2023 Marcum Year-End Tax Guide

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THE MARCUM YEAR-END TAX GUIDE 2023

While the credit is generally beneficial, there is a partial offsetting cost. The income tax deduction for salaries in 2020 or 2021, which are used for the credit, must be reduced by the amount of the credit. For those claiming the credit after filing the initial income tax return for the affected tax year, this rule requires an amendment of that income tax return to adjust the deduction. The Service’s position is that the deduction adjustment cannot be made on the return for the year the ERTC payment is received. The test measuring the decline in gross receipts is mathematical, and an employer can generally be more assured of meeting the ERTC requirements under this test. However, the partial or full suspension test is more subjective, and there isn’t specific statutory guidance. The availability of the credit has seen the creation of what the Service calls “ERTC mills.” This refers to promoters who aggressively market the applicability of the ERTC to employers, sometimes on general grounds, including the overall economic impact of the pandemic and supply chain disruptions. Eventually, the IRS called the mass marketing of the ERTC a “tax scam.” guidelines carefully before making ERTC claims. They highlighted that employers making improper claims may be required to repay the refund, along with penalties and interest. This can include a 20% accuracy-related In March, the Service warned employers to review the ERTC

penalty, a 75% civil fraud penalty, and potential criminal liability. After payment of the promoter’s contingent fee, the employer may be worse off by making the claim. In July, the IRS issued a legal memorandum discussing “supply chain disruption” as a basis for an employer claiming it had experienced a partial shutdown. The Service discussed several scenarios, noting that to support a partial shutdown, the employer must be able to demonstrate that: 1. The supply disruption was directly related to a government order and not due to factors like worldwide economic issues or port restrictions. 2. The disruption did not continue past the duration of identified government orders. 3. The employer did not have sufficient inventory to permit business continuation. 4. There were no alternate supplies (even at a higher cost). 5. Businesses could not continue their operations, even by offering fewer products. In September, the Service announced a pause in processing new ERTC claims for the balance of 2023. This action does not impact previously submitted claims, as they will continue to be processed. The suggestion is that the IRS is looking more skeptically at new claims as they may be the result of more aggressive positions on qualification, placing pressure on employers to

make more questionable claims. The release also indicates that the Service will be developing a settlement program for those who received improper refunds to avoid the imposition of penalties and other compliance action. It should be noted that the pause in processing new claims does not prevent the submission of proper ERTC refund claims for 2020 or 2021. Employers have until April 15, 2024, to file ERTC claims for quarters in 2020 and April 15, 2025, to file claims for quarters in 2021. However, one should review the basis of the claim carefully. For those who may have filed a questionable refund ERTC claim, the Service announced the details of a special withdrawal procedure to notify the IRS that the claim should be withdrawn. It applies to employers whose refund request has not yet been processed by the Service and payment has not been received. The release also provides that the procedure can apply to those who have received a refund check but have yet to cash it. More details can be found on the IRS website IRS.gov/withdrawmyerc. In other ERTC-related guidance: 1. The IRS concluded that the ERTC does not apply to a federal credit union for quarters in 2020 due to the ban on the credit for the United States government, a state, a political subdivision, or an agency or instrumentality thereof. Based on Rev Rul 57-128, the Service says that a federal credit