the country is being marketed ERC non-stop right now, because it is such a valuable asset. But unfortunately, this is my opinion there are a lot of companies who are being promised credits that don't exist. So analyze everything you are looking at. Have somebody that you have confidence in or that your CFO has confidence in, or your CPA has confidence in to go and do the analysis of this to see if you really qualify. I actually have a letter out that I give to anybody that wants to give it to their clients. It says here's how you qualify. Here's the values. If you want to talk and evaluate yourself personally here's a phone number to call and they can reach out to me or anybody in our company, they can reach out. However, I just think it's important as the advisor, to be the one to bring it to the client because somebody is going to email the client about it. And let's not take the chance on who that's going to be. So that would be my first step. See if your client really do qualify.
Dave Danic: Very good. Randy, how do people get in touch with you?
Randy Crabtree: Our company as Tom said at the beginning of Tri-Merit, that’s tri-mert.com. There’s an about us or contact us where you can find my information. I'm on LinkedIn. I do a lot of webinars, and I get to talk to guys which is fun. It’s a fun industry. I love, in fact, I was on two other podcasts this morning, too. I interviewed other people. It’s a fun industry to talk about the tax and accounting and the things.
Dave Danic: That's what we keep telling ourselves, it's a fun industry.
Tom Wadelton: Well, thank you both. This has been really valuable. I thought I knew a lot about ERC and I learned quite a few things today, but I think for anyone thinking this might be good for their clients, hopefully this is was educational. And then they also have expert resources. They can reach out when they say, okay, I really want to do this and want to move forward.
Dave Danic: Very good. Well thanks Tom and Randy.