Employee Retention Credit (ERC) Audits

Are you getting the right advice?

Congress created the Employee Retention Credit, a refundable tax credit, to encourage businesses to keep employees on the payroll while the business was shutdown due to the Covid-19 pandemic or experienced significant declines in gross receipts between March 13, 2020 and December 31, 2021.

In general, to be eligible for the ERC an employer had to meet one of the following criteria:

  • An employer experienced a full or partial cessation of business operations due to orders from the government that limited travel, commerce, etc. due to the Covid-19 Pandemic;
  • Experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021;
  • Qualified as a recovery startup business for the third and fourth quarters of 2021

In addition to the general criteria, there are also a number of different monetary limits based on the specific time period that wages were paid.  Qualifying businesses can claim up to a total of $26,000 per employee in refundable credits.  Tax refunds can be quite large for employers with a large number of employees.

Unfortunately, the implementation of the ERC has given rise to a number of third parties that are advising employers to claim the ERC when they may not actually qualify.  Many of these third party companies will use attractive mass advertising and direct solicitations that promise large tax savings for a business, unfortunately many of these are literally too good to be true!

These entities will often take incorrect positions regarding an employers eligibility for the ERC and the calculation of the credit.  These third party companies are known to charge significant upfront fees or to structure contingent fees based on the eventual amount of the refund and will often neglect to tell employers that wage deductions must be reduced by the amount of any credit.

The IRS has begun actively auditing ERC refund claims.  The IRS is training 100s of Revenue Agents to examine amended employment tax returns claiming the credit.  Business taxpayers must realize that in the end, they are responsible for the information on the tax returns and that improperly claiming the ERC can result in having to repay the credit, plus interest and penalties.   Even if you have mistakenly claimed the credit, you can often mitigate the impact by having correct amended tax returns filed prior to being contacted by IRS and potentially avoid certain penalties.

Determining eligibility for the ERC can be complicated and confusing.  Your business needs an experienced reputable firm to help you navigate the labyrinth of ERC regulations.  Our experienced tax resolution team stands ready to review your situation, provide you with a detailed analysis and help you secure any refunds that might be appropriate.  Contact us today for more information!

2021 NC Budget – Income Tax Implications

On November 18th, Governor Cooper signed the NC budget into law. While there are many things in the budget, we are going to highlight some of the  bigger income tax implications.

Business Owners

  • NC now conforms with IRS tax treatment on several Covid related measures. As a result, items like Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDLS), and Shuttered Venue and Restaurant Revitalization Grants no longer have adverse impacts to NC Income taxes. Action Item: Taxpayers with any of these items should evaluate amending their 2020 income tax returns.
  • The 2021 corporate income tax rate will be 2.5% and it will gradually be lowered until it hits 0% in 2030.
  • At the federal level, the state and local income tax deduction is capped at $10,000. This budget introduces a State And Local Tax (SALT) Cap workaround. Starting in 2022, S corporations or partnerships can make an election and pay state income taxes so that the owners get a fuller benefit of state income tax payments.
  • A Business Recovery Grant Program will be established between 60 and 90 days after the passing of the budget. Current interpretation is that a business must have an economic loss of 20% or greater from 3/1/2020 to 2/28/2021 as compared to the preceding 12 months and either be in the entertainment, hospitality, or restaurant industry; or if in another industry, then it must have had a 20% economic loss and not have received previous federal assistance. More details to follow on this program as it is established.


  • The NC income tax rate will decrease to 4.99% for 2022 and continue lowering until it hits 3.99% in 2026.
  • Starting in 2021, military retirement for service members with at least 20 years of service will not be taxable to NC.

We hope this information is helpful and we will update with additional information as appropriate.

The Incentive Stock Option Tax Trap

With the recent nCino initial public offering and stock market surging back to pre-pandemic highs, we are receiving a lot of questions about tax planning for incentive stock options (ISOs).   From a tax perspective, ISOs are arguably the most complex type of stock option.  The purpose of this article is to cover some of the high-level tax considerations for ISOs and highlight the need for income tax projections and income tax planning when it comes to ISOs.

ISOs are defined in the Tax Code as an option granted to an employee of a corporation (private or public) to purchase stock of the corporation if certain conditions are met[1]. Those who earn ISOs may seek to diversify their portfolio if a majority of their net worth is tied up in their company’s stock – say, for example, when their company has a successful IPO and the value of the stock is showing hockey stick type growth.  They may also desire to simply liquidate and cash out on the growth.  In either case, they are left wondering how to plan for taxes.

