Perhaps the most impactful tax opportunity seen over the past three years is that of the Employee Retention Credit (ERC). The ERC originated in the CARES Act in March 2020 and has been extended or modified in the months that followed by the Taxpayer Certainty and Disaster Relief Act, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act. While the extension is relatively easy to follow—wages through September 30, 2021, can now be considered through amended payroll return filings—other changes have been more challenging. This PYA Insight aims to clear up any confusion—particularly in two primary areas—that might exist because of these modifications.
Typically, one of two criteria must be met to qualify for the ERC. Either the eligible employer must have been subjected to a full or partial suspension of operations because of a COVID-19-related government order, or the eligible employer must have experienced a significant decline in gross receipts for the calendar quarters for which the ERC application is made. There is some variability as to the method for measuring the decline in gross receipts:
- For 2020 calendar quarters, eligible employers can apply for the credit starting in the first quarter where their receipts were less than 50% of the same calendar quarter in 2019, and can continue to do so until that same measure is restored to greater than 80%.
- For 2021 calendar quarters, the threshold was modified to simply be less than 80% of the same calendar quarter of 2019. It was also modified to allow eligible employers to look to the prior quarter and compare it to the same quarter in 2019 to determine eligibility—in essence, instituting a one-quarter lag in the applicability of the credit. New employers not in existence in 2019 could compare 2021 receipts to the same quarter in 2020 to determine eligibility.
Some later modifications opened the credit to “recovery startup businesses.” If you think you qualify in this category, contact us, as those nuanced rules are outside of the scope of this article.
Employers who do not have a decline in gross receipts must determine whether they have been subjected to a government-mandated full or partial suspension of operations. This may be especially confusing for those employers deemed to be essential businesses. If a business, particularly an essential business, elected to reduce operations, hours, or access because of reduced demand for services, out of an abundance of caution, or even to implement social distancing measures, this would not constitute a government-mandated shutdown. Therefore, those businesses would need to look to the gross revenue reduction calculations to qualify.
Resulting Return Modifications
Return modifications is the other area where we are seeing the most questions, particularly: “What do we do once we receive the cash?” Recipients of the ERC are required to reduce their wage expenses for the amounts received. The issue arises when the cash received comes in after the prior year’s returns have been filed. Most taxpayers—especially cash basis taxpayers—would prefer to adjust the return in the year the cash was received. However, guidance from the IRS requires taxpayers to amend tax returns for the years for which the credit was claimed. This might be an unexpected challenge for employers looking to turn the page on these trying times.
While there are opportunities for companies to explore the ERC, it is important to be informed about the rules in detail. There are many nuances of the ERC not covered in this article, but if you have any questions not addressed here, do not hesitate to reach out to our team, and we will be happy to discuss your particular facts and circumstances. You may email them below, or call (800) 270-9629.