ERTC Due Diligence – The Bottom Line Pharmacy Podcast
Have you done your due diligence to ensure that you qualify for the ERTC? On this episode of The Bottom Line Pharmacy Podcast, your hosts Bonnie Bond, CPA, Kendell Harris, CPA and Scotty Sykes, CPA, CFP®) discuss the complexities of the ERTC and regulatory guidelines that may help you decide if your pharmacy qualifies for the ERTC.
The Bottom Line Pharmacy Podcast is your regular dose of pharmacy CPA advice to fuel your bottom line, featuring pharmacists, key vendors, and other innovators.
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If you prefer to read this content, the video transcript is below.
Scotty: Welcome to the Sykes Bottom Line Pharmacy Podcast, your regular dose of pharmacy CPA advice to fuel your bottom line featuring pharmacists, key vendors and other innovators. Hello, everybody. Welcome back to the Sykes Bottom Line Pharmacy Podcast and today we are talking about our favorite subject now. Bonnie’s favorite — the Employee Retention Tax Credit. So…
Bonnie: Is this take 3, the third episode?
Scotty: This is probably our 10th video on this. But it’s continuing to gain momentum out there, there are a lot of third-party vendors out there. They are pushing this credit, so I think our point here is to inform the listener out there on what they need to be thinking about before they jump in to the ERTC for their pharmacy. To recap, there are three ways to qualify. You can have a drop in gross receipts, which we have covered in other videos, if you meet that drop in gross receipts, you absolutely should go for the Employee Retention Tax Credit.
Bonnie: That is the clear-cut point.
Scotty: Clear-cut. Black and white. My gross receipts dropped. But if you meet that, no-brainer, you go for it. Second item: Another way you can qualify is a full shutdown. Pharmacies were not fully shut down, so that is out. Third item: Which is where a lot of these vendors are pushing is the partial shutdown due to a government order. It is not as easy as just saying, “My supply issue was there. I had to tele-work a couple of people, social distance…” You have to get a lot more into it. So, we are kind of going to break down into what this partial shutdown means. Before we get into that, I do want to show my screen. For those watching on YouTube. The IRS released this in October of ’19. “Employers warned to beware of third parties promoting improper Employee Retention Credit claims.”
So, the IRS is on the fact there are vendors out there that are promoting this credit, may be that are not following the rules and not doing what they are supposed to be doing. You are just blanketly throwing out that, “You qualify. Let me get you the money, pay me the 20%. And I’m out.” And when you potentially get audited down the road, they are not going to be there to help you out. So, be aware of that IRS notice there — release — new release because the IRS is this is on their mind with these third parties.
Kendell: Scotty, I just wanted to end with a positive note. In some instances, there are some pharmacies who do qualify and not only that, here for Sykes & Company, P.A. we would have actually prepared and processed the ERC/Tax Credit, clients have received the funds. We definitely have prepared some for some pharmacies who did qualify, and in some certain circumstances, just to kind of briefly explain the circumstances. One pharmacy we had was kind of really closely related to a medical practice and the medical practice for all intents and purposes shut down during COVID for an extensive period of time, saw very few patients, and their pharmacy was impacted at a large reduction in gross receipts. So, we ran the numbers and we saw the reduction and at that time we were running the numbers for all our clients, we did not necessary call the clients and tell them, “Hey, we ran your numbers, and you did not qualify.” But we went and ran the numbers for all the clients. So, we were able to inform them, “Hey, you qualify.”
And another example is a pharmacy who had a restaurant, and there was a big reduction in the wages, because almost half of their employees’ time was spent in the restaurant even though it wasn’t a big portion of their revenue. So, in that instance because of the restaurant being closed and having employees there, we looked at that (we are going to get to the nuances of the rules, a little more, shortly), but they qualified. For those who are Sykes & Company, P.A. clients, I just want you to rest assured that we are looking at the numbers on a client-by-client basis. Proactively. And we have been from the beginning to see if those areas, where you would definitely qualify for, that could be quantifiable are items that… whether you qualify or not.
Bonnie: So, to be clear, for a large majority of our pharmacy clients, there was not a drop in revenue during COVID. COVID was good for business for pharmacies during that period of time. I think you guys would agree. Some of those specialty situations, like you just mentioned, you are absolutely right, Kendell. We are definitely looking at it, but I get it. I mean, our clients are calling, I am getting calls and emails all the time. Because you guys are being — you are getting calls, you are getting emails constantly from these third-party vendors — telling you you qualify, so I know that people have questions. That is what we are trying to do, to clear this up and tell you what we see and how we think it relates to pharmacy, so you can make a decision about how you want to move forward.
