Employee Retention Tax Credit Updates & Insights

Michael Blom & Rebecca Sheppard

Susan Barfield (00:07):
Hello everyone, thank you for joining another Casework Stream. Super excited to be joined today by both Mike Blom, and he is partner at the Lake Law Firm. And as many of you probably know, Rebecca Shepherd, she is a tax attorney at Frost Law. When I say you probably know Rebecca, we’ve seen your face on many webinars, especially during the PPP days. You were the go-to all knowing as it relates to PPP. So anyway, we really appreciate you guys joining us today. And also Bill Barfield, who is our Chief Revenue Officer and general counsel at Caseworks. We’re just excited to connect with you today and talk more about updates, insights, tidbits, your wisdom as it relates to the Employee Retention Tax Credit. We’re getting a lot of questions and we thought we would go to the experts to give us just what has transpired over the last few years. I know that there’s been some changes. So from that, Bill, I’ll let you get started. I know we’ve got a lot of questions to ask you guys.

Bill Barfield (01:15):
We do have a lot of questions. And again, thank you so much Michael and Rebecca for joining us. And I guess the first topic I would like to cover just deals with, if you could, describe for us what is the Employee Retention Tax Credit? When you say that, what comes to your mind in terms of trying to explain that?

Rebecca Sheppard (01:39):
That’s either of us?

Susan Barfield (01:40):
Yeah, go ahead Rebecca.

Rebecca Sheppard (01:43):
Sure. So the Employee Tax Credit was part of the original CARES Act with PPP and all of that stuff that Congress was trying to work out to help small business during the pandemic. But originally you couldn’t claim the Employee Retention Credit with PPP. So a lot of people just kind of put it to the side, it was like a $5,000 per employee credit. PPP was 15,000, then $20,000 per employee, it was much more lucrative, it was a better bang for your buck and people just focused on that. Then December 27th, 2020, Congress realized we were very much still in a pandemic. And changed their mind and said, “Okay, you can use both these programs and actually we’re going to make it easier to get the Employee Retention Credit and make it more beneficial to small business.” So what they did is said okay, for 2020 in order to qualify, you needed either a 50% drop in gross revenue quarter over quarter, or a suspension or partial restriction in operations.

(02:40):
For 2021, all you need is a 20% drop in grocery receipts or a suspension or partial restriction of operations in order to qualify, in order to be an eligible employer. And the credit actually increased. So for 2020, it was a 50% credit of up to $10,000 in qualified wage per employee for the whole year. So you’ve got five grand max. For 2021, if you qualify for all of it you get an additional $21,000, which is 70% of up to $10,000 in qualified wage per employee per quarter. It really changed the game in the way that people can use this benefit to help their businesses. I know for me, I’m sure for Mike as well, a lot of my clients had to put their own money into their businesses during this period of time, because revenue was tough and it was a tight time in order to operate. And this is a way that the government’s able to pay you back for doing all of that work to keep your employees employed.

Susan Barfield (03:44):
And Mike, I heard Rebecca say qualification. So will you elaborate a little bit on who qualifies for the ERTC? And also, has this evolved over the last couple of years? I know it sounded, Rebecca, like there’s been some changes. So potentially is there companies that were not eligible in the past that potentially are eligible today?

Michael Blom (04:09):
Sure. So really any US business can qualify for these credits. Even 501(3)(c) businesses, nonprofits. It’s really at least one full-time W2 employee, full-time is over 30 hours per week. They have to be a W2 employee. That does not include the owner or any family members at the business, and that does not include 1099 workers or part-time as well in the calculation. So as long as you have at least one, some firms have different criteria in what they’re going to work on, but at least one you can claim that credit. And in terms of-

Rebecca Sheppard (04:46):
Sorry, I don’t mean to interrupt, I’m so sorry. But if you have part-time employees, say you have 50 part-time employees, it may still be beneficial to claim it. Because it’s just of whether or not that $10,000 qualified wage is hit, or up to 10,000. So you could have 50 people make 5,000 in 2020 and you could each get 2,500 per part-time employee as well.

