Myths Around the Not so Simple Employee Retention Credit
By Jamie Parsons, Partner
Simply put, the Employee Retention Credit (“ERC”) is a refundable tax credit that was originally created under the CARES Act to assist businesses that were impacted by the pandemic with payroll costs.
An eligible employer qualifies for the ERC in one of three ways:
- Significant drop in gross receipts
- Full or partial suspension by a government order
- Recovery startup business
While the ERC may sound simple, it is far from that! Eligibility for the ERC is where many get tripped up and misled. Solicitors are taking advantage of this program and advertising that they can qualify any business for the ERC. On October 19, 2022, the IRS warned employers to be wary of solicitors who are advising them to claim the ERC when they may not qualify. So, let’s look at a few myths of the ERC eligibility…
Myth #1: I only need to look at gross receipts for my businesses that have employees.
IRS Notice 2021-20 provides aggregation rules for certain businesses that must aggregate the gross receipts of all businesses of the aggregated group to determine if the group has a significant drop in gross receipts. If the aggregated group does not experience a significant decline in gross receipts, then no member of the aggregated group can claim the ERC based on a significant decline in gross receipts. These aggregation rules apply even if some of the aggregated businesses do not have any employees.
Myth #2: My business was affected by a government order, so I qualify.
Possibly… however, it is certainly more complicated than that. The CARES Act states that a business must be fully or partially suspended during a quarter due to orders from an appropriate government authority limiting commerce, travel or group meetings due to COVID-19. IRS Notice 2021-20 goes on to say that to qualify for a partial suspension, a more than nominal portion of the business had to be suspended by a government order or a government order must have placed a modification against the business that had a more than nominal effect on the business. The notice further defines more than nominal as more than 10%.
Highlights:
- A government order had to exist that specifically fully/partially suspended the business or modified the operation of the business.
- That government order had to have a more than nominal impact on a more than nominal portion of the business (10% tests).
- If these tests are met, the qualification is only for the period that the government order was in effect, which may not be a full quarter.
Myth #3: My gross receipts in 2021 didn’t decrease enough to qualify.
To qualify for quarters in 2021 based on a significant reduction in gross receipts, a business needs a reduction of gross receipts of more than 20% compared to the same quarter in 2019. However, IRS Notice 2021-23 provides for an alternative quarter election for the first and second quarters of 2021. This election allows the business to look back to the previous quarter for a reduction of more than 20% in gross receipts. For example, if gross receipts in quarter 1 of 2021 did not decline by more than 20% compared to quarter 1 of 2019, the business can look to the previous quarter (quarter 4 of 2020 compared to quarter 4 of 2019). If gross receipts for quarter 4 2020 decreased by more than 20% compared to quarter 4 of 2019, then the business would qualify for quarter 1 of 2021.
Furthermore, IRS Revenue Procedure 2021-33 provided a safe harbor to exclude amounts for Paycheck Protection Program (PPP) loans, Shuttered Venue Operators Grants and Restaurant Revitalization Grants from gross receipts for ERC eligibility determination purposes.
The moral of the story is that the Employee Retention Credit has multiple layers and assessments that need to be made to determine eligibility for the credit, and your CPA is the best person to start with. Have you assessed your businesses’ eligibility for the credit?
Jamie L. Parsons Partner, CPA
Jamie is a Partner in our Firm’s assurance area with over 19 years of experience in public accounting. She works primarily with non-profit organizations and clients involved in the affordable housing industry, including tax credit properties, U.S. Department of Housing and Urban Development and U.S. Department of Agriculture Rural Development sites. She has experience […]
The information contained in this article is for informative purposes only and should not be relied on when making any business, legal, or other decisions. This information may be updated without notice and/or may not contain the most current information that is available related to this topic. Please consult with your advisor to determine how this information applies to your specific facts and circumstances.