Still a hot topic, the Employee Retention Tax Credit (ERTC) remains available retroactively for those who qualify. On this episode of The Bottom Line Pharmacy Podcast, the team (Bonnie Bond, CPA, Kendell Harris, CPA and Scotty Sykes, CPA, CFP®) discusses ERTC eligibility for startup pharmacies.
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Scotty: All right. Good morning, everybody. Today we are going to talk about the Employee Retention Tax Credit for Startup Businesses. We got a question on this. We had a previous podcast episode on Employee Retention Tax Credit for pharmacies, which, quick summary there, many pharmacies just need to be very careful, going for the Employee Retention Tax Credit.
If you are trying to qualify yourself as a partial shutdown due to a government order, that is going to be a very difficult thing to qualify for, for a pharmacy. We are not saying you do not qualify; it is just going to be difficult. You need to be careful if you are qualifying in that manner and using a third party to help you there. The other way you can qualify, outside of the partial shutdown, is a full government shutdown, which pharmacies did not have. And then the third way is the drop in gross receipts, which is a black and white kind of test there. And if you certainly qualify with the drop in gross receipts, no matter what that drop in gross receipts was for, you certainly should go after Employee Retention Tax Credits, up to $5,000 per employee in 2020, and up to $7,000 per employee, per quarter in 2021.
So, the 2021 credit is pretty significant, when you are thinking about it, and if you qualify. So, definitely look at it that way. But guys, we did get that question after that episode on Employee Retention Tax Credit for startup businesses, and Bonnie, you work with a lot of startups, right?
Bonnie: I do, so I wanted to ask you about that, Scotty. I do work with a lot of startups, and so I know the rules are a little bit different with startup businesses. Were there any updates when it pertains to recovery of a startup business?
Scotty: Yes, they do have a provision in there, in the regulations for startup businesses. And to be a startup business, you had to have opened your doors after Feb. 15, 2020, and you must have less than $1 million in gross receipts. So, if you are a startup pharmacy, and you can check those two boxes, you may qualify. You cannot qualify under this startup business section, if you qualify using the other rules that I just went over: the full shutdown, the partial shutdown or the drop in gross receipts.
So, if you do not qualify with those, but you did start after Feb. 15, 2020, and you do have less than a million dollars of gross receipts in 2020, 2021, you could certainly qualify with this credit. And it is capped at $50,000. So, the Employee Retention Tax Credit for startup companies it is capped at $50,000 for only the third quarter of ’21, and the fourth quarter of ’21. So, there is only two quarters there, that this is applicable for startup pharmacies out there. But if you are a startup pharmacy, and you have less than $1 million, you do not qualify otherwise for the credit, and you started after Feb. 15, you certainly could get up to a $100,000 from this credit. You obviously must have employees.
Scotty: So, it is calculated based off the employees, capped at the $50,000 mark there.
Kendell: And I have a question. I know recently, with some changes that were going on with the IRS for the Inflation Reduction Act, that there was going to be a lot of money being allocated to the audits. Have you heard anything new about how that is going to impact us in the future; the amount of funding that the IRS is getting to do audits and things like that, as for those who have already applied for the ERTC?
Scotty: Yeah, in fact that is a good update, because we are seeing a lot of chatter in the tax world, that the IRS is shifting resources. They are shifting training, and they are starting to really dig down into these Employee Retention Tax Credit audits. In the tax world, there has been a lot of concern here, about these Employee Retention Tax Credit pop-up shops, if you will, these ERTC mills qualifying companies all over — blanket qualifying companies that they qualify with this credit. And that is concerning because these mills really want these fees that they are going to collect: 15%, 20%, 25% of the credit amount — and they are not really acting in your best interest. They are going to close their doors, and then they are done, and they have collected their monies. And when you get audited down the road — two, three years from now — they will not even be around. So, it is a big concern in the tax world community.
The IRS is starting to pick up on this as well. And so, they are shifting resources. We are going to start seeing audits really come down on this tax credit in the coming years. In fact, they did… Congress extended the statute of limitations for audits in this area…
Scotty: …in the laws they passed. So, there will be a lot of audits down the road. So, you just want to be really careful here, especially if you are doing that partial shutdown, which we talked about in that previous podcast episode.
Bonnie: Yeah, I think the main takeaway here is remember that even if someone reaches out to you, to contact you about the possibility of you qualifying for these credits, you, as the business owner, are signing and attesting to the information that you are putting out there. So, in a couple years, if you are audited, and have an issue with this, those people that reached out to you are probably going to have closed shop, and be gone, and your name is the one that is on the forms. So, it will be up to you to deal with that.
Scotty: And a couple other things to consider for the Recovery Startup: To qualify, if you own multiple pharmacies, you have to look at all of your pharmacies as a group here, to qualify as a startup. So, if you have multiple pharmacies, and you are in control over those pharmacies, you are probably going to be over the $1 million receipts there. So, you are going to have to look at qualifying the traditional way, for the ERTC. And also, if you purchased a pharmacy, there could be some unique issues you need to look at there, to determine whether you qualify with a purchase, or a stock purchase, or asset purchase of your pharmacy, after that Feb. 15, 2020, period. So, you need to look into that with your professionals, as well, and keep those in mind.
Kendell: So, I think we kind of jumped straight into the bottom line portion. And I would just say, with the startups in general, after we released the last podcast, we got a phone call like minutes after it was released.
Bonnie: Right after.
Kendell: And the pharmacy owner said, “Listen, I am getting contacted by so many people. And I have read the rules myself, and there is no way I qualify. But they are all telling me to apply anyway.” So, you know, it is the Wild, Wild West out there right this second.
But like you said, they are getting ready to audit these things, so just be prepared. And like you said, Bonnie, you are the one signing, in the pharmacy industry in general…
Kendell: A lot of pharmacies increased in revenue during that time.
Bonnie: They did.
Kendell: And most did not shut down. That is, in general. So, that is my bottom line.
Kendell: In general, most pharmacies did not qualify for the rules, under the original rules. But startups, maybe some can fit in there.
Scotty: Startups, bottom line here is, if you are a startup, and you paid employees in that third quarter ’21, fourth quarter ’21, you received less than $1 million and you opened the doors after 2/15/2020, you certainly absolutely should be looking into this, especially if you had a drop in gross receipts in your traditional pharmacy.
Keep in mind the controlled group rules, and all your pharmacies as a whole. You have to consider that with these. But the partial shutdown, like we said, is going to be a stretch. And if you do qualify in the partial shutdown, it is most likely going to be right when COVID started. And you are talking about probably a short period of time. The money is not going to be worth the effort, and the audit risk. Plus, you had PPP wages. You were probably using those wages for PPP, which is going to kick out a lot of the wages for the ERTC. So, it is just going to be a stretch for that partial shutdown.
Bonnie: That sounds like the bottom line.
Scotty: All right, well I guess we wrapped that up. And if you have questions, throw them in the queue, or the chats, whatever, because this one came from a question, and we love questions. So, we appreciate everybody listening, and we will see you guys next time.