Employee Retention Tax Credit Retroactive Credits for Dental Practices

Dental practice owners and the financial advisors that support them are always on the search for advantageous tax credits that can minimize tax liability. Tax-advantaged savings environments, business deductions and even government funded relief programs, like the CARES Act, have all been standard good practices over these last few years.

Although most COVID-19 relief programs have expired, the Employee Retention Tax Credit (ERTC) has recently stepped back into view. Dental practice owners have been contacted by specialty tax consultants and retrieval companies offering to help them claim ERTC retroactive credits for 2021.

However, if your practice did not have suspended or modified operations or reduced collections in 2020 or 2021 compared to 2019, can you qualify, and will it hold up against an IRS audit? Before engaging a retrieval company, it’s a good idea to revisit the eligibility requirements to find out.

ERTC ELIGIBILITY REQUIREMENTS:

The eligibility rules governing the ERTC have undergone several revisions since it was first introduced in March 2020 and updated in June of 2021. This summary should level-set the key expectations and requirements.

• A decline in gross receipts with a drop by 50% or more for any quarter in 2020 when compared to the same quarter in 2019, and/or a drop by more than 20% for any quarter in 2021 compared to same quarter in 2019.
• A government order requiring a full or partial shutdown. This is based on closing all or a portion of your physical space.
• A government order caused more than a nominal effect on your business. This is based on the modification of a business activity.

AMOUNT OF THE CREDIT

• 2020: 50% of wages per employee with a maximum of $10,000 annually. $5,000 maximum credit per employee. Quarters two, three and four are eligible.
• 2021: 70% of wages per employee with a maximum of $10,000 per quarter. $21,000 maximum credit per employee. Quarters one, two and three are eligible.

CAN YOUR BUSINESS JUSTIFY THIS CREDIT UNDER AN AUDIT?

You must meet one of the three scenarios above to qualify for the credit. A decline in gross receipts is easy to recognize, however most dental professionals will not qualify for this in 2020 or 2021.

Full shutdown of a dental practice, if mandated by the state dental society, typically lasted between eight to 15 weeks beginning in March 2020, allowing most dental practices at a minimum to qualify during your mandated shutdown period. As of this writing, CWA does not know of any government mandate that required dental practices to partially close revenue producing areas once states allowed practices to reopen in 2020.

The qualification method still up for debate is a government order requiring either a partial shutdown or a modification to a business activity that caused more than a nominal effect. Thanks to the IRS safe harbor definition, a nominal portion or effect is defined as 10%.

So, you may qualify if a government order caused:

1. A nominal portion of your operations were suspended, and you had a reduction of more than 10% in gross receipts or worker hours as compared to the same quarter in 2019, you would qualify. This qualification is explicitly regarding a change to your physical space. For example, a restaurant had to shut down the indoor sit-down service.
2. A required nominal effect safe harbor modification that impacted your business activity by 10% or more. This qualification is based solely on a modification of business activity. For example, keeping people six feet apart. A restaurant was able to reopen but had to reduce capacity from 50 to 30 people to keep tables six feet apart.

Consider a dental practice that had to modify their waiting rooms and entry to their offices and provided increased cleaning procedures. These modifications alone do not qualify you for the ERTC. You must also meet the 10% nominal effect test of being able to see less patients,  an impact to business revenue, or your employees worked less hours.

If you meet any of the objective scenarios above, please speak to your CPA or tax advisor before moving forward with the claim.

If you do not, and are leveraging subjective measures in preparing the claim, it might not hold under an audit.

It’s also important to know what you are committing to.

Consider the following:

1. Fees: What is the fee and is it paid at time of filing, or after the refund is received?
2. Taxability of Credit: This credit creates taxable income in the amount of the credit, requiring taxes owed when the corporate return is amended.
3. Timeline: The timeline to receive these credits from the IRS can take over nine months. This can impact cash flow when you consider that the retrieval company fees, amended payroll tax return fees and taxes owed on additional income are due out-of-pocket months prior to receiving the credit.
4. Liability: In case of audit, who assumes responsibility? Many retrieval companies have engagement contracts that remove any liability from the agency, leaving the responsibility to fall back to the owner’s lap.

KEEP IN MIND

The ERTC was designed to aid struggling businesses during the COVID-19 pandemic as a way to supplement businesses that made the decision to retain employees on the payroll when the business itself was financially unstable. The qualifying time period was extended to support those businesses who were still struggling in 2021.

ERTC statutes were pushed out in a hurry by Congress. The language for qualifications is vague, leaving what can be perceived as room for interpretation.

Although there is no clear guidance now, the IRS can still create it after the fact. The statute of limitations gives the agency plenty of time to go back and audit any claims that appear dubious.