With the 2021 tax filing season underway, it is important for taxapyers to review their tax saving opportunities, especially as they relate to the Employee Retention Tax Credit (ERC).
Overview of the Employee Retention Credit
Since enacted in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Employee Retention Credit (ERC) guidelines have changed several times. While the American Rescue Plan Act of 2021 (ARPA) extended and expanded the ERC through December 31, 2021, the subsequent signing of the Infrastructure Investment and Jobs Act (IIJA) in November 2021 retroactively changed the eligibility date to September 30, 2021. Worry not, taxpayers can still retroactively claim the ERC as they have up to three years from the completion of the program to look back to determine if wages paid after March 12, 2020 through September 30, 2021 are eligible.
Who Now Qualifies for the Employee Retention Credit?
An employer carrying on a trade or business in 2020 and/or 2021 is considered an “eligible employer” for the Employee Retention Credit if they meet the Gross Receipts Test OR the more subjective Full or Partial Suspension of Business Test.
- Gross Receipts Test – In order to qualify under this test, there must be a:
- 50% decline when comparing Tax Year 2020 gross receipts to the corresponding quarter in 2019
- 20% decline when comparing Tax Year 2021 gross receipts to the corresponding quarter in 2019
- For the 1st quarter of the 2021 tax year the Company can “look back” to the prior quarter to qualify. For example, if a Company has a 20% + decline in the 4th quarter of 2020 compared to corresponding quarter in 2019 they will qualify for the 1st quarter of 2021.
The business remains eligible for the credit until gross receipts exceed 80% of the same 2019 calendar quarter. Businesses that were not in existence in 2019 could use a comparison to 2020 for purposes of the credit.
- Full or Partial Suspension of Business Test – A trade or business that was fully or partially suspended or had to reduce business hours due to a government order related to COVID-19.
The IRS has stated that “more than a nominal portion” of operations needed to be suspended by a governmental order. The “more than a nominal” criteria are considered to be met under the following scenarios:
- Hours of service performed by employees in the suspended portion is 10% or more than the total hours of service.
- Gross receipts from the suspended portion of the business operations are 10% or more of the total gross receipts.
- Modifications to business operations that result in a reduction of 10% or more in an employer’s ability to provide goods or services.
Other components should be taken into consideration for determining whether a modification required by a government order has impacted operations (e.g., format of service changes, limitations in occupancy, etc.) and guidance in determining whether an employer is able to continue similar operations prior to COVID-19 (e.g. Is employees’ work portable, telework abilities, etc.).
The Full or Partial Suspension test is harder to qualify wages for the ERC as it is not based on confirmed receipts, so careful attention should be paid to contemporaneously document a taxpayer’s argument if qualifying under this test.
How Much Credit Benefit is Available?
The maximum credit per employee is:
- $5,000 for the 2020 tax year
- $7,000 per quarter or $21,000 for the 2021 tax year (Quarter 4 is excluded, unless the Company is a qualified “Recovery Startup Business)
Recovery Startup Businesses
ARPA also made the ERC available for a “Recovery Startup Business,” which is defined as:
- New trades or business started after February 15, 2020,
- Business with average annual gross receipts not exceeding $1,000,000,
- Is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts, and
- Employs one or more employees (other than 50% owners)
So, despite whether a start-up business meets the Gross Receipts Test or Full or Partial Suspension Test as noted above, the start-up business is eligible to claim the ERC for Quarters 3 and 4 of the 2021 tax year.
Start-up businesses who qualify for the ERC may claim up to $50,000 per quarter, whereas other businesses have no cap on the amount of ERCs they may claim.
Review Your Situation Carefully
While the Employee Retention Credit has been around for over a year now, many taxpayers are still unclear as to whether they qualify – understandably as the laws have continued to change around the qualifications and eligible periods. We recommend taxpayers review the ERC requirements carefully with their tax advisors to determine if they are eligible for these credits.
Joyce Kandt, principal, leads the firm’s tax credits and incentives practice. Contact Joyce today regarding your eligibility and for an assessment of potential credits.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.