Michael Blom (05:12):
That’s right. Yeah.

Susan Barfield (05:15):
Awesome.

Bill Barfield (05:15):
Makes sense. Michael, Rebecca, quick question for you. How many companies here in the US do you think are eligible for this type of retention credit?

Rebecca Sheppard (05:26):
I have no idea.

Susan Barfield (05:28):
No idea?

Bill Barfield (05:28):
In general, is this a small population, large population?

Rebecca Sheppard (05:33):
Yeah, it’s a large population very well. And you can tell by I’m sure the amount of robocalls you guys get about this every day, and I know I have colleagues and friends in different industries that are saying they’re getting hammered. Everyone’s telling them like, “You’re eligible for 700,000, 800,000,” all of this, without ever talking to them. Without finding out whether or not their business was restricted, what happened to them. So I would just say be mindful in who you go to and make sure you’re going to somebody who’s, I wouldn’t say necessarily a lawyer, but like a lawyer, CPA, tax professional, somebody that you trust that you think is going to properly determine whether or not you’re eligible. Because I’m sure Mike agrees in that there’s going to be audits on this, and there’s going to be a lot of companies that are improperly claiming credits. And that companies that popped up that are charging you a huge fee to do this work may not be there in two years when you’re audited, and then you’re going to kind of be stuck.

(06:43):
So just be really careful and mindful, if somebody tells you that you’re eligible for the credit, ask them how you’re eligible. Is it restrictions? Is it revenue based? If it’s restrictions, ask them more questions like, “Great, is it because I am an attorney and I’m a litigator and the courts were shut down? Is that the reason? Is it through this period? How am I going to get there?” Because I think there’s going to be a ton of people who think it’s too good to be true and aren’t going to apply for it and aren’t going to try, and then there’s going to be the opposite where there’s going to be tons of people who are just… It’s kind of like the PPP game, so much fraud, and you just want to really be thoughtful about where you go.

Bill Barfield (07:28):
I understand. Michael, I know we typically talk about mass torts. And the ERTC claims are a little different than mass torts, but at the same time, there are similarities. Why are law firms or mass tort law firms pursuing these type of claims? And how are these claims, these ERTC claims, how are they similar to mass torts?

Michael Blom (07:52):
Law firms are pursuing these claims to help business owners recover credits that are due to them, as many business owners have been told by their accountants or payroll companies that they either don’t qualify, or they were never told in the first place that there was such a program. So that’s why law firms are helping them. And in terms of mass tort, everyone has a similar, I guess you could say, injury or damage that if you’re qualified, that you are entitled to those benefits through the IRS. And it’s a very large population of businesses that are eligible. But very different than, of course, a dangerous drug or medical device.

Bill Barfield (08:32):
I understand.

Susan Barfield (08:33):
Yeah, that makes sense. Rebecca, I’m going to touch on something you just mentioned. I guess the question I would have is, do you need to be a law firm to handle these cases and how can businesses protect themselves if a law firm is not required to complete the claims? I guess you mentioned something about an audit. So what is needed to protect you from an audit and what do you need to have on file?

Rebecca Sheppard (08:56):
Absolutely. You don’t need a law firm to file these claims. I am a lawyer, Mike is a lawyer, but there are reputable CPA firms that do this. There are reputable payroll companies that do this. I would just make sure that you understand what you’re saying is eligible. I had a new client come into me the other day a few weeks ago for tax controversy. She’s like, “I owe a million dollars to the IRS.” I was like, “Okay, how did that happen?” She’s like, “Well, I got $3 million of ERC and I claimed it on my tax return.” I was like, “Oh, you claimed it before you got the refund? Well, I would’ve said to do it the other way, but it’s okay. We’re in this situation now. You got a $3 million refund, that’s awesome. Are you sure it’s right? Because now you owe a million dollars to the IRS, are you sure that the claim is right?” She was like, “Well, I’m eligible.” And I was like, “How?” And she couldn’t tell me.