Generally, ISOs are not subject to ordinary income tax upon exercise.  Ultimately, if the shares are held 1 year after exercise and 2 years after the grant date the employee can qualify for long-term capital gains treatment on the sale of the stock – otherwise known as a qualifying disposition.

Easy enough, right?

Wrong—c’mon, we’re talking about taxes here!  As is turns out, there are two tax systems every individual taxpayer must keep track of: the “regular” income tax system (the one most of us think of) and the alternative minimum tax system (AMT).  Generally, if your AMT tax is higher than your regular tax, you must pay AMT equal to the amount over regular taxes (you end up paying the higher of the two).

AMT is much different than the “regular” income tax system with its own income recognition rules and disallowance of certain “regular” tax deductions.  It also has its own flat tax rates of either 26% or 28%, depending on the level of income.

For ISOs specifically, “regular” tax and AMT are essentially inverses of each other.  Upon exercise, income is not recognized for “regular” tax purposes but is recognized for AMT purposes.  Note this does not mean you will automatically owe AMT tax, it just means that your alternative minimum taxable income (AMTI) will increase and you have a higher risk of paying AMT.  The amount included in AMTI is the difference in value between the exercise price and the grant price.

Thankfully, Tax Reform has helped mitigate AMT tax issues for many taxpayers after its passing which took effect beginning with tax year 2018.  Some of these changes to the AMT rules benefitting taxpayers were inadvertent such as the cap on state and local tax itemized deductions which are disallowed for AMT purposes and some advertent such as changes to AMT exemptions and thresholds.  However, those earning over $200K in income still need to be engaging in some form of tax planning to ascertain if they will be subject to AMT upon exercise of ISOs. Those earning over $1M are the most at risk[2].  Other factors, such as filing as married-filing-separately may further increase the risk of paying AMT.

To plan how much in ISO value to exercise before experiencing AMT requires detailed federal and state income tax planning iterations.  The goal is to exercise as many options as you can without triggering AMT.  If there is a need to exercise more than that, see below for additional tax planning opportunities.

If you have already exercised a significant amount of ISOs but have not sold them, there are still several tax planning options to consider in the year of exercise, assuming you would otherwise be subject to AMT.

We discussed qualifying dispositions already but what about disqualifying dispositions?  Disqualifying dispositions generally occur when you don’t meet the 1 year holding requirement following the date of exercise.  However, if you would otherwise be paying AMT tax it may actually be preferable to a qualifying disposition.

When a disqualifying disposition occurs (ideally within the year of exercise) the ISOs become Nonqualified Stock Options (NQSOs), you pay “regular” income tax on the sale, and have a favorable adjustment for AMT purposes (reduced AMTI).   However, it’s not an all or nothing decision.  You can execute disqualifying dispositions for some of the ISO tranches and not others.

The question then becomes: how many shares do you need to sell through disqualified dispositions in order to achieve the optimal amount of tax mitigation by reducing the AMT to zero? Again, this is a complex question that requires doing tax projections – an estimate of your total taxable income and tax liability for a given period – to understand the overall impact on your taxes under different scenarios.  It is necessary to evaluate the options for each specific tranche of ISOs as opposed to viewing them as a single investment tool.

Tax Reform also introduced an opportunity to defer tax recognition for up to 5 years by making an §83(i) election.  However, this is only available for private companies and is somewhat narrow in its application.

ISO holders following the status quo by holding and selling shares without a tax plan in place may end up getting surprised when they file their tax returns the following year.  It’s recommended that you involve all members of your personal advisory team including your CPA, Financial Planner, and Estate Planner.

Contact us at Adam Shay CPA, PLLC to figure out the best tax plan for you.  We start with your specific goals in order to tailor a tax planning strategy that will help you meet those goals.

This article was contributed by Chris Massey, CPA (NC License Number 39147), a tax manager at Adam Shay CPA, PLLC.

[1] §422(b)

[2] https://www.taxpolicycenter.org/briefing-book/who-pays-amt#:~:text=Taxpayers%20pay%20the%20higher%20of,percent%20top%20statutory%20AMT%20rate.

NC Annual Report Scheme

If you own a business in NC, you may have recently received a Solicitation to file your NC Annual report for a fixed fee that is above and beyond the cost to do so with the Secretary of State (SOS). While the mailings appear to be official, they are not affiliated with the NC SOS. Similar mailings were sent out last year and the NC SOS posted an alert warning business owners about the scheme. We are advising clients NOT to have this company file your annual report, due to risks listed in the NC SOS alert (linked below). We recommend filing your NC Annual Report online via the NC SOS website.