Scotty: Yeah, I think the restaurant example is a great example of a pharmacy being able to get in with a partial shutdown or a snack bar, soda shop if you can meet the requirements of that portion of your business being a more than nominal portion of your — nominal in terms of the ERC is 10% — so, you need to be able to quantifiably show the 10% that will push you into qualifying for the ERC. In terms of the restaurant or the snack bar, 10% can be wages, and hours of service for your employees in that department, or it could be revenue, if I am not mistaken.
Scotty: Understand that word “nominal” is a crucial piece to the puzzle if you are going to go with the partial shutdown. So, the IRS would say, or the regulations and the regulation that really highlights all of this and it is very straightforward to read, it is not very technical, is IRS notice 2021-20. If you are going to go with the partial shutdown qualifier for your pharmacy, I would encourage you to read the IRS notice 2021-20, there are a bunch of Q&A in there, and a lot of that is applicable to pharmacies, that you can apply to your scenario. So, a lot of… we have seen a lot of these third-party reports on the partial shutdown for pharmacies. We have clients who have sent them to us, for review, and most of them center around social distancing, supplier issues, teleworking, maybe for a couple of their employees. All good and great. But you better have in your documentation, how that is more than nominal, in other words you would be able to quantifiably show how that social distancing or the supplier issue — teleworking is pretty much out — we are a CPA firm, and we did not even qualify for teleworking. And we have 45 people who had to telework. So, there is a big hurdle with the teleworking to get that to qualify.
So, you just need to read these regulations, and a couple questions in particular on notice 2021-20 that are applicable to pharmacies is Question 12, which talks about the suppliers. If you have a supply issue, that you are going to claim, because of a partial shutdown, you need to be able to say, “All right, I had that supply, it had a more than nominal effect on my business. “You need to quantifiably show how it was a 10% nominal effect. That is going to be a bulletproof support hopefully if you were to get questioned. Question 13 talks about lack of demand because other areas had to be shut down. Going back to Question 12, the supplier also had to have been under a government order. You could not get the drugs that caused them to have the supply issue. So, not only do you have to quantifiably — this in the regulation — not only do you have to quantifiably show that you had more than a nominal impact, here, because of the supply issue you also need to be able to explain what the supplier restrictions were on their side. Be mindful of that. So, OSHA just talked at the … OHSA requirements is a qualifier and said OSHA is not a government entity, is not a government order, if you will, so that kind of kicks that argument out. So, as you can see, this is an extremely complex area.
Bonnie: Yeah, and highly subjective.
Scotty: It is subjective, it is extremely complex. But as you can see, this is not just a blanket thing. This is not a universal thing. It was never intended to be a universal credit for everybody. Again, if you qualify and you meet these requirements, by all means you should go for it. But we just want to be… make sure you are doing the due diligence out there to be careful here. Because aggressive positions here could get some trouble down the road. The IRS has extended the audit limitation, statute of limitations for ERC claims. Normally it is three years.
Bonnie: I think that is a big thing. That is a big lightbulb, right?
Scotty: It is a big thing.
Bonnie: I mean it should be obvious to people if they are extending the extension limit of time.
Bonnie: That they are planning.
Scotty: So, this is going from three years to five years.
Scotty: So, there will be plenty of time to audit these things. Penalties and interest if you had to pay it back. And another thing that I don’t think a lot of people have thought about, if you get the credit, you have to pay tax on the credit, you have to amend your tax return for the year you are pulling the credit from. So, if you have to amend 2020 or 2021, that is the year you are getting the credit, to report it as taxable at that time. And then four years later you get audited. The IRS says, “Well, you didn’t do the due diligence, or you do not qualify, you know, you cannot support it.” Not only will you have to pay back the credit amount, potentially penalties and interest, but you may be out for the tax you had to pay on the credit amount. Because four years from now, you will be on the statute of limitations for amending, again, that to take out the credit. So, you would have paid tax on the credit, and you would not have gotten the credit because the IRS would have said no go. So, you got to think about that as well.
There is also one more question I want to talk about, and that is Question 13. And now I am highlighting areas that I have actually seen on some partial shutdown documents from other vendors. And Question 13 says, if a stay-at-home order caused your customers to stay at home, and as a result it reduces in demand for your products and services, it does not necessarily mean you qualify. It has to be that direct order on your business that is causing the issue. Not a direct order on somebody else that impacts your demand. Now if you qualify because of the gross receipts Kendell mentioned above, you are in. But if you do not meet the gross receipts qualifier and you are just saying, “I had less demand,” be careful with that. Question 13 on Notice 2021-20 should be checked into. With all of this, and I will shut up.
Kendell: (laughs) He is heating up right now.
Bonnie: He is on fire.
Kendell: Scotty is on a roll.
