The CARES Act Employee Retention Tax Credit: Challenges and Opportunities

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The CARES Act ERTC is complex, making it a challenge for companies to determine their overall eligibility.

As John F. Kennedy famously observed, the Chinese word "crisis" is composed of two characters, one representing danger and the other, opportunity. When it comes to the CARES Act Employee Retention Tax Credit (ERTC), the opportunities for access to critical funds are counter-balanced by the complexities, challenges, and potential compliance risks.

In a follow-up to our blog about the CARES Act focused on Employee Retention Tax Credit opportunities for qualified essential and non-essential businesses, we spoke to the ADP tax credits team about the risks, complexities, and challenges related to calculating and filing for the ERTC.

What has made the CARES Act ERTC unique in terms of its scope, timing, and complexity?

Tax Credit Team: There are multiple layers to the complexity of the CARES Act ERTC, making it a challenge for companies to determine their overall eligibility before even considering the employees, hours, and wages that are required to calculate the credit for which they may be eligible.

For example, the definition of "partial suspension of operations" under the CARES Act has been one of the most challenging ambiguities to sort through. The statute states that eligibility begins when governmental orders are in force, but it does not define when eligibility ends. This has required a lot of professional judgment on our part, in collaboration with clients, to determine timelines. Many of our clients have multiple locations, and state governmental orders have been anything but consistent. To make matters more complex, some orders were lifted and then reinstated, creating scenarios where some weeks could be eligible and others not. Also, in some cases, city mayor mandates were contradictory to their state government mandates.

Additionally, in some cases, determining company eligibility has been challenging because there has been no qualifying metric for gross receipts. As a result, companies are challenged to determine their eligibility for the credit with a high degree of confidence.

Aside from a clear and definitive metric, the intricacies of gathering and parsing through payroll data, combined with multiple layers of company and wage qualification criteria, present a real challenge when it comes to calculating the credit once you determine eligibility.

Because the required data flows through a variety of stakeholders, including HR, payroll, finance, and tax departments, a sharing of data, knowledge, and process is all critical to ensuring that the right calculations are made without negatively impacting the employer's broader tax strategy.

So, there is a lot of work and some uncertainty involved. Employers need to clearly identify potential pathways towards employer eligibility prior to capturing employee level credit.

What are some of the ambiguities within the legislation that has made it a challenge for companies to determine their eligibility for the ERTC at a company level?

T.C. Team: For one thing, the definition of an eligible employer under the CARES Act has been a moving target. Different orders have different restrictions on different companies and even different segments within companies. Take for example a gas station that includes a restaurant – the gas station could remain open as an essential business, but the restaurant had to remain closed.

Until the IRS issued a set of FAQs in May 2020, it was difficult to determine whether an employer was eligible—and even more challenging if the company was deemed an essential business.

At the same time, unlike other tax credits that depend on payroll data to determine eligibility, the ERTC requires employers to dig a level deeper to determine not just when employees were paid but whether they were actively working or on some form of paid leave. Healthcare costs and paid time off factor into the determination as well. As guidance on these questions evolved, legislation evolved too, making a complex activity even more challenging.

How do time pressures/urgency compound the challenges of determining eligibility, calculating, and filing for the ERTC?

T.C. Team: Companies are already facing challenges of the pandemic but also have faced the challenges and pressures in large part due to ambiguity in determining their eligibility and delays in receiving up-to-date IRS Forms, so they can file and claim the credit. That urgency can create a challenging operating environment.

We have experienced that filing for the ERTC is vital for many employers to remain afloat. Executives are trying to leverage ERTC dollars to retain employees and keep operations afloat. The biggest challenge is filing efficiently and accurately, so they can get those funds quickly.

I think many initially assumed that the process would be simple and quick, but it is never as simple or as quick as companies would like it to be. Employers should conduct a thorough analysis of their fact pattern prior to calculating and filling for the ERTC. This may include identification of mandated governmental full or partial shutdown orders and gross receipt testing.

How does the consultation process work if a company wants assistance with their ERTC eligibility/calculation?

T.C. Team: A big part of the process involves data gathering and fact-finding to determine overall eligibility. The company should expect data collection strategy calls which help identify where there may be a large population of impacted employees (in order to determine the best way to collect impact data).

Learn more and stay informed

Visit the ADP Employee Retention Tax Credit (ERTC) Rapid Response Center and the ADP Cares Act Tax Credit FAQ Resource Page

ADP continues to monitor and communicate legislative updates.

Get customizable email templates and in-depth information on resources to support employees during the COVID-19 crisis in the COVID-19 Employee Communications Toolkit.