NC SOS: Solicitation for Services Alert: https://www.sosnc.gov/imaging/dime/webportal/54023612.pdf
NC SOS: How to File An Online Annual Report: https://www.sosnc.gov/divisions/business_registration/annual_report_how_to_file
NC SOS: Filing Online Annual Reports: https://www.sosnc.gov/divisions/business_registration/annual_report

Should Companies Participate in Social Security Tax Deferrals?

On August 8th, President Trump signed an executive order that would allow employees that make less than $104,000 to defer the collection of the employee side Social Security taxes.  The Treasury Secretary has indicated that an employer can decide if their company will participate or not.  As an employer, should you?  It’s tough to say, but we’ll try to lay out the pros and cons of each possibility.


If your company participates:

  • Employees that make less than $104,000 will have more cash in their pockets.  The employee cash increase would be 6.2% of each paycheck.
  • There is the possibility that the deferral is forgiven.


What are some risks in participating?  A lot of guidance and details need to be released about the executive order.  What happens if an employee defers Social Security taxes and leaves their position?  Who is responsible for paying the deferral—the employer or the employee?  Without more guidance there is risk that employers could be on the hook for employee deferrals.  That’s the greatest potential downside.


Our hope is that more information and guidance will be available before you have to make a decision.  If you have questions about this particular topic or are interested in working with a CPA firm that will provide you with proactive advice and help you stay on top of the ever changing 2020 landscape, feel free to reach out to us @ [email protected].

This information is current as of 5/26.


Friday evening the SBA released a new Interim Final Rule regarding the Paycheck Protection Program (PPP). There still remains a lot to be clarified, but among other things it did clarify that bonuses paid to employees count towards forgiveness compensation calculations as long as it meets other stipulations required for full forgiveness (i.e. < $100K in annualized pay, etc).

We are getting lots of questions about forgiveness as many businesses approach the end of their 8 week forgiveness period. You should really proactively plan during your 8 week period.

After you’ve reached the end of your 8 week period, if you are confident you will receive full forgiveness then you may want to consider proceeding to submit your forgiveness application. If not, you may want to wait and see if any potential legislative changes could favorable impact your situation (such as extending 8 weeks to a longer period). In general, there is no need to rush to submit your forgiveness application.

Bankers will clearly prioritize forgiveness applications that are clean and well organized. This is one area that you don’t want to skimp on professional services.

Mitigating Risks of PPP Loans

This information is current as of 5/13/20.  If you have questions or are considering taking action, you should speak with a CPA or attorney to discuss your specific situation.


The Payroll Protection Program (“PPP”) was written, launched and implemented as a swift response to the economic hardships of COVID-19 on small businesses. It was clear from the initial launch that details of the program would be forth coming. However, these details have been sporadic and vague at best, leaving many to wonder and speculate on both loan forgiveness and possible future PPP audits.

On April 28, 2020 U.S. Treasury Secretary Steven T. Mnuchin, along with the SBA, announced they would be reviewing all PPP loans in excess of $2M and other loans as appropriate. They also indicated large companies that have liquidity and access to capital should reevaluate their needs for a PPP loan and return the money by May 14th, 2020 as part of a “safe harbor”.


Our recommendation:

Business owners should conduct an internal assessment of their current and short-term operations and finances in light of the economic hardships imposed by COVID-19. This can be as informal as an internal email or as formal as a board presentation or written memo. However, the documentation should be stored should the SBA or regulatory bodies audit the business’ need for a PPP loan at a future date.

The government is continuing to update and release new information concerning PPP loans. Until they provide additional guidance, borrowers should seek advice from their legal counsel.  Borrowers have to determine their own factors to include as part of their internal assessment on whether to accept (or keep) PPP funds or return them by May 14th, 2020. We recommend business owners include the following questions as part of their internal PPP assessment:

  • Has the company had to close or alter operations due to COVID-19? Has this impacted revenue?
  • If the company had to close, what is the re-opening plan? Is demand for goods/services expected to be lower after the company re-opens?
  • Has there been a reduction of customer orders or customers reducing the amount of their orders? Have customers cancelled or postponed their orders?
  • Are customers inquiring to change their payment terms or push out their bill due dates?
  • Was there an increase in March and April as customers increased their inventory, but a drop is expected in the coming weeks?
  • Has the company conducted layoffs, furloughs, or salary decreases?
  • Has the company suffered a loss in productivity due to employees being required to work remotely and/or care for children who are unable to attend school or day care?
  • Is the company taking steps to preserve working capital? Such as a hiring freeze, delaying large purchases or office improvements, or otherwise reducing costs?
  • Has the company sought advice from external or internal counsel?
  • Has the company attempted a financial projection of the next few months? What did they use to create this projection?
  • Are there any delays or expected delays with the company’s supply chain? Have materials suppliers cancelled or delayed orders to the company?
  • Does the company have access to credit or liquidity from banks, equity owners, or other third parties? If so, what are their terms and how would a loan from them impact the business?
  • How likely is a default on existing credit lines? For example, is the company having a hard time paying its bills on time?
  • Are there reasons the company may want to avoid government scrutiny?
  • Could the company tolerate negative publicity?
  • Are the company’s competitors also facing declining revenues or other similar challenges as your company?


At minimum, Adam Shay CPA, PLLC recommends the following:

  1. Be prepared that with any government funded program, there are certain rules you must abide by and documentation that will need to be produced.
  2. Put internal controls in place (internal assessment) to be able to support your position on why your company needed a PPP loan and the use of its funds.
  3. Consider the other benefits of the CARES Act your company can take besides PPP – such as the employee retention tax credits and tax deferrals.
  4. There is no requirement that the entire PPP loan is forgiven.  If all or a portion of it is not forgiven, the rest is a loan at a 1% interest rate over a 2 year term. Or your business could repay a portion of the loan early.
  5. Provide regular updates to the company’s managers on the use of PPP funds and the impact PPP has had on the company.
  6. Review PPP guidelines as they continue to emerge and if guidelines are unclear, take a conservative approach.
  7. Seek outside counsel should the SBA or regulatory agency inquiry regarding your PPP loan.

Paycheck Protection Program Loan Forgiveness

If you receive funds from the Paycheck Protection Program (“PPP”)  we want to ensure that you are able to receive the maximum amount of loan  forgiveness.  You should not make expenditures you would not otherwise incur just so that you receive full forgiveness of the loan.  We would like to offer you the following recommendations to account  for the loan proceeds:


  • All funds should be deposited into separate bank accounts. These funds need to be kept separate from any operating revenue bank account. You need to be able to account for all funds and how they were used separately.
  • Establish a separate Class in your General Ledger Software to track PPP related expenses.
  • Create a PPP file to organize and retain invoices and proof of payments for all PPP related disbursements.
  • Guidelines for Forgiveness:

– You can use for payroll costs (including health insurance and retirement benefits), rent and utilities.

– You cannot use more than 25% of the forgiveness amount for rent and utilities. The lease and services agreements have to be dated before February 15, 2020.

– Payroll annualized above $100,000 will not count towards forgiveness.

– You can use to pay the interest on your mortgage but not for principal payments.

There are two restrictions that also impact forgiveness:

Headcount – you cannot reduce headcount (based on Full Time Equivalents “FTE”).   If you’ve had a decrease in headcount in 2019 or 2020, please discuss with us.

Compensation – compensation levels cannot be reduced by more than 25% for any one employee (unless they make over $100,000). If employees have been furloughed or laid-off, then you may hire them back and make up salary that was missed to ensure full forgiveness. The time period used for comparison is the most recent full quarter that the employee was employed.


Example Forgiveness Calculation:

X Co. borrowed $100,000 in PPP proceeds on April 10, 2020. Over the next 8 weeks, X Co. spent $50,000 on payroll costs and $40,000 on rent and utilities. X Co.’s loan forgiveness is limited to $66,667: $50,000 of payroll costs and $16,667 of rent and utilities. Your non-payroll expenses cannot exceed 25% of the forgiveness amount.


*As of April 15, 2020 the SBA has indicated that further guidance on the details of the forgiveness will be released in the future.

Please reach out to us with any questions regarding your PPP funds.

COVID-19 Disaster Assistance Programs

This information is current as of 4/21/2020.


  1. Economic Injury Disaster Loan (Includes up to $10,000 Emergency Grant)

SBA Economic Injury Disaster Loan (EIDL)

The U.S. Small Business Administration (SBA) is providing low-interest rate federal disaster loans for small businesses and non-profits who have been affected by COVID-19. Currently, small businesses can borrow up to $2M in assistance and the interest rates are 3.75% for small business and 2.75% for non-profits. These loans have long-term repayment options, the maximum being a 30-year term.  Funds have currently been all used up, but they are expected to be replenished.