(09:48):
If you’re taking $3 million from the IRS, you have to be sure what you’re doing. And especially, you guys are all lawyers, look at the law. The law says you need to have a government order that restricted your business, have the orders in your file. These orders are actually disappearing from the internet. We’ve had to have law clerks go to the Way Back Machine, which I didn’t think was going to be part of my law practice, but here we are. Because new health commissioners are coming on, new mayors, new whoever, and they’re wiping sites clean and starting over. And so, all these Covid orders that restricted your business legitimately, aren’t there anymore. So you want to try to grab them while you can, put them in your file. That’s really important. There’s a worksheet that goes with the 941s. Keep that in your file, that’s not going to be filed with the IRS, but you need to be able to show exactly how the calculations came about.

(10:40):
Congress said you can use PPP and ERC, but you can’t use the same dollar twice. So what does that mean? You need to be able to show that Mike made, let’s say a hundred thousand dollars, probably made a little more, but let’s say you made a hundred thousand dollars in 2020. You want to show 10,000 of ERC wages, 20,000 of PPP and X for FFCRA. And maybe you had another local bucket of some kind of benefit that you got. Show where the dollars go, so that way you can show if the IRS comes to you in two years like, “What happened?” Be like, “Oh well, I’m sure that these qualified wages are accurate because look, I took 10,000 here and I took 20,000 here and I took 30,000 there.” So it’s going to add up to the right amount. Whereas if you don’t have that work paper, you’re not really sure where the numbers are coming from, and it’s going to be a lot harder for you to defend it in audit.

(11:34):
So I would say definitely show qualified wages where you got the numbers from, and those government orders why you were restricted. And obviously if you do gross receipts, make sure you have your profit and loss statements and bank statements and all that.

Bill Barfield (11:46):
I understand. Michael, quick question. In terms of the business itself, what type of documentation would you suggest that the business have when they’re filing these type of claim forms?

Michael Blom (11:57):
Sure. The main type of documents would include your IRS 941s for 2019, 2020 and 2021. Also, payroll documents by pay period from March, 2020 through September, 2021, usually in an Excel format. Quarterly financials, which are gross receipts from 2019 through 2021. If you took out PPP monies, those application draws, draw one and two. And then also it would be formulating a eligibility or impact statement if the vendor or the law firm is going to be using the governmental shutdown mandate order, how your business was affected in each of those quarters. There’s also other documents that are required, but those are the main list for most businesses.

Bill Barfield (12:49):
Thank you, Michael. Quick question, what is the administrative process like when you’re filing this paperwork? What is the process, can you describe that for me?

Michael Blom (13:02):
Sure. We collect all of the financial documents, review everything, compile and calculate the credits. We also schedule a, typically it’s a 45 minute interview to assess the eligibility of the business owner and business under the governmental mandate test for a partial or full shutdown. An impact statement is then prepared, the claim is then prepared and sent to the client to review and to sign off on, and then it’s submitted to the IRS. The IRS will then send a check to the business, typically within three to 12 months. It’s a varying time period.

Susan Barfield (13:39):
Rebecca, does that sound similar to what your firm is doing? Is there any different administrative process that you guys are doing?

Rebecca Sheppard (13:51):
That’s about it. There’s certain things to keep in mind that make the claims a little hairier. Control groups, like how many companies do you own and what the eligibility is for each one. If you’re using gross receipts, all the companies of one control group is going to come together into an aggregated group, which can play with that eligibility. And so, just make sure that when you’re doing those interviews, or for us we have an organizer, whatever you’re doing, make sure that you’re being clear as far as what the makeup is of your firm, if there’s a majority, like there’s one owner, does that owner own anything else, or 50 50, do they own anything else? How is it structured and how do they do it? Because that’s going to impact the claim. And it could mean if it’s gross receipts and there’s one group, it could mean that it’s a good thing and you’re pulling in other businesses. And if it’s government restrictions, how that interplays, if you’ve combined employees, things can get a little tricky with certain things.

