Brotman Law July 9, 2024 22 min read

ERTC Audit Preparation Tips for Nevada Businesses

What Nevada Businesses Owners Need To Know About ERTC Audits

In Nevada, where the economy spans from the bustling entertainment and tourism industries of Las Vegas to the technology-driven developments in Reno and the mining operations in rural areas, the Employee Retention Tax Credit (ERTC) has been a vital support during the COVID-19 pandemic. This federal incentive offers a lifeline to businesses that maintained their workforce amidst the pandemic's economic impacts. However, accessing the ERTC also means that businesses must be prepared for potential IRS audits.

This article will delve into effective ERTC audit defense strategies that are tailored to the diverse economic sectors of Nevada, emphasizing the importance of legal expertise and proactive preparation to mitigate audit risks.

Understanding the ERTC in Nevada’s Business Landscape

The ERTC provides a refundable tax credit to employers who sustained employment despite experiencing significant operational disruptions or declines in gross receipts due to the pandemic. In Nevada, where the economy has experienced significant ups and downs, it is crucial for businesses to adhere to the rules and guidelines of the Employee Retention Tax Credit (ERTC). Compliance is important to ensure that businesses can benefit from the credit without facing penalties or issues during audits.

The ERTC presents a refundable tax credit opportunity for Nevada businesses that maintained their workforce during the substantial operational hurdles posed by the COVID-19 pandemic. Eligibility criteria include demonstrating a significant decline in gross receipts or the partial or full suspension of operations due to government directives.

While not exhaustive, here is a summary of ten notable COVID-19 directives issued in Nevada throughout 2020 and 2021, which significantly impacted businesses:

  • State of Emergency Declaration (March 2020) - Governor Steve Sisolak declared a state of emergency, leading to widespread business disruptions. This declaration was the basis for subsequent restrictive orders affecting business operations across Nevada, qualifying many for the ERTC due to government-mandated full or partial suspensions of their operations.
  • Closure of Non-Essential Businesses (March 2020) - An immediate and extensive closure of non-essential businesses was mandated, including sectors like entertainment, hospitality, and certain retail services. This directly impacted businesses by halting operations entirely, a primary condition for eligibility under the ERTC.
  • Restrictions on Restaurants and Bars (March 2020) - Restaurants and bars were initially restricted to delivery and takeout only, disrupting normal business operations significantly. This shift not only reduced revenue but also qualified these establishments for the ERTC by demonstrating a partial suspension of their business operations.
  • Phased Reopening Plan (May 2020) - As part of a phased approach to reopening, businesses were allowed to operate under strict capacity limitations. These restrictions, while enabling some degree of operational resumption, still qualified businesses for the ERTC due to continued partial suspensions mandated by state orders.
  • Mandatory Face Masks in Public Spaces (June 2020) - The imposition of mandatory face masks in public spaces, including businesses, required companies to enforce new protocols. The associated costs and operational disruptions could be included in ERTC calculations, as they impacted the way businesses normally operated.
  • Extended Unemployment Benefits (July 2020) - With unemployment benefits extended, businesses faced challenges in rehiring staff, which can be an important aspect of the ERTC audit, demonstrating efforts to retain employees despite ongoing economic difficulties.
  • Reduction of Public Gathering Sizes ( November 2020) - A significant reduction in allowable public gathering sizes during the holiday season affected retail, events, and service industries, sustaining their eligibility for the ERTC due to enforced limitations on their operational capacity.
  • Pause on Economic Activities (November 2020) - A "statewide pause" re-imposed several restrictions due to a surge in COVID-19 cases, including reduced capacities for businesses and further closures. This reinforced the continued impact on businesses, supporting further claims for the ERTC.

  • Vaccination Rollout and Business Implications (Early 2021) - The initiation of vaccine distribution had mixed effects. Businesses involved in healthcare and public services faced new operational demands and costs, potentially affecting their ERTC eligibility by altering their employee utilization and retention strategies.
  • Lifting of Certain Restrictions (Mid 2021) - As some restrictions began to lift, businesses still faced challenges in returning to pre-pandemic operations levels. The phased lifting of restrictions continued to affect businesses, making the ERTC relevant for covering periods when businesses were not fully operational.

