Does your business qualify for the Employee Retention Tax Credit (ERTC)? If you answered no, are you sure? As we’ve discussed in previous blog articles, the ERTC has the potential to be the second largest source of financial relief for businesses during COVID-19. More employers can now qualify for the ERTC than when they were first introduced. Plus, businesses have an opportunity to utilize both their second-draw Paycheck Protection Loan proceeds and the ERTC as long as certain rules are followed.
If your business does qualify for ERTC, the time to take advantage of this refundable tax credit is now as Congress is considering ending the program early (in Q4 vs the original year-end deadline) with the new infrastructure bill. Either way, it’s critical for business owners to stay on top of filing deadlines and stay current with the latest IRS guidance.
In this article, we’ll focus on all the requirements necessary for your business to be eligible for ERTC—including business size and passing the Reduced Gross Receipts Test and/or the Government Order Test.
Why should my business worry about qualifying for ERTC?
The Employee Retention Tax Credit (ERTC) is a credit that provides tax relief for companies that lost revenue due to the COVID-19 pandemic. Eligible businesses can get a refundable payroll tax credit equal to a percentage of eligible wages per employee. In 2020, the credit was worth 50% of the first $10,000 of wages and healthcare benefits paid to each employee. In 2021, employers can claim 70% of the first $10,000 is qualified wages for each employee in every quarter.
If you received a second-draw PPP loan, your business can take advantage of both programs—as long as you avoid “double-dipping”. Check out our previous blog to learn how you can balance PPP proceeds with ERTC to maximize loan forgiveness and tax credits. You can retroactively claim ERTC by filing an amended 941.
How does my business qualify for the ERTC?
Some business owners think they don’t qualify for ERTC because their business was able to maintain operations throughout a full or partial government shutdown order. This is just not true. Your business did not have to be completely crushed by the pandemic to qualify for ERTC. Let’s take a closer look at all the ways a business can qualify for ERTC in 2021:
Business operations timeframe: You must have carried on a trade or business or were a tax-exempt organization from January 1, 2021, through June 30, 2021.
Business size: To qualify for 2021 credits, an eligible employer is considered small if they have 500 or fewer average full-time employees (FTEs).
Employers must also pass one of the following tests that demonstrate “material impact”:
Reduced Gross Receipts Test: An employer experiences a significant decline in gross receipts—which includes all receipts received including PPP loan forgiveness. In 2020, the decline is defined as at least 50 percent in any calendar quarter when compared to the same quarter in 2019. In 2021, the decline is defined as at least 20 percent in any calendar quarter when compared to the same quarter in 2019. If you weren’t in business in 2019, you can use 2020 as your comparison year.
Government Order Test: A business must experience a calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19.” This is perhaps the most overlooked and misunderstood qualification; your business might qualify but not realize it. Let’s explore this further.
How does my business pass the government order test?
Some business owners think if they weren’t a restaurant or retail store, there’s no way their business was damaged enough by pandemic-related shutdowns. However, let’s take a closer look at what this type of material impact means:
Did you experience reduced operations? Partial shutdowns count too. Were you able to sell items for pickup and/or delivery, but unable to allow diners or shoppers inside your store? Did you have to reduce hours due to government orders? For example, restaurants and bars often had operating hour restrictions placed on their business. Was your business impacted by a curfew? That would count as a partial shutdown.
Was your supply chain materially impacted? Was your business impacted by other businesses being shut down? Perhaps you were an essential business, but a critical supplier was not and so your supply chain was cut. As a result, you could not continue business operations.
Did you have to make changes to accommodate social distancing orders? If you had to change your business layout to accommodate social distancing due to a local health order, that could help you qualify for ERTC. For example, a nail salon owner wasn’t under shutdown but had to change their layout to accommodate social distancing from a local health order and could only operate at 25% capacity. Even though they had strong receipts, they can prove their business was under government orders.
In any of the above examples, thoughtful and thorough documentation is extremely important. You must keep a copy of any government order that impacts your business. The government can audit this for up to 5 years.
What happens if my business operates in several locations?
Multi-location businesses (possibly even multi-EIN businesses) should keep in mind where portions of their business are and how they are impacted. For example, you may have had a small business in one town under an order while another location in another town had already opened up. If the one under lockdown reduced the supply available for the one that was open, that is considered a partial shutdown. If one office was dependent on another, you could have potentially experienced a partial shutdown in both locations. Again, careful documentation of these types of situations would be key to making your case.
Need help with ERTC?
As the economy opens back up, fewer and fewer businesses will qualify for the ERTC by passing the government order test. But with new orders potentially cropping
up to combat Delta variant surges, this is something to keep in mind. Be sure you stay up-to-date with IRS guidance and watch what happens to ERTC in the infrastructure bill.