Susan Barfield (14:57):
Yeah, that makes sense. This is for both of you but Rebecca, maybe you can start. How is your firm acquiring these type of cases and how are you determining if it’s a good fit, a case for guys to work on?

Rebecca Sheppard (15:14):
Sure. So lots of different things. I give a lot of talks as you know, that is one thing I do. So we partnered with the National Restaurant Association. We partnered with the Maryland Association of Childcare, because a lot of schools were shut down and daycares were shut down and things like that. So giving talks to them, making sure we’re educating the consumer base there. We get just regular word of mouth from other work we do. As a tax firm, I think it might be a little bit easier because we are in that space. And so all my clients before this were small businesses, bars, restaurants, all these places that had tax problems and would’ve been qualified for the credit. So we were able to help all of them and then work through their networks as well.

Susan Barfield (16:23):
Sure.

Bill Barfield (16:24):
Michael, quick question for you. In terms of your firm, what does the intake process look like for these type of claims, for these clients?

Michael Blom (16:34):
Sure. Once they come in, the lead comes in, we’re different than Rebecca’s firm. We’re not a organic tax firm I would say, we’re primarily in the mass tort space and also PI. So for us to go back on the last question, it’s primarily paid advertising through ads, organic SEO that we have our brand out there. And then also referrals, but not to the extent that Rebecca’s firm has dealing with all of the tax clients. And then to elaborate on your question, I would say we want to help everyone that comes through our door. So once, if it’s either a referral or a lead submission, we do a brief intake to confirm that they’re the business owner, the actual business name is correct, all of their contact information, their number of full-time W2 employees. Do a couple other calculations to make sure that they’re over our firm’s threshold.

(17:36):
And then we send them the retainer agreement, go over that with them, discuss why or why not they may be eligible. And then once they’re signed up, we schedule that 45 minute interview with them. And that’s really the process that we have. It’s more involved for referrals of course, because you want to keep that high relationship with who is referring the case to you. And so you’re on the phone more with them, with the referrer and also with the business owner on the front end, versus a lead gen lead coming through that you’re just speaking to them for the first time.

Rebecca Sheppard (18:16):
We actually have a pretty different process. We have a lead come in and we scope it as a courtesy. We determine whether or not they’re eligible, get all the documentation, see if they’ve claimed it before, look at the 941s, all that kind of stuff up front, and then do the engagement after. Once we know what the credit is and where everyone is and all of that kind of stuff. Just a little different.

Bill Barfield (18:47):
Yeah, I understand. In terms of deadlines, are there deadlines with these claims? First question. Second question would be how do law firms or how do firms in general, how do they take advantage of these type of claims within their practice in terms of an opportunity for the firm?

Rebecca Sheppard (19:08):
Sure. There are deadlines, payroll taxes are weird. Instead of it being like… Normal tax refund statute is three years from the date of filing or the date it is due. For payroll tax returns, they’re deemed filed April 15th of the year after. So for all 2020 claims, the due date is April 15th, 2024, because it would’ve been due, if it was timely filed it was presumed to be due April 15th, 2021. It’s super strange. And then for 2021 it’s going to be April 15th, 2025. So there is time, I’m Not going to say you have to do this next week or you’re going to lose out. But it does take a little while, like Michael said, so the sooner the better to get it out there just to get it moving.

Bill Barfield (20:02):
I understand. In terms of the opportunity for a law firm, what is the opportunity?

Rebecca Sheppard (20:08):
I think getting their own, seeing if they were qualified based on restrictions. Most litigators that had a more than nominal portion of litigation in 2019, I would say would probably be eligible. And then looking for referral partners in ways that they can partner with other law firms to be able to help other businesses that they may have a relationship with.

Susan Barfield (20:38):
Rebecca, we were talking this week and you shared one example, and I’m curious from both of you the answer to this. What are you guys seeing as it relates to pitfalls, problems, challenges that folks should be anticipating? I know you shared one earlier. Any other cases come to mind, Rebecca?

