By Tricia Petteys, Payroll Vault Franchising, LLC

 

The IRS has made several big announcements recently. First, in September, it enacted a moratorium for processing new claims, due to a huge backlog and rampant fraudulent filings. In October, they announced a claim withdrawal process for business owners who may have been the target of a credit filing scam or who have doubts after filing that they actually qualify for the tax credit.

As chief operating officer and co-founder of a payroll service company that specializes in serving small businesses, we have successfully processed tens of millions of dollars of ERC credits for clients. But we also know many small business owners who were convinced to file for ERC by heavy-handed marketing used by questionable tax filing companies.

It’s more important now than ever for business owners to know the facts about ERC qualifications, how to spot a filing scam attempt, and how to withdraw a filing if they think they’ve made a mistake.

ERC Situation Overview

To recap, ERC is a special tax credit offered to employers who paid wages between March 13, 2020, and December 31, 2021, during the COVID-19 pandemic shutdown. To qualify, an employer must have experienced one of the following during this time period:

• Sustained a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021.
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.
• Qualified as a recovery startup business for the third or fourth quarters of 2021

Additional information on ERC qualifications and how to file a claim are available on the IRS website.

Due to the large number of claims filed, the IRS announced on September 14 that it had a backlog of about 600,000 claims, and it was seeing an alarming number of fraudulent claims. To address the problem, the IRS put a moratorium on processing new claims, extending the original 90-day waiting period for valid claims to 180 days. Deadlines for filing and processing remain unchanged, however, which means business owners must be vigilant to avoid scams.

Spotting a Scam

Business owners have a limited time to file for ERC. According to the IRS, the filing deadline for the 2020 tax period is April 15, 2024, and the deadline for the 2021 tax period is April 15, 2025. Because of this shrinking window, unscrupulous filing companies will pressure business owners to file quickly and without doing their due diligence to ensure they’re qualified. To avoid being taken in by these scams, business owners should watch for these warning signs of an ERC scam:

• Unsolicited contact from companies claiming to help with ERC filings. 
• Instant eligibility determination promises, i.e., “We can do it in minutes.” • Large upfront fees or fees based on refund size. 
• A refusal to sign the ERC filing.
• Misleading claims about ERC risks, i.e., “There’s no penalty for an ineligible filing.”
• A lack of clarity on ERC eligibility.

 As a payroll professional whose company does business tax filings, I highly recommend business owners only work with reputable tax professionals when filing any claims. Make sure to check the eligibility and computation worksheet and perform a self-evaluation. Business owners shouldn’t file a claim if they have doubts about their qualifications. However, if they’ve already filed a doubtful claim, there is a solution.

Withdrawing Questionable Claims

On October 19, the IRS announced a new withdrawal system for business owners who suspect their ERC filings may not be valid. Fraudulent claims that were filed willingly won’t exempt the filer from criminal investigation and subsequent prosecution, but business owners won’t be penalized or fined.

Employers can withdraw an ERC claim if they meet four criteria:

• They filed an adjusted employment return (Forms 941-X, 943-X 944-X, or CT-1X).
• They filed the return only for ERC with no other adjustments.
• They are withdrawing the entire amount of the ERC claim.
• Either the IRS hasn’t paid the employer’s claim, or the employer hasn’t cashed or deposited the refund check.

 An employer that wants to withdraw an ERC claim should follow special instructions, which are available on the IRS website. To summarize, employers who filed through a professional payroll company should consult their payroll service provider; the provider may need to file the withdrawal request, depending on whether the claim was filed individually or batched together. Employers who file claims on their own should fax their withdrawal requests by computer or mobile device; requests may also be mailed, though this takes longer. Lastly, employers who have been notified that they’re under audit may send the request to their assigned examiners or respond to the audit notice if they don’t have an assigned examiner.

Business owners who have received a refund check can still withdraw a claim if they do so before cashing or depositing. They should mail the voided check with their withdrawal request, using the instructions available on the IRS website.

ERC is a valuable benefit to employers who kept their employees through a difficult economic period. Unfortunately, there will always be those who will take advantage of goodwill efforts and programs designed to help others. It falls to business owners to watch out for attempts to lure them into filing unqualified claims — so this financial assistance can reach those who need it most.

 

Tricia Petteys is the chief operating officer and co-founder of Payroll Vault Franchising, LLC. For more information about IFA franchisor member Payroll Vault Franchising, LLC, please visit franchise.org/franchise-opportunities/payroll-vaultfranchising-llc.

