Guirguis & Gibbs, Inc. - Santa Clarita CPA

Exploring The Employee Retention Credit: Understanding Lessons In Advertising, Taxation And Inflation

Posted by: Carl Goldman in KHTS Featured October 10, 2023 - 8:36 am 0 777 Views

Author: Mark Guirguis, CPA, CMA, Registered Representative | Vice President, Guirguis & Gibbs Inc.

The CARES Act of 2021, hailed as a financial lifeline for struggling small business owners grappling with cash flow issues amid the COVID-19 pandemic, presented a seemingly attractive opportunity.

The Federal Government pledged $55 billion dollars in refundable credits to businesses that retained employees and paid qualified wages from March 12, 2020, to January 1, 2022. This Employee Retention Credit (ERC) became a focal point for companies specializing in assisting businesses, with a narrow focus on the tantalizing prospect of a maximum credit of $26,000 per retained employee.

Under the guise of providing assistance, the CARES Act employed deceptive advertising tactics. The $55 billion dollars, disguised as refundable credits, appeared as a helping hand to struggling businesses. However, the devil lurked in the details—the assistance was not in the form of stimulus or Payroll Protection Program loans but in refundable credits. This credit, while potentially offering a federal tax refund larger than the taxes paid, had its pitfalls. The credit amount was capped at $26,000 per employee, leading to businesses reporting higher net income and, consequently, paying taxes.

Related Article: Embarking On A Financial Journey: The New Client Experience With Guirguis & Gibbs, Inc.

Companies capitalizing on ERC promotion attracted businesses with promises of financial relief, yet the reality unfolded as businesses navigated a lengthy application process, revising quarterly tax returns, and facing an 8-12 month wait for refunds. The contingent fee for service, deductible only in the year paid, added to the tax implications. For some businesses, this extended timeline could determine their survival.

The taxation implications of ERC were paradoxical. While the government appeared to extend an olive branch with refundable credits, it simultaneously introduced tax obligations for businesses seeking financial relief. Refundable credits allowed the government to reduce payroll expenses, prompting businesses to revise numerous tax returns, with contingent fees only deductible in the year paid. Potential tax liabilities, coupled with looming IRS audits, created further complications for businesses.

The inflation impact on ERC was an additional concern. The $55 billion dollars allocated for ERC was not from pre-existing funds but newly printed money, contributing to the increasing money supply and inflation. The ERC, designed to address payroll expenses in 2020 and 2021, failed to account for the erosion of purchasing power due to inflation. The influx of $55 billion dollars into an economy experiencing a 40-year high in inflation further exacerbated the problem, questioning the true value of the ERC against the framework of diminishing purchasing power.

In essence, what seemed like a financial lifeline for businesses struggling amid the pandemic under the CARES Act had hidden complexities, from deceptive advertising to tax implications and inflationary consequences. The ERC, while offering relief on the surface, revealed a more intricate and challenging landscape for businesses navigating the path to financial recovery.

If you applied for the ERC and are concerned about the potential impacts to your business or yourself, don’t hesitate to call and make an appointment with us.

Guirguis & Gibbs Inc. is located at 27819 Smyth Drive Floor 2. Valencia, CA 91355. Give us a call at (661) 209-3287.

*Mark Guirguis is a Registered Representative of Cetera Financial Specialists LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult your tax and/or legal advisor. Neither Cetera Financial Specialists LLC nor any of its affiliates offer tax or legal services.