Although originally a Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provision, the Employee Retention Credit (ERC) didn’t rise to fame until its eligibility for Paycheck Protection Program (PPP) borrowers became law in the 2021 Consolidated Appropriations Act. In the American Rescue Plan Act of 2021, this refundable payroll tax credit was further enhanced and made available for wages paid through the end of 2021.
However, on November 15, 2021, President Biden signed into law the bipartisan Infrastructure Investment and Jobs Act (IIJA). The IIJA retroactively repealed the ERC for wages paid after September 30, 2021, thus eliminating the credit for fourth-quarter wages for all employers, with one exception: recovery startup businesses. The retroactive nature of the repeal of the ERC has caused employers that reduced their fourth quarter employment tax deposits in anticipation of claiming the ERC to look for guidance from the IRS regarding these amounts that are now required to be deposited. On November 24, 2021, the IRS issued a statement acknowledging the issue and for affected employers to “monitor guidance issued by the IRS.” It also provided guidance for employers that submitted Form 7200 to receive an advance payment of the ERC for the fourth quarter of 2021.
Why would Congress retroactively discontinue a credit extension that was enacted only eight months ago? Possibly because the ERC is costing the government significantly more than anticipated. For 2021, the credit amount is 70 percent of qualifying wages and allocable health insurance paid up to $10,000 per employee per quarter. Unlike for recovery startup businesses, there is no cap on the total credit amount, which can mean significant dollars for eligible business and nonprofit employers.
Many organizations walked through the ERC qualification criteria prior to the IRS issuing guidance and the numerous legislative changes. A preliminary determination that a company was ineligible should be revisited in light of IRS Notices 2021-20, 2021-23, and 2021-49. For example, below are some common misconceptions addressed in the guidance issued.
Our employees were able to work from home, so we were not considered partially or fully shutdown.
Outside of recovery startup businesses, employers may qualify for the ERC if operations were fully or partially suspended due to government orders related to COVID-19 or if the employer experienced a significant decline in gross receipts.
IRS Notice 2021-20 describes several instances when an employer may be considered to have a partial suspension of operations if more than a nominal portion of its business operations are suspended due to a government order despite the ability to work remotely.
The business has performed better than ever, so we must not qualify under the revenue decline.
One criterion for determination of eligibility for the ERC is that the employer sustained a significant decline in gross receipts. The evaluation of the decline is performed on a quarterly basis. For 2020, the decline must be greater than 50 percent compared to the same quarter in 2019; however, for 2021, the decline must be greater than 20 percent compared to the same quarter in 2019. Therefore, even if a business has a general upward trend for the year, there may be one outlier quarter for ERC eligibility. The gross receipts determination should be made on the same accounting basis as the annual tax reporting, and gross receipts are determined under Section 448(c). If an employer has income from forgiveness of its PPP loan in a quarter, that revenue may be excluded from the calculation of gross receipts.
The organization’s full-time equivalent (FTE) count exceeds the thresholds, so we are ineligible except for the reduced benefit to a large employer.
The ERC employee count is not computed in the same manner as an FTE count used for PPP loan qualification. The ERC only counts employees who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. In other words, part-time employees are generally not included.
My company is owned by private equity, and the aggregation rules preclude us from qualifying except as a large employer.
The aggregation rules for the ERC are complex and require careful evaluation of the ownership structure, significance of activity of the private equity sponsor, and related facts and circumstances. The benefit of qualification as a small employer would make additional analysis of your facts and circumstances an exercise that could prove beneficial.
ERC refund claims can be substantial, thus warranting careful attention and consideration. Now is the time to run quarterly gross receipts comparisons through Q3 2021 and revisit the subjective qualification criteria set forth in Notice 2021-20. Consult with your BKD Trusted Advisor™ with questions that you may have regarding the ERC and qualification requirements or submit the Contact Us form below.