By Mark W. Banks, CPA, CFE, MAFF
While many of our clients have focused on PPP loans and obtaining forgiveness to help them through the pandemic, recent IRS guidance may allow us to assist them with additional employee tax credits through 2021.
Significantly, the IRS made it clear that businesses not directly impacted by COVID-19 shutdown orders can still take advantage of Employee Retention Tax Credits (ERTC).
As with all other COVID-19 financial assistance, the ERTC requires specific criteria to be analyzed to determine each entity’s eligibility. That said, there are basically two main ways businesses may be eligible for ERTC: significant decline in gross receipts and/or operations were impacted via order from an appropriate governmental authority.
The maximum ERTC offerings differed in 2020 compared with 2021: in 2020, it was $5,000 per employee for the year; in 2021, it is $7,000 per employee, per quarter.
For 2020, the first ERTC eligibility hurdle was showing that, in at least one quarter of 2020, the business saw a drop in gross receipts by 50% or more than the same quarter in 2019. Next, each business can analyze the following quarter to determine if they experienced at least a 20% decrease compared to 2019. By meeting the 50% and 20% thresholds in consecutive quarters, the subsequent quarter would qualify for ERTC as well.
For 2021, the initial ERTC quarterly threshold is a 20% or more decline in gross receipts when compared to the corresponding 2019 quarter. The quarter that immediately follows a quarter with at least a 20% decline also is eligible for ERTC.
Assume that Company A experienced a 33% decline in Q1 2021 gross receipts when compared to 2019. Here is how the year might go with regard to ERTC eligibility:
- Q1 2021 Gross Receipts decline: 33% (ERTC eligible)
- Q2 2021 Gross Receipts decline: 5% (ERTC eligible)
- Q3 2021 Gross Receipts decline: 5% (ERTC not eligible)
- Q4 2021 Gross Receipts decline: 21% (ERTC eligible)
In the above example, Q3 is not ERTC eligible because gross receipts declined less than 20%, and it followed a quarter that also had a less than 20% decrease.
Government Order Eligibility
Although governmental orders have been lifted for many businesses in 2021, some industries (such as restaurants and entertainment) may still be affected. So, even if a business does not meet the gross receipt test, it may still qualify for ERTC if federal, state, or local government orders limiting commerce, travel, or group meetings impacted its ability to operate.
Note: the above explanation of ERTC is a high-level overview and could change depending on new laws or regulations. Additionally, other factors may impact an entity’s eligibility for ERTC, such as the number of employees.
When calculating a business’s ERTC eligibility, please review the IRS guidance, which has links to the latest updates.
Mark Banks, CPA, CFE, MAFF, is a supervisor and member of Boyer & Ritter LLC’s business relief services team as well as the firm’s advisory services practice. He can be reached at firstname.lastname@example.org.
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