Update on Employee Retention Tax Credit (ERTC)
Recently there has been a lot of industry chatter about the Employee Retention Tax Credit (ERTC). In this episode of The Bottom Line Pharmacy Podcast, join Bonnie Bond, CPA, Kendell Harris, CPA and Scotty Sykes, CPA, CFP® as they talk about qualifying for the ERTC and what to look out for.
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As always, ask Sykes if you have questions about qualifying for the credit.
If you prefer to read this content, the video transcript is below.
Bonnie: Welcome to the Sykes & Company, P.A. The Bottom Line Pharmacy Podcast. This is your daily dose of pharmacy CPA advice to fuel your bottom line. I am Bonnie Bond. This is Scotty Sykes and Kendell Harris. We are all CPAs at Sykes & Company, P.A. and this is our new podcast that we are getting going.
Scotty: We wanted to streamline our content. We are talking to pharmacy owners every single day, so we wanted to kind of get a real-time content program going. And so, we are going to try this out. We are going to have innovators in the industry. We are going to have our clients on here. We are going to have other Sykes & Company, P.A. team members on here. We are going to have vendors on here. All to discuss the bottom line of your pharmacy, and how to maximize that. So, it is going to be exciting. We are going to kind of be not so formal here and just have a good time.
Kendell: Yeah, and I think we have been creating content at Sykes & Company, P.A. for over 10 years. I went on YouTube and I took a little gander at some of the older videos. Ollin has been doing it longer than a lot of people have been doing educational videos on YouTube, so 10 years of videos. So, we have had various formats, a lot of good information; this format is just to try to be streamlined, and get to the bottom line. So, just a quick reminder… I will try to see if I can share the correct screen.
If you are not familiar, or you want to see some of our information, you can go to the Sykes & Company, P.A. website, and then click on Media Resources. And from here, there are various topics that you might be interested in. You can actually just search.
So, I know we are going to be talking about the ERTC today. You can actually just search a quick word and find it; there is different information on it. And then also, on our YouTube channel, you can see hundreds of videos that have been put up. You can just type in Sykes & Company, P.A. and make sure you subscribe. So, I just wanted to share that. If anyone has not subscribed that way, the content can pop up when you log in.
Bonnie: Kendell said we had to talk about the ERTC Employee Retention Tax Credits, my favorite. So, one of the things that I am getting a lot of, and which is why we just decided to kind of kick off this podcast talking about this topic, is we are getting a lot of communication and questions from clients on this. There are a lot of third parties, a lot of payroll vendors especially, that are reaching out to the pharmacy client base that we work with, basically telling them that they probably qualify for this tax credit.
So, obviously, they are calling us, because you know, we are team members with them, and they want to know, “Do we qualify?” And so, it is a hot topic. It has been a hot topic for a year and a half. I know, Scotty, you have been working with this since COVID hit.
Scotty: Yes, it is a hot topic. And we have some videos already out there on this topic, so keep that in mind. And we will probably touch on that at the end as well, but, the bottom line here is, well, I am going to jump to the bottom line, but the bottom line here is there are three ways to qualify: You have gross receipts drop, your revenues are dropping here versus a corresponding quarter in 2019. And this is 2020 versus 2019 quarter, or 2021 versus 2019 quarter. So, if you have a drop in gross receipts – a significant drop that is – you can qualify there. Now, a lot of pharmacies are just not going to qualify with the drop in gross receipts, right, Kendell? I mean, we have seen pharmacy owners pretty much have some of their best years during the COVID pandemic. And so, not a lot of pharmacies are going to qualify here.
Kendell: That is one thing I think we want to highlight in general with this segment: there is so much information out there. And in context, sometimes there is some truth to it, but then with us, we focus on pharmacies, and when you zero in on that information and how it applies to pharmacies, sometimes pharmacists can take advantage of different opportunities, sometimes they cannot. So, the PPP was huge. That was all over the news.
And then the ERTC, from what I noticed, it didn’t get nearly the same coverage on the major headline-type news, but there are some individuals who knew about it. They knew some of the details, and they have taken advantage of it and they are spreading the word. So, for example, I have a client… they called me up and they are like, “Kendell, I trust you. I know you look over everything for me, but have you looked at the ERTC?” And I am like, “Yes, your revenues have increased dramatically. It is not something you would qualify for.” And he is like, “I trust you, Kendell, but somebody came into the pharmacy, and they are telling me I qualify. They are just telling me I qualify and can you double- and triple-check the numbers?”
Bonnie: Yeah, and that is what is happening a lot. You know, from the very beginning we have been tracking this and looking at this for our clients every quarter. You know, we are all doing that. And it, just like you said, Scotty, it is just a situation where business was good for pharmacists during COVID in most situations. And so, for the gross receipts test, it just really, for most people that is a definite disqualifier there.
Scotty: The second way to qualify is a full shutdown due to a government order. You had to actually close your door and shutdown your business. Pharmacy is essential; you guys had to stay open. You are not going to qualify there. The third area is partial shutdown due to a government order.