Throughout 2020 and 2021, Governor Steve Sisolak's administration in Nevada took decisive actions to mitigate the spread of COVID-19 with a range of orders that had profound effects on the state's businesses. For businesses preparing for an Employee Retention Tax Credit Audit, it is crucial to document how each phase of these orders affected their operations. Detailed records showing the timeline of restrictions and their direct impacts on business activities are essential. This includes documenting changes in customer capacity, operational hours, employee retention efforts, and any other relevant financial records that reflect the pandemic's impact. These detailed accounts will be vital in justifying the retention credit claims during audits, particularly in demonstrating continued eligibility during the phased reopening periods and under varying levels of operational restrictions.

Impact of COVID-19 on Key Nevada Cities

During the COVID-19 pandemic, the state of Nevada experienced widespread business disruptions that varied significantly across its key cities—Las Vegas, Reno, and Elko—each facing unique challenges that are crucial in determining eligibility for the Employee Retention Tax Credit (ERTC) and preparing for potential audits.

  • Las Vegas: The vibrant heart of Nevada’s hospitality and gaming industry, was hit exceptionally hard by the pandemic. Known globally for its bustling casinos, entertainment venues, and hotels, the city faced unprecedented shutdowns starting in March 2020 when Governor Steve Sisolak ordered the closure of all non-essential businesses. This directive led to a virtual standstill of the city’s main economic activities. Casinos went dark, and hotels saw their occupancy rates plummet to near zero as travel halted. The impact on revenue was profound and immediate, rippling out to affect not only the primary businesses but also the vast ecosystem of suppliers and service providers reliant on a thriving tourism sector. For businesses in Las Vegas, documenting these impacts is critical for ERTC audits, as they must demonstrate significant operational disruptions and efforts to retain employees despite drastically reduced revenue.

  • Reno: The narrative shifts from hospitality to technology and logistics. As a growing tech hub, Reno experienced shifts in operations with many businesses grappling with disruptions in supply chains and operational capacities. The onset of the pandemic exacerbated these issues, as lockdowns and travel bans affected the availability of components and delayed shipments, creating bottlenecks and slowing production. Companies in the tech sector had to quickly adapt to remote work setups, which involved additional costs for technology upgrades and cybersecurity measures. Similarly, logistics companies faced challenges in managing fluctuating demand and health regulations for their workforce. For Reno’s diverse business landscape, the ERTC eligibility hinges on showing how these disruptions necessitated maintaining a workforce in the face of operational challenges and additional costs.

  • Elko: Primarily dominated by mining and related industries, tells yet another story of adaptation and resilience. As global demand for raw materials fluctuated wildly due to the pandemic, businesses in Elko contended not only with these market dynamics but also with implementing safety-related operational changes. Mining operations, which cannot be paused easily or operated remotely, had to introduce stringent health protocols to protect workers while trying to maintain productivity. This delicate balance of continuing operations amid health risks and market uncertainty presents a compelling case for ERTC claims, as businesses had to retain employees despite significant operational and financial hurdles.

  • Henderson: Retail and Commercial Services. Henderson, as one of the largest residential areas in Nevada, saw significant disruptions in its retail sector and service industries that cater to both local residents and tourists. Many non-essential businesses had to close temporarily or operate under strict capacity limits. Local retail stores, beauty salons, and fitness centers had to enhance their online presence or shift to appointment-only services to sustain operations. It's crucial for these businesses to document the duration of reduced operations, the transition to online services, and efforts to retain staff despite decreased foot traffic.

  • Carson City: Government and Related Services. As the state capital, Carson City experienced disruptions in government operations with many offices moving to remote work. This shift dramatically reduced the customer base for downtown businesses, including cafes, print shops, and other services that depend on government employees. These businesses should record the impact of reduced government operations on their revenue, adaptations to service delivery, and measures to maintain employment during periods of reduced activity.

  • Sparks: Logistics and Warehouse Operations. Sparks, with its extensive industrial areas and proximity to major logistics hubs, faced challenges in its warehouse and distribution sectors. While there was increased demand for distribution services due to a surge in online shopping, businesses also had to implement costly safety measures and potentially deal with reduced workforce availability due to health concerns. Documentation for ERTC should include details on operational adjustments, safety-related expenses, and efforts to avoid layoffs despite potential disruptions in staffing.

  • Fernley: Manufacturing and Industrial Impact. Fernley, hosting several large manufacturing facilities, dealt with interruptions in production due to supply chain disruptions and the need for social distancing on production floors. This led to temporary closures or reduced production schedules. Manufacturing businesses must maintain records of production stoppages, financial impacts of reduced output, and strategies to retain skilled workers during shutdowns or slow periods.

