Brotman Law July 9, 2024 19 min read

The Do's and Don'ts of ERTC Audit Defense for South Carolina Businesses

Learn More About Your ERTC Audit Risk 

In South Carolina, where the economy is bolstered by sectors such as automotive manufacturing in Greenville, tourism in Charleston, and a significant agricultural presence throughout the state, the Employee Retention Tax Credit (ERTC) has been a pivotal financial support during the economic downturn caused by the COVID-19 pandemic. This federal program assists businesses that have maintained their workforce despite significant operational and financial challenges. However, leveraging the ERTC also subjects businesses to potential IRS audits. For South Carolina companies, understanding the complexities of ERTC compliance is critical to maximizing the benefits of the program and managing potential audits effectively.

This guide will provide strategies for ERTC audit defense tailored to South Carolina's diverse economic landscape, emphasizing the importance of comprehensive preparation and the role of professional legal advice.

Understanding the ERTC in South Carolina’s Business Environment

The ERTC offers a refundable tax credit to employers who retained staff despite experiencing significant declines in gross receipts or undergoing full or partial suspensions of their operations due to government-mandated COVID-19 restrictions. For businesses across South Carolina, particularly those in sectors directly impacted by these disruptions, accurately documenting these impacts is essential for establishing ERTC eligibility and preparing for potential IRS audits.

South Carolina’s Statewide Orders That May Have Impacted Their Business

Below is a summary of ten significant COVID-19 orders issued in South Carolina during 2020 and 2021 under Governor Henry McMaster and how these directives impacted businesses, especially in relation to the Employee Retention Tax Credit (ERTC) Audit.

  • State of Emergency Declaration (March 2020)- Governor Henry McMaster declared a state of emergency, enabling the state to mobilize resources and enact business-related restrictions. This was crucial for businesses to start documenting disruptions for ERTC eligibility.
  • Closure of Non-Essential Businesses (April 2020) - Non-essential businesses, including retail stores, gyms, and dine-in services, were temporarily shut down. This mandatory closure significantly affected their operations and revenue, substantiating ERTC claims due to complete suspension of activities.
  • Stay-at-Home Order (April 2020) - South Carolinians were required to stay at home unless for essential activities, drastically reducing customer foot traffic and impacting business operations across the board. This supports ERTC claims as businesses faced forced reductions in operational capacity.
  • Mandatory Mask Mandate (August 2020) - A statewide mandate required masks in all public spaces, imposing new operational challenges and costs for businesses to manage compliance, which could affect customer interactions and revenues.
  • Phased Reopening Plan (May 2020) - The introduction of a phased reopening allowed businesses to resume operations but under strict capacity limits and safety protocols. Despite reopening, the lingering restrictions continued to affect business functionality and profitability, supporting ERTC eligibility due to partial suspension of normal operations.

  • Ban on Large Gatherings (2020-2021) - Continued restrictions on the size of public gatherings affected venues and businesses relying on such events, supporting their ERTC claims due to restricted operational capacity and direct impacts on revenue.

  • Extension of State of Emergency (Multiple times in 2020 and 2021)** - The repeated extensions of the state of emergency highlighted the ongoing impact of the pandemic, reinforcing the need for continued documentation of business disruptions for ERTC eligibility.

  • Temporary Prohibition on Evictions (2020) - This order helped businesses preserve cash flow by temporarily halting evictions, indirectly supporting operational stability during periods of revenue loss.

  • Financial Assistance Programs for Small Businesses (2020) - South Carolina launched several initiatives to provide financial aid to businesses facing economic distress. Participation in these programs is crucial for ERTC documentation, highlighting the financial impact experienced and the necessity for additional support to retain employees.

  • Vaccination Rollout and Business Operations (2021) - As vaccines became available, businesses were encouraged to support vaccination efforts among employees, affecting operational adjustments and health safety measures. These efforts are relevant to ERTC claims as they demonstrate ongoing efforts to safely maintain operations and employment.