Now, I am not going to sit here and tell you, or tell a pharmacy owner that, “You do not qualify here.” You may qualify here, it is just your risk appetite, but I can tell you that, well, I will just be straight up, it is going to be very rare that you are going to qualify under a partial shutdown due to a government order.
So, let us just cut to the chase there. It is going to be rare to qualify due to a partial shutdown due to a government order. And you know, Kendell, you mentioned we are sitting here talking to pharmacies, we look at everything through the lens of a pharmacy owner, when we are looking at new tax law, accounting issues, when the ERTC regulations came out, you know, we were digging into that information saying, “How can this qualify for pharmacies?” So, that is how we are looking at it.
And so, we have done that due diligence for you, the pharmacy owner. And again, it is just going to be difficult to qualify with that partial shutdown. You have to have a government order, that government order has to tell you have to modify your business, and if you are going to modify your business, you know, and claim the credit here, you need to make sure you have a good case. Not just one thing, “Hey, I had to social distance.” I mean, you do not want to go claiming this credit with just one thing: “I had to social distance.” You want to have four or five things on how it impacted you, and have your thesis.
Bonnie: And so, guys, that is what I hear a lot from clients. They ask me about the partial shutdown, you know, “Hey, well, I did delivery, and did not have people coming through the pharmacy,” or “We only did drive-through pickup.” And so, Scotty, I mean, are you seeing that people are using that?
Scotty: I always ask, “Well, were you required to go delivery? Were you required to lock your door and go curbside?” And usually, the answer is, “No.” So, there you go. I mean, you were not required; a best practice, if you will.
Supply chain issues come up a lot. You will hear that with the “ERTC mills,” is what they call them, “ERC mills” – these pop-up companies that are doing these credits – because they are very lucrative, but you will hear a lot of arguments saying supply chain issues… that is going to be very difficult to make that argument in a pharmacy.
You are going to hear about CDC guidelines or OSHA guidelines, those are not government orders. And so, if the ERC pop-up shops that are coming and knocking on your door saying, “Hey, you qualify here. We are going to charge you 15%, 20% of the amount we get you, and then we will do the credit based off of supply chain issues. Great, here is the large credit amount.” And, all of a sudden, next thing you know, they wind down their operation two years from now, and you are stuck with the audit all by yourself.
Bonnie: Yeah, I would think the concern there would be, do these people really have your best interest? These new companies that have popped up to do this, or do they really just want to push through all of these different credits to get their fees? So, I think we have to be really careful as pharmacists, as clients, to just make sure that you feel comfortable with what you are stating, your justification, and not just go based on this third party that has called you and told you what you possibly qualify for.
I think you also have to look at the monetary benefit there. We have talked lots about it. And it ends up that it is only a $5,000 credit maybe. So, then you kind of have to ask yourself, “Is it really worth going through the risk and the work?” Because, it is not a small process to get this credit – versus, if it is a, you know, $100,000 credit.
Scotty: Well, a lot of pharmacy owners got PPP right when COVID started. You cannot double-dip PPP wages, forgivable wages, with ERTC wages. So, you cannot claim the ERTC off of wages you have paid with forgivable PPP monies. So, you cannot double-dip there. So, you know, that is going to rule out a lot of pharmacies that may even qualify, if you did, for a partial shutdown in early 2020 or 2019 when the pandemic first started for 2020.
Bonnie: I wanted to ask you two about startups. Are there any special rules for pharmacies maybe that were starting up during the COVID time?
Scotty: Yeah, yeah, there is. If you… great point. If you opened your business after, I want to say it is February 2020, and you have gross receipts less than $1 million for these startup pharmacies, you definitely need to look into this credit. So, startup pharmacies, if you are a startup out there, you opened like during or after the pandemic kind of hit, you definitely need to put this on your radar and look at it.
Kendell: Yeah, the PPP was more clear-cut. So, I mean, if someone just comes with a piece of paper that just said, “Sign here, and you get this big ERTC,” you really need to understand what you are signing; it might not be that clear-cut. It might not be that simple.
And I think for a lot of industries, it is pretty clear-cut and simple, but for the pharmacy industry, because of the gross receipts, most industries, that is the reason why they are getting it: it is because their gross receipts dropped in that period. But for the pharmacy industry, the pharmacists need to really understand that the bottom line is, generally speaking, you really need to understand the rules before you sign anything related to the ERTC.
Scotty: Yeah, certainly. So, you know, it is going to be pretty rare to have a drop in gross receipts in a pharmacy during a pandemic. It is going to be pretty rare to qualify under a partial shutdown. And even if you do qualify, you know, it is probably, again, going to be right when that pandemic started and you had PPP monies, and you cannot double-dip. So, you know, this is a great relief, part of the CARES Act, but it is just a good chance a lot of pharmacies, unfortunately, are just not going to qualify. And if you do want to go for it under a partial shutdown, you have to have your case and you better be ready, because these are going to be audited and there is going to be some tax court cases. And there is going to be all kinds of litigation down the road in this area.