BGP Urges Prompt Release of Small Business COVID Refunds
The Employee Retention Tax Credit or ERTC, which provides COVID refunds to small businesses, has recently come under attack. In fact, processing new refunds has been halted till 2024. This delay is a tragedy for a worthwhile and cost-effective program.
The resilience of the U.S. economy dulls our memories of the desperate times of COVID: panic, cruel lockdowns, schools and places of worship closed, lines outside hospitals and morgues. Small businesses were punched in the gut. Yet many struggled heroically to stay alive - and kept Americans employed.
To its great credit, Congress passed the ERTC to support small businesses and nonprofits who continued their workers on payroll and provided benefits during the pandemic. The alternative? A landscape of boarded-up shops and unemployed Americans. The refund is particularly noteworthy as small entities typically lack the access to Washington that large entities are afforded. Large concerns got the lion’s share of the $5 trillion pandemic relief long ago - and with no complaint. American Airlines alone received $12 billion. In contrast, an overwhelming number of small businesses are still waiting for their ERTC claims to be processed.
It is critical to note that ERTC payments are a refund - the money for small businesses is taken from payroll taxes that they have already paid. In other words, the program is self-funded. The role of government in American capitalism is to collect these taxes. In exchange, it has a duty to disburse the economic security that should be provided.
In contrast, to the ERTC, which is self-funded, the awards given to large institutions were gifts. Why was there almost no protest against these payments?
In fact, the eligible small businesses saved the government money. The ERTC refunds of $5,000 per employee (for 2020) and $7,000 per employee (for the first three quarters in 2021) pale when we consider what the federal government and states would have paid in unemployment had these businesses failed. Finally, ERTC relief is taxable income. This means that some of the money being disbursed is going back to the government.
Discussions of ERTC have hinted at the prevalence of fraud. Yet, according to available information from the IRS, fraud in this program is actually low. Their Sept 14 news release notes that of the 3,600,000 claims filed, only 252 (less than 0.01%) were even investigated for illegality, resulting in the very low number of fifteen charges and, so far, only six convictions. This small rate is in part because the ERTC has built-in fraud protection: an entity cannot claim more employees than it previously reported to the IRS.
Yet, this news release further states that “The IRS believes many of the applications currently filed are likely ineligible, and tax professionals note anecdotally that they are seeing instances where 95 percent or more of claims coming in recent months are ineligible…..” This statement begs for a response. It seems astonishing to delay a Congressionally authorized refund program based on anecdotal evidence.
Further, the IRS is encouraging companies to withdraw claims, stating that it will reward this action with threats of no penalties or prosecution. Yet, despite this intimidating language, the overwhelming number of claims, at least so far, are legitimate. These IRS offers of “amnesty” may well discourage honest and worthy small entities. I have witnessed this.
The publicity surrounding the program has been criticized, as TV personalities and rap stars seem to be “hustling” business. But if this is unsettling, remember that small businesses have limited access to smooth and sophisticated professionals. Further, as we all know, aggressive advertising is common in US business culture. Think of the mascots promoting insurance products, lotteries, legal services, and loans. Perhaps this is not appetizing, but it is perfectly legal. COVID relief should not be limited to those who can hire professionals with vacation homes and dinners at Michelin-starred restaurants.
The ERTC has also been attacked for using a business arrangement where fees are based upon a percentage of refunds. Again, such arrangements are common for many businesses. The application process, as well as the wait for funds, has proven to be long and cumbersome. The burden of hourly fees before refunds are given often cannot be shouldered by cash-strapped, small entities. Contingency arrangements are their best option.
The technical guidelines for obtaining ERTC relief can be intimidating. As in all programs, there will be some errors. But this should not stop the refund process to all. An overwhelming number of business owners are financially literate and understand risks—they routinely sign contracts, pay employees, and work with suppliers and customers. It is unlikely that most have been, to use the words of the IRS news release, “duped” or “scammed” into filing claims.
The IRS publication also suggests that the sudden increase in claims, long after the pandemic, is worrisome, and potentially due to fraud. However, the program was initially not well advertised. Eligibility was also expanded a year after the program was initiated, further discouraging prompt claims. But most importantly, filings are either late or not: If they come in before a stated deadline, they should be processed.
Small businesses are the backbone of the U.S. economy. According to the Department of Commerce, they employ a full 46% of the private sector workforce. Yet ERTC disbursements are currently less than 3% of COVID relief.
I have witnessed how ERTC money has helped small entities survive and keep people working. Who were the people small businesses provided with employment? Many are the aides in assisted living facilities who cared for your loved ones, laborers in factories, and delivery drivers who provided you with food and medicine. These are the people who left children at home while schools and daycare facilities were closed.
There was nary a complaint when, a few years ago, large entities got trillions of dollars in payouts. Why is there an uproar when small businesses, who self-funded their payroll taxes, are applying for a small fraction of this amount in refunds?
The ERTC is working well, if heartbreakingly slowly. We urge prompt release of these refunds. Small businesses have earned them.
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Michael Grosberg is the President and CEO of Boston Growth Partners, LLC, a business consulting firm and can be reached by visiting www.bostongrowthpartners.com