Scotty: With all of this, again, any partial shutdown order that you are going to claim as being your partial shutdown, again, you have to show, you need to explain a [more than] nominal impact to your business and a quantifiable number is going to be a great support. Furthermore, you are only eligible for the credit for the period that you were partially shut down. So, you know, if you are going to just say throw a blanket, you know, this government order was in effect on March 27th through, you know, March of 2021, March 3rd of 2021, whatever, during that whole time we were partially shut down, you know, that is kind of a flag, because, you know, this, again, this impacts only the time the partial shutdown will only be eligible for the ERTC for the period of time you were actually partially shut down. So, if you had that supplier issue and it was a valid issue, a [more than] nominal impact to your pharmacy, you can show that the supplier had some restriction going on there. You know that supply issue would only be partially shut down during the period it actually occurred there.
Kendell: Yeah, and on that point, some clients that I was looking at, you look at the government order that impacted their pharmacy, some of them did initially, some counties, it was sometimes on the county and city level. So, we did some research on that, and the order might have only been for a week.
Kendell: That impacted the pharmacy. But then they said, “Well, we continued to close the doors because of safety measures for our staff. “Well at that point, it is no longer a government order. So, the eligibility would have been for a week.
Bonnie: And then you do calculations for that week.
Kendell: Yeah, because if you remember, there were phases of businesses, different business types kind of got, they allowed the doors to be opened or a certain number of people, and then restaurants, and then this. So, everybody, if you remember, they were looking on their county’s website or the city’s website to figure out whether their business could open their doors again.
Kendell: And the pharmacies were, generally speaking, if there was an order, it wasn’t several months, you know.
Kendell: And they list too that if there is an order, say there is a certain amount of people or the social distancing, and you have enough space to still service your clients or your customers, your patients, even though maybe someone might wait a few minutes, then that is not a partial shutdown or anything of that nature, because you have enough space even within social distance.
Scotty: You got to show that, and you got to show the [more than] nominal impact.
Bonnie: And I have read that you really have to show that you had to turn away people.
Scotty: You have to show the [more than] nominal impact. So, if you, if you could only let three people in your store and you used to be able to let 10 in there, you got to show how that had a [more than] nominal impact. If you cannot show that, and you get audited, you know, you might be, you know, you are not going to meet the requirements for the credit. So, there is probably a lot of pharmacies that do qualify for maybe a period of time. And the period of time is probably not very long, right? And if you did qualify, it was probably right at the beginning of the pandemic. So, when you think about it, most pharmacies out there got PPP. You cannot double dip with PPP wages. So, if your pharmacy, let’s just say you were partially shut down and you are able to pull a month, say May of 2020, April and May of 2020. Well if you had PPP during that time and you claimed those April and May wages for PPP-
Bonnie: You’ve already used it, yep.
Scotty: …you are out, you are out for the ERC. So, if you do qualify under one of these, you need to consider whether it is even worth it. Because it may end up calculating out and it is not worth it. So, all in all, the due diligence is going to be very important. Showing the third parties why you qualify, what orders they were, how it had a [more than] nominal effect on you, quantifiably would be the best way to show a [more than] nominal effect. The IRS puts 10% in the regulations. And again, read through that Notice 2021-20, it has a lot of great information in there.
Kendell: It is an easy read.
Scotty: It is an easy read. It is 100 pages, but it is, it is very good. And it actually, on page 100-
Scotty: It is double spaced. On page 100, it does have the substantiation requirements. So, it is telling you, showing you what records you need to be able to maintain. You need to have the government order that is applied to you. Any records you have that are showing the [more than] nominal portion that was suspended. So, you are being able to quantify the [more than] nominal impact to you and so forth. So, there is a lot of good information in there as well. I think if you are a pharmacy owner out there and you are wondering how you qualify if you qualify, Notice 2021 is going to give you a lot of insight.
Kendell: Yeah, and I can imagine that everyone pushing these ERCs, and I can imagine, not everybody’s malicious. But if they go to a strip mall and it is like a clothing store, reduction in gross receipts. Restaurant closed; they closed their doors.
Bonnie: It is easier, yeah.