Rebecca Sheppard (21:00):
Yeah, we also do second looks to make sure the people are claiming the right amount. Because like Mike said, CPAs and payroll companies may be a little more conservative, and only looking at gross receipts or something like that and have an outdated view of what’s allowed and what’s not allowed. So we’ll do a second look to see if there’s more claim there. And I’d say at least 30% of the time we’re noticing over claims. We’re noticing that if there’s a government restriction that ended on April 25th, that some payroll companies take it to the end of the quarter even if the government restriction stopped. That people didn’t back up PPP properly, that owner’s wages were calculated. There’s a bunch of different things to be looking out for that maybe a less sophisticated person to prepare it wouldn’t have seen.

(22:03):
I had a perspective client, his refund was $1.5 million. And I was like, “This is amazing, it’s $1.5 million you’re going to get.” And he was like, “Paycheck said they could do this for me for 500 bucks a quarter.” And I was like, “This is a lot of money, you have to be really careful.” Yeah, I’m sure you’re going to find somebody cheaper than me. You’re probably find someone cheaper than Mike. But be mindful in that sometimes you do get what you pay for. And if you’re over-claiming, that may not be worth it. Or under claiming, who knows? You want to make sure that you’re going to somebody who’s going to be doing a proper calculation, who is making a determination with you. We’ve decided together, Michael said that they interview you, everyone is going together and this is our position. We’re signing this tax return because we are on the same page as you, and this is what we’re claiming. Versus somebody who’s washing their hands of it and they’re like, “We’ll do the calculations for you, but that’s the end.”

Susan Barfield (22:59):
Yeah. Anything that you’re seeing, Mike? Any pitfalls?

Michael Blom (23:04):
Yeah, I agree with over-claiming for sure. That can come back that the business is going to have to send back money with an audit later on. With these payroll and accounting firms, they’re not going to cover those audit fees. You’re going to be paying them directly. I’m not sure what Rebecca’s firm does, but we do cover the audit fees for those, even if it’s a desktop audit all the way up through a full audit. So, that’s something to consider. And with over-claiming, that’s a problem because if you work with a payroll or accounting firm, I don’t believe they’re going to send you back whatever you paid them up front. With the law firm on a contingency fee, our firm, we actually do send that back. So if you have to send back a $20,000 or $50,000 after an audit, we reduce our fee and send that back to the client as well.

Susan Barfield (24:01):
That’s great feedback. This has been so helpful. Lots of great insights. I guess if both of you think about our audience being personal injury attorneys and mass tort attorneys, and we may have covered everything, any advice for them as they are contemplating and thinking about getting into the space and helping employers and obtaining these cases? Anything come to mind?

Rebecca Sheppard (24:29):
I guess just be thoughtful about who you partner with. Like we’ve been saying, not all advice is good advice. So just be thoughtful as far as who you’re going to team up with.

Michael Blom (24:41):
In terms of referrals and helping out your own clients that you have, PI and mass tort attorneys in other practice areas. You should also look, I’m sure everyone has a lot of business owner clients in their own client pool that are their current clients or past clients. I’d encourage them to reach out to them, through the ethical ways to reach out to them. And then if they are interested in having those business owners introduced to a ERC firm like one of ours or someone else, a referral relationship can be begun with that.

Rebecca Sheppard (25:18):
Yeah, same with us. We have referral partners as well.

Susan Barfield (25:21):
Perfect. Well, good. Well Rebecca, Mike, thank you both for taking time out of your Friday to visit with Bill and I and to share this insight and updates to the industry. And we will have your information when we send this out, so if any attorneys have questions they can reach out to you directly. But thank you both for your time. This was great.

Rebecca Sheppard (25:43):
Thanks, take care.

Susan Barfield (25:45):
Thank you. Thanks for having us.

Bill Barfield (25:45):
Thanks, everyone.