Throughout the pandemic, Governor Henry McMaster's administration took various measures to mitigate the spread of COVID-19 while trying to manage its economic impact. For South Carolina businesses preparing for an Employee Retention Tax Credit Audit, it is essential to document how each state order affected their operations, financial health, and employment practices. Detailed records should include the timing of government orders, descriptions of how these orders influenced operational capacities, financial impacts, and efforts to retain employees under challenging conditions. This comprehensive documentation will be key to demonstrating the necessity of the ERTC during periods of significant operational disruption and recovery.

Impact of COVID-19 on Key South Carolina Sectors

As the COVID-19 pandemic swept through South Carolina, its impact varied significantly across different regions, each facing unique challenges that reshaped their economic landscapes. The Greenville and Upstate region, known for its strong automotive and manufacturing sectors, Charleston's tourism-driven economy, and the state's agricultural heartlands each experienced disruptions that not only tested their resilience but also necessitated precise documentation for financial relief measures such as the Employee Retention Tax Credit (ERTC) and IRS audits.

  • Disruptions in Greenville and Upstate's Automotive and Manufacturing Industries: In Greenville and the broader Upstate area, which serves as a hub for automotive and manufacturing industries, the pandemic introduced significant operational challenges. Key among these were disruptions in production and supply chains. As global supply chains were hampered by lockdowns and transportation halts, local factories saw delays in receiving essential materials and components, forcing them to slow down or, in some cases, temporarily halt production. This not only affected their immediate output but also had cascading effects on employment and regional economic stability. Businesses in this sector had to adapt by renegotiating supplier contracts and optimizing production processes to handle abrupt changes. Documenting these disruptions in detail—including the extent of production delays, the specific nature of supply chain challenges, and the measures taken to retain employees despite operational downturns—is crucial. This information will substantiate their claims for the ERTC by illustrating how the pandemic directly impacted their operations.
  • Charleston and Coastal Areas: Tourism and Hospitality Industry Setbacks: Charleston and the surrounding coastal areas, heavily reliant on tourism and hospitality, faced severe downturns due to travel restrictions and a decline in visitor numbers. Hotels, restaurants, tour operators, and retail businesses that cater to tourists saw unprecedented losses as foot traffic dwindled. The cancellation of major events and conventions, which are staples for Charleston’s economy, added further strain. Local businesses had to quickly pivot, enhancing their online presence or offering new services such as virtual tours or delivery options to mitigate losses. The economic impact on Charleston's tourism and hospitality sectors needs to be meticulously recorded, detailing declines in bookings, changes in business operations, and efforts to adapt to the new market conditions. Such documentation is essential for justifying ERTC claims, demonstrating the sustained efforts to maintain employment in the face of drastic revenue reductions.
  • Sumter: Challenges in South Carolina's Agricultural Sectors. Across South Carolina’s agricultural sectors, farmers grappled with market volatility and distribution challenges. Disruptions in distribution channels meant that getting produce to markets became more difficult and costly, while fluctuations in demand—especially from large buyers like restaurants and schools—created additional pressures. These challenges were compounded by the need to adjust production practices to ensure safety and compliance with health regulations. For agricultural businesses, detailed records of how market volatility and distribution issues impacted their revenue and operations are vital. This documentation supports their ERTC claims by showing the direct economic impacts of the pandemic and the necessity of retaining staff during uncertain times.
  • Columbia: Government and Education Sector Impact. Columbia, as the state capital and home to the University of South Carolina, saw significant disruptions in both government operations and higher education. Many government offices and university facilities were either closed or operating remotely, drastically reducing foot traffic in the city center and negatively affecting local businesses such as cafes, bookstores, and print shops. These businesses should document operational changes, loss of revenue, and efforts to retain employees, such as adapting to online sales or service offerings.
  • Rock Hill: Small Business and Local Retail Challenges. Rock Hill, part of the Charlotte metropolitan area, experienced challenges in its vibrant small business sector. Local ordinances required many non-essential businesses to reduce operations or close entirely, impacting retail stores, beauty salons, and personal services. Documenting the duration of closures, adaptation to safety protocols, transition to online platforms, and employee retention strategies will be crucial for substantiating ERTC claims.
  • Spartanburg: Automotive and Manufacturing Downturn. Spartanburg, with a substantial presence in automotive manufacturing and related industries, faced production halts and disruptions due to supply chain issues and safety measures. Manufacturing plants had to reduce shifts or temporarily shut down, affecting numerous workers. Companies need to maintain records of production stoppages, financial impacts, and measures taken to retain employees during these periods for ERTC documentation.
  • Myrtle Beach: Tourism and Hospitality Freeze. Myrtle Beach, heavily reliant on tourism, suffered tremendously due to travel restrictions and public health measures. Hotels, restaurants, entertainment venues, and retail outlets along the beachfront faced extended periods of reduced activity or closure. Businesses in this sector must document the severe drop in tourists, adjustments made to operations (such as enhancing sanitation or offering takeaway services), and efforts to keep staff employed.
  • Anderson: Healthcare and Essential Services Strain. Anderson, serving a critical role in regional healthcare, saw increased pressure on its medical facilities while other sectors of the economy slowed down. Hospitals and clinics faced high costs related to pandemic response (e.g., acquiring PPE, increasing staff hours), while non-medical businesses struggled with reduced customer demand. Healthcare providers and associated businesses should document increased operational costs, revenue impacts from non-COVID services, and employee retention efforts.