These loans can be used for the following:

  • Pay fixed debts
  • Payroll
  • Accounts payable
  • Rent
  • Working capital
  • Other bills that can’t be paid because of the impact of COVID-19

Per the SBA’s website, for questions please contact SBA disaster assistance customer service center at 1-800-659-2955 (TTY: 1-800-877-8339) or e-mail [email protected]. To apply for a COVID-19 Economic Injury Disaster Loan click: https://covid19relief.sba.gov/#/


Emergency Grant (EIDL $10,000 Grant)

The EIDL Grant is calculated as $1,000 per employee up to a $10,000 maximum. It can be combined with the PPP Loans, but the $10,000 grant offsets the PPP forgiveness.


  1. Paycheck Protection Program (PPP)

Part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Paycheck Protection Program which provides 100% federally guaranteed forgivable loans to small businesses and 501(c)(3) non-profits with fewer than 500 employees. Loan amounts are up to $10M per business. It’s important to know that these loans can be forgiven if the borrowing business either maintains their payroll or restores it after the crisis. As of 4/21/2020, the original $349 billion allocated to the PPP Loans has been depleted, but there is pending legislation proposing an additional $300 billion to replenish the PPP Loans.  We can connect you with banks that are still accepting applications.

How much can I borrow?

SBA loans that are part of the PPP can be up to 2.5 times your average monthly payroll costs, but cannot exceed $10 million.


Payment Protection Program Bill funds may be used for:

  • Payroll costs;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Employee salaries, commissions, or similar compensations;
  • Payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation);
  • Rent (including rent under a lease agreement);
  • Utilities; and
  • Interest on any other debt obligations that were incurred before the covered period.


  1. Employee Retention Tax Credit (ERTC)

The Employee Retention Tax Credit is available to businesses who have been forced to closed due to a government issued stay-at-home order or have had a 50% reduction in revenues and are unsure if they will rehire all employees. The ERTC may not be combined with PPP or EIDL Grant.

How much is the tax credit?

50% of wages in quarter with a maximum of $10,000 per employee during the period of 3/12/2020 – 12/31/2020. The ERTC stops once the business may reopen or revenues are 80% of the same quarter of the prior year.


  1. Delay of Employer Payroll Taxes

Generally, most any business is able to qualify for a delay of Employer Payroll Taxes. The delay of Employer Payroll Taxes is essentially a 0% loan with a 2 year term limit. 50% of the loan will need to be paid back by the end of 2021 and 50% will need to be paid back by the end of 2022. The delay of Employer Payroll Taxes can be combined with the PPP loan, but the tax deferral portion won’t be forgiven. It can also be combined with the EIDL.

How much is the loan?

It is about 6.2% of employee wages from 2/15/2020 – 12/31/2020. For example: An employer paying $100,000 in wages receives a $6,200 0% loan payable over a 2 year period to end no later than 12/31/2022.

Is the IRS Shutdown?

The American Society of Tax Problem Solvers solicited the below information directly from the IRS and the short answer is no, they are not closed. Generally, the IRS is not conducting any in-person meetings, however the Taxpayer Advocate Office and the Automated Collections System are still working. Although certain divisions are closed, the IRS remains open and is performing its duties. Regular processing times may be slower than normal as more of their employees are working remotely and are unable to conduct person-to-person business. Field examinations are suspended, although the examination may continue to take place remotely if possible.


Do I need to be worried about the IRS placing a lien or levy on my property?

As part of the IRS’ People First Initiative, they have stated they will not issue any new notices of federal tax lien or levies, except in extreme circumstances. An extreme circumstance would be if the statute of limitations was about to expire or the taxpayer is putting assets beyond the reach of the Government.

However, interest and penalties continue to accrue on any outstanding tax liability.


How do I stop a collection activity when I have lost most of my income?

We at Adam Shay CPA, PLLC have experience communicating with Revenue Officers at the IRS and can help draft correspondence on your behalf to them depending on your particular circumstance. The IRS has stated that they are considering the release of existing levies on a case by case basis, under their existing guidance. Please Note: If your employer is deducting levies from your wages, your employer has a legal obligation to continue to deduct levies until they receive a release of levy document from the IRS.


Installment Agreements:

IRS Commissioner Rettig stated that installment agreement payments due between 4/1/2020 through 7/15/2020 are suspended under the IRS’s People First Initiative. If you are currently making monthly installment agreement payments or direct debits from your bank, it is important you contact your bank immediately to suspend those payments. Please note that you will need to inform your bank 2 weeks prior to 7/15/2020 to begin making your direct debit payments again to avoid default once the suspension period has ended.