The Employee Retention Credit (ERC) is a refundable tax credit specifically designed to support businesses that maintain their payroll during the COVID-19 shutdown. It applies particularly to those who experienced a significant drop in gross earnings during 2020 and the first three quarters of 2021. While all businesses can access its benefits, smaller organizations stand more to gain. Let’s delve into what makes you eligible for the ERC.
Eligibility Conditions: Revenue Reduction or Government-Imposed Shutdown
A crucial condition for ERC is that your business experienced a reduction in revenue or dealt with a government-induced shutdown. Businesses which faced partial or total suspension during any quarter of the COVID-19 lockdown could qualify, including those dealing with capacity restrictions. Since understanding these eligibility criteria can be somewhat complicated, it’s advisable to consult with individuals well-versed in government orders, their effective periods, and their potential impacts. Examples of suitable businesses include:
1. Companies that were required to halt operations completely
2. Essential businesses that were restricted in operations or hours, such as eateries compelled to avail fewer tables
3. Companies unable to deliver due to supplier shutdowns
4. Businesses that closed certain segments due to government directives
Considering the Number of Full-Time Employees
A “small business” can claim the ERC for each staff member, irrespective of work status. Larger corporations can also claim the ERC but only for specific healthcare expenses and salaries paid to non-working employees.
Significant Reduction in Gross Receipts
According to the IRS, a business can also fulfil ERC eligibility if it has witnessed a substantial dip in gross receipts. For 2020, this refers to a quarterly gross receipt that is less than 50% compared to the corresponding period in 2019. For the first three quarters of 2021, it means quarterly gross receipts that are less than 80% compared to the same period in 2019.
During the first three quarters of 2021, businesses that didn’t see a 20% drop in gross receipts compared with 2019 can decide to use the following quarter as a benchmark.
Establishing a Recovery Startup Business
A business set up after February 15, 2020 with annual gross receipts less than $1 million qualifies as a ‘recovery startup business.’ If you meet these criteria and have one or more W2 employees, the other criteria may not carry as much weight. However, such startups can only receive up to $50,000 in ERC per quarter.
Wrapping Up
Businesses can still claim the ERC if they fulfill the eligibility criteria. However, bear in mind other considerations such as laws that may influence eligibility and the potential credit your business could obtain.