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

Common Triggers for IRS Audits in South Carolina

Businesses in South Carolina might face IRS audits due to:

  • Inconsistencies in Financial Reporting: Discrepancies between the information provided in ERTC claims and other financial or employment records can raise red flags.
  • Excessive Claims: Large claims that appear disproportionate to the business's operational impact or size may trigger additional scrutiny.
  • Random Selection: As part of routine checks, the IRS may select businesses randomly to ensure compliance and verify the accuracy of claims.

Avoiding Common Mistakes in ERTC Claims

When applying for the ERTC, South Carolina businesses often encounter several pitfalls:

  • Misinterpreting Eligibility: Incorrectly assessing what qualifies as significant operational disruption or substantial decline in gross receipts.
  • Inadequate Documentation: Failing to maintain detailed records that clearly link operational changes and financial outcomes directly to the pandemic.
  • Calculation Errors: Errors in calculating the eligible amount due to misunderstandings of IRS guidelines or payroll complexities.

Key Documentation for ERTC Audit Defense

Building a robust defense against an ERTC audit involves comprehensive documentation:

  • Detailed Employment Records: Demonstrating the continuity of employment and payroll expenses throughout the affected periods.
  • Financial Statements: Clearly showing revenue declines directly correlated with pandemic-related disruptions.
  • Regulatory Compliance Documents: Providing evidence of compliance with federal and state COVID-19 regulations that impacted business operations.

Role of Tax Attorneys in ERTC Audit Defense

In South Carolina, tax attorneys play a crucial role in navigating the complexities of ERTC audits by providing:

  • Expert Legal Guidance: Offering interpretations of complex tax laws and advising on their application to specific business scenarios.
  • Audit Preparation: Assisting businesses in organizing and reviewing documentation to ensure it robustly supports the ERTC claim.
  • Representation During Audits: Managing communications with the IRS to ensure that the business’s interests are effectively represented.

Proactive Audit Preparation Strategies

To minimize the risk of audits and ensure readiness, South Carolina businesses should adopt several proactive measures:

  • Regular Documentation Review: Ensuring all documents related to the ERTC are accurate and complete.
  • Continuous Legal and Financial Consultation: Staying updated on changes to ERTC regulations and IRS auditing practices through regular consultations with tax professionals.
  • Mock Audits: Conducting internal or third-party audits to detect any potential issues before they are flagged by the IRS.

Cultivating a Compliance-Focused Corporate Culture

Developing a corporate culture that emphasizes compliance can significantly aid in managing ERTC audits. This involves educating employees on the importance of precise record-keeping, regularly updating compliance protocols, and implementing strong internal controls over financial management.

Conclusion: Securing Continued Benefits from the ERTC in South Carolina

For businesses across South Carolina, effectively managing ERTC claims involves more than just meeting eligibility criteria; it requires strategic planning, meticulous documentation, proactive audit defense measures, and leveraging specialized legal expertise. By adopting these practices, businesses can confidently navigate the complexities of ERTC audits and ensure continued financial stability and growth in South Carolina’s dynamic economic environment.

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Last updated: July 10, 2024

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