Kendell: And then they knock on your pharmacy, they are just thinking, you know,”90% of everyone I talked to qualified, so you are bound to qualify.” But you know, they’re not looking at it from a specific pharmacy. Because while those other companies were losing tons of money and their employees could not work, the pharmacies were looking for more people to work because a lot of times they were kind of, people were still flooding in to get their prescriptions and revenues were increasing. So, I think the pharmacy, it is just in a different ball game than the average American business. And the impact was completely different. So, I could see how people knocking on your door would just assume you qualify, but just, you know, ask them for documentation on how you qualify. And then you read through it yourself and think, “Does this actually match what happened to me?” Even if you did not look at the regulations here, if you look-
Bonnie: So that is my biggest thing, Kendell, is, you know, I keep hearing, “Well, the third party has told me that I qualify. You know, they’ve looked at my stuff and they told me I qualified. “Well, I, I think that is the biggest takeaway is you need, like Scotty said, you know, read through this stuff yourself. Ask them what it is that they are using to tell you. I mean, what are the qualifications they’re using to say that you, I mean, how do you qualify? And you need to make sure that you are on board with that and then it makes sense to you. Because at the end of the day, they are not signing it, you are. You are attesting to the information on that information. So, in a couple years, if you get audited, they are not going to the third party, they are going to go to you. So…
Scotty: And you know, if your risk appetite is, “To heck with it, you know, they are telling me I qualify,” then go, you know, that is all you. You know, that is your decision to make. But you know, just be aware of the kind of the due diligence that and the complexity behind this credit based on just, “Hey you qualify.”
Scotty: Yeah, so. Let’s see, I am looking at a third party report here. Sanitation of existing offices. You know, if I do not see any, you know, there is no nominal support explaining the nominal impact with this report. So, a sanitation was one of them. Supply chain was one of ’em. Virtual equipment, teleworking was one of them. There is a four-part test for that virtual teleworking thing. Be careful of that in 2021-20. Doctor’s offices were closed or reduced their hours. That decreased prescription volume, but it was not more than nominal. So, you know, just looking at the regulations, you could kind of have a field day with this one here.
But you know, the reason why this is so popular, why this is such a big topic right now, is all the COVID relief programs are pretty much gone now except this one. And again, like Kendell, you were saying, we have been looking at this since they passed the CARES Act. I mean I have been studying this one for two years now. This is not new to us. But the reason why it is popping up is because most COVID relief programs are done now, and you have these third-party vendors, pop-up shops. There are no regulations to these pop-up shops. They can do whatever they want. They are in it for their… They are not looking out for your best interests necessarily. Most of them are not. A few of them out there that are maybe doing what they need to be doing. So that is why you are seeing a lot of this. And then so you see pharmacies say, “Yeah, well I got it, I got it, I got it.” I mean, be aware, you know, this is what is happening behind the background. But again, with all that being said, if you are an aggressive risk tolerance kind of guy or girl, go, you know, that is your call. But we wanted to be sure that we explained the due diligence, the complexity, of what pharmacies are facing here. And if you did have that restaurant or snack shop or you do have a nominal impact and you can show that, you know, let us know and we’ll be happy to help if you are a client of ours, we haven’t already talked about it. So, I think with all of that said, Bonnie and Kendell, I think we can put this one hopefully to rest for right now.
Kendell: It is the end of the trilogy of podcast on the ERC. (Bonnie laughing) It is the last of three.
Scotty: And you know if you email us and say, “Hey, can we get the credit?” You know, I am going to push this video out to you.
Bonnie: There might be a prequel. (laughs) (Kendell laughing)
Scotty: I do not think we are going to be talking about this credit anymore, knock on wood.
Scotty: But if we do. (Bonnie laughing) We will cover it. If there are any new developments, we will cover it.
Bonnie: If we need to, we will do it.
Scotty: We’ll cover it. If there are any new developments, we will cover it. And believe me, nobody was looking at these regulations closer than I was trying to get pharmacies into this.
Bonnie: I was just about to say that. Scotty has been looking in this from day one, just trying to find a way that pharmacies would fit in this model.
Scotty: I was picking, looking for how a pharmacy-
Bonnie: Any little, small area, yeah.
Scotty: So, I’ll, yeah, I mean.
Bonnie: Not trying to be negative, just trying to be real about what we see.
Scotty: Yep, yep. So hopefully that helps everyone out there. And if you have any questions, feel free to reach us. Let’s see, bottom line. I think the bottom line is do your due diligence. If you are being approached about qualifying for the ERTC, do your due diligence. Look at Notice 2021-20 and just do your due diligence.
Bonnie: My bottom line would really be the same, but just do not just take what a third party tells you. You have to do your own homework, your own research, and make sure that you are comfortable. Because at the end of the day, you are signing it.
Kendell: Yeah, and I just think the pharmacies, the pandemic impacted them a lot differently than the most of American businesses. So, the ERC was great for the American business and especially those who were really hurting during that time. So, if you are a pharmacist, just say, you know, read through it and does this actually apply to me? All right. Thanks everybody for listening. Until next time, if you got any ERTC questions, shoot them our way, [email protected]. Thank you.
ADDITIONAL READING: EMPLOYEE RETENTION TAX CREDIT FOR START-UP PHARMACIES