By Colin Hamilton, Unsecured Funding Source

 

Although franchise costs can range from $10,000 to $5,000,000, the majority of franchises cost between $50,000 and $200,000. Ironically, the range where the majority of franchises fall, is also the most difficult to find funding for. While franchise startups below $75,000 can often self-fund out of cash, and for enterprises costing $250,000- and-up, entrepreneurs tend to be able to acquire traditional SBA and commercial loans. The gap in-between those two is traditionally a difficult amount to achieve. It is that perfect number where it is often too much for someone to pay cash out of their savings accounts for, but lower than many SBA lenders want to deal with, due to the time and energy it takes to underwrite SBA files. Many new franchisees are faced with the difficult process of trying to figure out the best way to fund their franchise, and many are not presented with the wide range of options available to get their new venture off the ground. Although SBA loans are a great product that have funded millions of America’s businesses, a one-size fits all funding strategy is no longer viable in today’s constantly changing economic conditions. Attempting to open a new franchise, or expanding operations on an existing franchise, within the range of $50,000-$250,000, can prove a difficult task. As such, we see many franchisees utilizing the following six funding vehicles as viable options for their venture. These following six are not mutually exclusive and many entrepreneurs are choosing to utilize a combination of one, two, or even more options in order to fund their franchise start-up.

1. Equity Investors: One common form for financing is selling partial ownership of the company to investors or business partners. The franchisee can lean on investors to leverage their networks to make a franchise more profitable while sharing risk; however, this can also create other issues. One needs to get along well with their partners and will normally take home less profit both from operating the business as well as in the eventual sale of the business.

2. Cash: A very popular option recently, cash creates the opportunity for cash flow sooner from the business as interest rates rise. However, choosing to utilize cash as a primary means of funding comes with costs as well. Exhausting cash supplies leads to lack of diversity in their portfolio. Many savvy investors prefer to keep in other investments, diversifying their portfolio. As well, utilizing all your cash creates further risk if you need additional funding due to unforeseen circumstances.

3. ROBS: A popular funding option for the past 40 years, ROBS (Rollovers as Business Start-ups) is investing your retirement in oneself. Utilizing funds from an existing 401(K), one can redirect the capital into their own business. When one goes to sell their business, the profit goes back into their retirement, tax free. Although it is a great funding option for some, it is limited. If a franchisee is looking at a side-hustle or semi-absentee model while continuing at their current place of employment where the 401(K) is held, they cannot normally utilize funds from the 401(K).

4. Commercial Loans: Although traditionally commercial loans have been difficult for new franchisees to acquire due to lack of time in business, there are now options available out there for new franchisees. UFS has launched the Jumpstart Loan program, with zero requirements for time in business, to assist new franchisees with starting and launching their first units. This is a revolutionary new product which allows for quicker funding and ramp ups, with far fewer requirements than the SBA loan programs. Many borrowers looking to fund in the $50,000- $250,000 range have begun to pursue the Jumpstart Loan.

5. Personal Loans: Overlooked by many seeking funding options, personal loans are becoming more popular in funding franchisees up to $350,000. Utilizing one’s own personal credit profile, personal loans can be leveraged to fund non-SBA-eligible franchises, like cannabis, CBD or emerging brands. However, personal loans are also being utilized for traditional franchises as well, due to lower time, and stress, investment than a traditional SBA loan. Personal loans can take 2-3 weeks, require minimal paperwork, and not involve the cost of business plans and packaging.

6. HELOCs: Currently, many franchisees utilize HELOCs as an option to pull equity from their homes at some of the lowest interest rates possible. The lower minimum monthly payments help a new franchisee cashflow their budding business. The downside, however, is the collateralization of their home, putting additional stress on the franchisee. One great way to use the HELOC is to leave some available balance, in order to address any financial strains that may arise in the first couple years.

Regardless of which of these options the franchisee chooses to utilize, it is imperative to think through the pros and cons of each vehicle. There is no one simple answer when it comes to investing in one’s franchise, and one should always compare, research and seek counsel from trusted advisors and investors on how to proceed. Taking into account one’s risk tolerance, (such as willingness to collateralize one’s house), one’s goals (long term net worth vs current cash flow), and current personal financial conditions are paramount to creating a funding strategy for achieving success as a franchisee.

 

Colin Hamilton is the director of business development at Unsecured Funding Source, a direct lending and advisory service for start-ups and business acquisitions. For more information about IFA supplier member Unsecured Funding Source, please visit franchise.org/suppliers/unsecured-funding-source.