Even after all this time, we still face much misinformation about ERC for small businesses. Hardly a day goes by without a text message, email or LinkedIn invitation to reconsider my ERC options. Many are tempted by verbal assurances that seem too good to be true. They are, in fact, too good to be true.

First and foremost – a point that apparently many small business taxpayers missed – is that the credit it is based on and limited by the amount of business’ reported wages in prior wage tax filings. Wages of owners, owner’s relatives, and some part time worker wages do not count toward this purpose.

Then, there must be a qualifying negative business condition. This article by Steve Nelson CPA is the best I’ve seen to explain those conditions.

I expect that a significant source of future business for me will be handling audits and tax penalties for improperly claimed or miscalculated ERCs. The IRS is ramping up warnings on this topic and recently added ERC scams to its “Dirty Dozen” 2023 List of tax cheat targets. It is fairly easy for the IRS to identify businesses that were not eligible, so we expect many audits and collection actions ahead that will be costly for small businesses.

When a business does not have the cash to immediately pay back the improper credit plus the tax penalties, then additional planning and precautions are necessary. That’s when a service like ours becomes most valuable.