As COVID restrictions lift and the country starts to open back up, many businesses are wondering if they still qualify for the Employee Retention Credit (ERC). The answer can be a moving target. Continue reading to learn how you may still be able to qualify.
Background: What is the Employee Retention Credit and how do businesses qualify?
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits (ERC) previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act.) One of the changes, which we communicated about previously, is that eligible employers can claim a refundable tax credit equal to 70% of the qualified wages paid to an employee during quarter 1 and quarter 2 of 2021.
The IRS has defined an eligible employer as a business that experiences either**:
A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%)
What happens to the Employee Retention Credit as restrictions are being lifted?
Many employers, particularly those in hospitality and retail, have been assumed to qualify based on full or partial suspensions of their operations due to government orders. In light of the recent adjustments to COVID restrictions in many states and counties, this may impact your ability to access this payroll tax credit.
The IRS has published a response to a very commonly asked question regarding this situation:
Question 22: If an employer is subject to a governmental order to fully or partially suspend its business operations and the order is subsequently lifted in the middle of a calendar quarter, is the employer an eligible employer for the entire calendar quarter?
Answer 22: Yes. An employer with business operations that are fully or partially suspended due to a governmental order during a portion of a calendar quarter is an eligible employer for the entire calendar quarter. However, only wages paid with respect to the period during which the employer is fully or partially suspended due to a governmental order may be considered qualified wages.
Example: State Y issued a governmental order for all non-essential businesses to close from March 10, 2020, through April 30, 2020, and the governmental order was not extended. Pursuant to the order, Employer N, which operates a non-essential business in State Y, closes from March 10 through April 30. Employer N is a large eligible employer in the first quarter and second quarter of 2020, but may claim the credit only for qualified wages paid from March 13, 2020, the effective date of section 2301 of the CARES Act, through April 30, 2020, with respect to employees who were not providing services during this period because of the suspension of operations due to State Y’s governmental order.
Does my business still qualify for the Employee Retention Credit if the full or partial suspension of operations are lifted?
If your business is no longer fully or partially shut down due to COVID restrictions, you may still qualify for the ERC in 2021 if gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019.
Continuing with our example, if operations resume at 100% but gross receipts for a calendar quarter in 2021 are 73% of what they were in the same quarter in 2019, the business may continue to qualify under the second metric.
The IRS has compiled this very helpful list of scenarios related to ERC qualifications. Starting at the bottom of Page 17, you can review these frequently asked questions.
If you are a PaySteady client and currently record CARES Wages into payroll, you will need to stop doing this if and when you no longer qualify for the Employee Retention Credit.
How long can we claim the Employee Retention Credit?
Assuming your business still qualifies for the credit under either metric above, the ERC will remain active until the end of 2021.
If your business is considered a “recovery startup business” you may qualify for the ERC in quarters 3 and 4 of 2021, up to $50,000 per quarter.
**Other restrictions apply regarding the size of the employer, date the business was opened, etc. Please contact your financial advisor or accountant to confirm your individual situation if you are unsure.
COVID regulations are changing quickly at the state and local levels. It’s important to continue to monitor restrictions before claiming additional wages toward the ERC.
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