  • North Las Vegas: Hospitality and Entertainment Venues. North Las Vegas, which includes parts of the larger Las Vegas metropolitan area, saw significant impacts on its hospitality and entertainment venues, including smaller hotels, event spaces, and entertainment complexes that serve both locals and tourists. These businesses had to cancel events, operate at reduced capacity, and in many cases, pivot to virtual event offerings. It is essential for these businesses to document event cancellations, changes in operational models, and employee retention efforts.

For businesses in these Nevada cities, accurately documenting how pandemic-related government orders affected their operations, financial health, and workforce is crucial. This documentation not only supports claims for the Employee Retention Tax Credit but also prepares businesses for potential audits by demonstrating compliance with the tax credit requirements and the necessity of the financial relief provided during these challenging times.

Triggers for IRS Audits all Nevada Businesses Should Know 

Nevada businesses that utilized the Employee Retention Tax Credit are now faced with the risk of an IRS Audit. These audits are aimed at verifying the precision and validity of ERTC submissions. Navigating these audits demands meticulous attention to detail and strategic foresight, as businesses work to understand the triggers and prepare accordingly.

The IRS may initiate ERTC audits based on several indicators, including:

  • Discrepancies or inconsistencies in the data provided on ERTC claims versus other financial records.
  • Excessive ERTC claims that seem out of proportion with business size or industry norms.
  • Random selection as part of broader IRS compliance efforts.

Frequent ERTC Claim Mistakes

Businesses in Nevada often face specific pitfalls when filing ERTC claims, including the following:

  • Misunderstanding Eligibility Requirements: Particularly around what constitutes a significant decline in gross receipts or the specifics of governmental orders impacting operations.
  • Poor Documentation: Inadequate record-keeping related to payroll and how operational changes directly linked to COVID-19 mandates.
  • Calculation Errors: Incorrectly determining the amount of eligible wages or misapplying the credit calculation formula.

Essential Documentation for ERTC Audit Defense

Successfully defending an ERTC audit requires comprehensive documentation. You should make sure you have the following documents available if you are going through an IRS Audit, and in preparation of an audit. 

  • Detailed Employment Records: Demonstrating the maintenance of staff levels and payroll continuity.
  • Accurate Financial Statements: Illustrating the economic impact on the business, linked directly to pandemic-related factors.
  • Government and Operational Correspondence: Proving adherence to local and federal COVID-19 related regulations.

The Role of Tax Attorneys in ERTC Audit Processes

In Nevada, tax attorneys play an indispensable role in managing ERTC audits by:

  • Clarifying Complex Regulations: Providing expert interpretations of intricate tax rules and how they apply to specific business scenarios in Nevada.
  • Preparing Documentation: Organizing and preparing all necessary documentation to substantiate ERTC claims.
  • Representing Businesses During Audits: Handling negotiations and communications with the IRS, ensuring that businesses receive fair treatment.

Proactive Audit Preparation Strategies

Nevada businesses can adopt several strategies to minimize the impact of audits:

  • Regular Documentation Reviews: Ensuring all documents related to ERTC claims are accurate and audit-ready.
  • Ongoing Advisory Services: Staying updated on changes to ERTC regulations and IRS guidelines through continuous engagement with tax professionals.
  • Internal Audits: Conducting in-house or third-party audits to identify any potential issues that could arise during an IRS audit.

Building a Compliance-Oriented Corporate Culture

Creating a corporate culture that emphasizes compliance can greatly aid Nevada businesses in managing ERTC audits effectively. This includes regular training for employees on compliance issues, updating internal policies to meet current tax laws, and implementing strong internal controls to ensure ongoing adherence to regulations. 

Conclusion: Securing ERTC Benefits Through Strategic Compliance in Nevada

For businesses across Nevada, effective management of ERTC claims involves more than just applying for and receiving the credit; it also requires a strategic approach to ensure compliance and readiness for IRS scrutiny. By understanding the nuances of the local economy, maintaining robust documentation, and leveraging the expertise of experienced tax attorneys, Nevada businesses can not only navigate ERTC audits successfully but also secure a stable financial footing in the post-pandemic landscape. 

"Sam is a wonderful, results-oriented and extremely knowledgeable and talented attorney, who really has 'heart' in working on behalf of his clients, and explains options in a straightforward, respectful manner. He has assisted us with great outcomes which have added to our quality of life. I would not hesitate to recommend Sam for his services as he is an ethical, personable and expert attorney in his field. You will likely not be disappointed with Sam's work ethic, approach and his efforts."

-Aileen Dwight, Licensed Clinical Social Worker & Psychotherapist

Last updated: July 10, 2024

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