Is Your Company Eligible for the Employee Retention Credit?
September 30, 2020
If you aren’t familiar with the Employee Retention Credit (“ERC” ) yet, you probably want to check out the first article in our series on this valuable tax credit opportunity.
In short, the ERC is a fully refundable tax credit for companies experiencing severe business disruptions due to COVID-19. Employers can receive up to $5,000 per full-time employee. With your third-quarter filing due on October 31, 2020, you should assess your company’s eligibility. You might also have a refund opportunity related to previous quarterly Form 941 filings!
Before we dive in, know that your business will NOT be eligible if you:
- Received a Paycheck Protection Program (“PPP”) loan and did not repay the PPP by the safe harbor date of May 14, 2020, or
- Operate as a self-employed individual with no employees
If none of the above exclusions apply to your business, the next step is to determine if your company meets the definition of an Eligible Employer. There are nuances to this definition, so read on to get a better understanding of the necessary qualifications.
Who is an Eligible Employer
Eligible Employers can include private-sector businesses and tax-exempt organizations that were in operation during 2020 and that experienced one or both of the following scenarios:
- You were fully or partially shut down due to orders from an “appropriate government authority” – resulting in limited commerce, travel, or group meetings during any quarter in 2020.
- You experienced a decline in gross receipt of 50% or more – as measured by comparing gross receipts for a quarter in 2020 quarter to the same quarter in 2019.
While the language of the above two requirements seems straightforward, there are some nuances. At Aprio we have encountered many clients that believed their business didn’t qualify based on these criteria; however, on closer analysis, changes made to maintain operations had created significant economic impacts they had not considered.
Read on to learn more about how these requirements are defined for purposes of the ERC, or take Aprio’s quick online survey to see if you qualify.
The definition of fully or partially suspended operations
First, let’s talk about what it means for your business to be either fully or partially suspended. For the purposes of the ERC, suspended operations encompass any “shutdown” imposed by an “appropriate governmental authority” (we’ll define what this means next) that restricted your business operations in any way, whether that restriction meant ceasing all operations or operating on a reduced scale.
If you’re not sure whether your business experienced a suspension that meets this definition, here are some scenarios to consider:
- If your business had to reduce operating hours due to a governmental order, then your operations were partially suspended.
- If your business was required to implement safety modifications like distancing requirements, but you were able to continue operating normally, you probably did not experience a partial suspension of operations.
- Alternatively, if your business had to implement safety modifications that had an impact on your operations, then this may be considered a partial suspension.
- If your business closed physical locations, continued operations through teleworking employees, and there was no impact on your business, your operations were not fully or partially suspended.
- If your business had to close or limit operations at some, but not all, locations due to differing state and local governmental orders, your business experienced a partial suspension of operations.
- If you voluntarily suspended operations or reduced hours at your business for reasons other than a government-imposed restriction on operations, your business did not experience a full or partial suspension for the purposes of the ERC. However, if you voluntarily suspended operations due to COVID-19, you may be eligible for the ERC if you experienced a significant decline in gross receipts.
The definition of orders from an “appropriate governmental authority”
While it would seem rather clear what an order from an appropriate governmental authority should mean, and how it should apply to your business, that is anything but the case. With the various rules around government shutdowns changing as states and cities enter different phases of closing and reopening, government orders and their impact to your business continue to evolve regularly. Then add the public remarks of elected officials during an election year to the mix, and this seemingly straightforward requirement becomes very complicated very quickly.
Therefore, the next step in determining if you meet the definition of an Eligible Employer is to analyze the definition of “Order from an Appropriate Government Authority.” The official definition for purposes of the ERC includes only orders, proclamations, and decrees from federal, state, and local governments that limit commerce, travel, or group meetings due to COVID-19. It does not include statements from a governmental official made during press conferences or in interviews with the media, nor does it include the declaration of a state of emergency by a governmental authority which does not limit commerce, travel, or group meetings in any manner.
Examples of an order from an appropriate government authority include:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified period;
- A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and who may travel to and from work at the workplace location;
- An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period; and,
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Most essential businesses were explicitly excluded from government shutdowns, theoretically also excluding these businesses from the ERC on the basis of fully or partially suspended operations. However, there are several scenarios in which an essential business may have experienced suspended operations based on the unique and varying restrictions across governmental orders.
For instance, your essential business may have experienced a full or partial suspension if:
- a governmental order restricted more than a nominal portion of your operations;
- a governmental order required your business to close for a period of time during normal working hours;
- your suppliers were unable to make deliveries of critical goods or materials because a governmental order required the suppliers to suspend operations; or,
- you were unable to provide your customers with a normal level of service.
While many essential businesses were severely impacted by shelter-in-place orders that required customers to stay home, this alone is not a qualifying reason to support fully or partially suspended operations as long as your essential business was not required to close its physical locations or otherwise modify its normal operations.
However, not meeting the qualifications for fully or partially suspended operations due to a governmental order does not immediately disqualify you from the ERC. Your company may still meet the definition of an Eligible Employer and may be eligible for the ERC if you experienced a significant decline in gross receipts.
Significant Decline in Gross Receipts
If your business didn’t meet the fully or partially suspended qualification to be an Eligible Employer discussed above, all hope is not lost! You may be able to qualify as an Eligible Employer if you experienced a significant decline in gross receipts – the decline doesn’t even have to be directly related to COVID-19 – but there are a few stipulations you need to know.
First, understand that “gross receipts” for the purposes of the ERC basically means the total of all your revenue and income without the consideration of any expenses. If you operate a tax-exempt organization, calculating gross receipts for the ERC is unique as it should include the same types of income as for-profit businesses in addition to any amounts received as contributions, gifts, grants, etc.
For the ERC, a “significant decline” means a reduction in gross receipts by 50% or more. This reduction is measured by comparing a calendar quarter in 2020 to the same calendar quarter in 2019. The period for the significant decline begins with the first quarter your gross receipts dip below 50% of the same quarter in 2019, and the period ends in the quarter immediately following when your gross receipts return to more than 80% as compared to the same quarter in 2019.
While Aprio can help with calculating these components, it is important that you keep records for the relevant calendar quarters in 2019 and 2020 to document the significant decline in gross receipts. The records should be available for IRS review for at least four years.
If you are a business owner that thinks the ERC may be helpful, take Aprio’s quick ERC survey to find out if you qualify. Then connect with an Aprio expert to help calculate and maximize your potential benefit. Aprio’s experts have vast experience with calculating and claiming payroll tax credits and have been on the forefront of helping clients navigate the adverse financial impacts of the Coronavirus pandemic.
About the Author
Justin Elanjian, CPA, is the Partner-in-Charge of Aprio’s Paycheck Protection Program (PPP) & Employee Retention Credit (ERC) Services. As a national PPP expert, prominent speaker and strategic business advisor, Justin helps both lenders and borrowers navigate the complexities of the PPP. He also helps his clients realize benefits from other stimulus package programs, such as the ERC, and is committed to strengthening his clients’ balance sheets and helping them achieve what’s next. Justin also leads a team of more than 50 professionals who share his passion for helping businesses maximize the federal COVID relief programs.