Is My Business Eligible for the ERC?

The answer to this question depends in part on what kind of business structure you have. The ERC is available to any sole proprietorship, LLC, S-Corp, C-Corp or 1099 employee that meets the eligibility requirements. Effective Jan. 1, 2021, those requirements include small businesses that had an average of fewer employees than 500 full-time equivalent (FTE) employees as of December 2020. When the CARES Act passed in 2020, only businesses with an average of 100 or fewer FTE employees could claim the ERC on all qualified wages paid to workers during a qualified period, but that number was expanded with later legislation. Businesses might also have qualified health plan expenses if a qualified employer partakes in a group health care plan.

If an employer is qualifying based on its number of full-time employees, it must meet either of the two following criteria to get the ERC:

  • A decline in gross receipts by more than 20% in any quarter compared to the same quarter the previous year (this changed from the original rule, which required a reduction of at least 50%); or

  • A full or partial suspension of operations due to government orders limiting commerce, travel, or group meetings. Keep in mind that you will only get a tax credit on wages paid during the part of the quarter the business was shut down. The employer credit amount and if it will be a refundable tax credit depends on your business’s qualifications.

For a little more clarity on how the gross receipts requirement has changed, here’s a look at the different pieces of legislation:

  • CARES Act: Under this relief act, effective for 2020, your business would qualify for the ERC if its quarterly gross receipts fell by more than 50% from the same quarter the previous year.

  • Consolidated Appropriations Act (CAA): Starting in 2021, your business would qualify for the ERC if its quarterly gross receipts declined by more than 20% vs. the same quarter a year earlier.

The Internal Revenue Service provides guidance on how an employer can determine if it suffered a partial suspension of operations or significant decline of operations due to the COVID-19 pandemic. The short answer is this: If more than a “nominal portion” of an employer’s business operations are suspended by a government order, that’s considered a partial suspension.

An ERC analysis by Meaden & Moore, a provider of accounting and business consulting services, found that a portion of an eligible employer’s business operations will be considered “more than nominal” under the following scenarios:

  • Gross receipts from that portion of the business operation are 10% or more of the total gross receipts (both determined using the gross receipts of the same calendar quarter in the previous year); or

  • The hours of service performed by employees in that portion of the business are 10% or more of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same prior-year calendar quarter). 

If you need more clarity, the IRS website offers numerous examples of businesses having to close or downsize certain operations due to a governmental order and how to report your income tax or employment tax on your employer’s quarterly federal tax return. The following situations might not apply to your specific business, they can help shed further light.

  • Example 1: Employer F, a restaurant, must close on-site dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service. However, Employer F is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. Employer F’s business operations are considered to be partially suspended because a portion of its business operations – indoor and outdoor dining service – is closed due to the governmental order.

  • Example 2: Employer G, a retailer, must close its storefront locations due to a governmental order. The retailer also maintains a website through which it continues to fulfill online orders, and its online ordering and fulfillment system is unaffected by the governmental order. Employer G’s business operations are considered to have been partially suspended due to the governmental order requiring it to close its retail store locations.

Okay, so what happens if your business saw a big pickup in revenue before the end of 2020? In this case, your business might no longer qualify for the employee retention credit. The rules get a little complicated here. However, an article on the Entrepreneur website took a stab at explaining it. According to that article, under the updated rules, a business is no longer allowed to take the ERC in the quarter immediately following a quarter when its gross receipts exceeded 80% compared to the gross receipts in the same calendar quarter the previous year.

To put it in simpler terms, let’s say a business qualifies for the maximum ERC beginning in the 2020 second quarter because its gross receipts were less than 80% compared with the same quarter a year earlier due to Coronavirus. The business continues to qualify during the third quarter for the same reason. But during the fourth quarter, its revenue climbs by 82% compared to the same quarter in 2019. At this point, the business no longer qualifies for the ERC credit. 

Businesses may also qualify for the Paycheck Protection Program or also known as a PPP Loan. These loans are an incentive to keep their employees on payroll for the time period. Businesses might also qualify for loan forgiveness or refundable payroll tax credit through the program as well depending on the payroll costs. It is always best for taxpayers to consult a CPA to know the basic FAQs of employee retention tax credit to ensure that your business receives maximum credit.

Qualified employers also give their employees eligibility for the families first coronavirus response act which requires certain employers to provide employees with paid sick leave or expanded family and medical leave for specified reasons related to COVID-19.

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