The Employee Retention Credit (ERC), which is also known as the ERC credit or the ERC tax credit, has proven to be one of the most lucrative incentives that are currently available to aerospace companies; however, many aerospace companies are unaware of the potential cash benefit they could receive from this credit.
As a result of the significant drop in air traffic that occurred during the COVID-19 pandemic, a great number of aerospace companies might be qualified for the credit. Find out if you qualify for the credit and what its benefits are by reading the information that is detailed below.
How the ERC Credit Might Be Able to Assist in the Recuperation of the Aerospace Industry?
The ERC provides many different businesses with the opportunity to speed up their recoveries.
The credit can be used to generate cash, which can then be put toward expanding business operations, improving business processes, and investing in the future adaptability of the company. During this time of economic recovery, the ERC is able to assist aerospace companies in positioning themselves to face any future challenges that may arise.
What Are the Advantages of Participating in the ERC?
Given that the tax credit will increase from a maximum of $5,000 per employee per year for 2020 to a maximum of $7,000 per employee per qualified quarter in 2021, the ERC comes at a good time to assist with the economic recovery.
Companies that are qualified for the federal tax credit may be able to receive additional cash flow from the ERC, which can be used to expand their strategic horizons. This additional cash flow may be as much as $26,000 per employee. It is not unusual for businesses with as few as 150 employees to be awarded credits totaling more than $1 million for each qualifying quarter.
Credits can be taken in addition to the Paycheck Protection Program (PPP) and other incentives, and they can be refunded in full even if the company has a tax loss. Other incentives can be taken as well.
Eligibility Requirements for Aerospace Businesses to Receive ERC Credit
To be eligible for the ERC, aerospace and defense companies’ quarterly revenue must have decreased significantly when compared to the same quarter in 2019, and the decline must have occurred during either 2020 or 2021. This experienced in a drop in income for several aircraft companies, which was caused by a halt in air travel brought on by the epidemic.
How Can You Determine whether Your Aerospace Company Qualifies for the ERC and What Are the Benefits?
For your company to qualify:
- The loss in revenue for the 2020 quarters needs to be at least fifty percent.
- The loss in revenue for all quarters in 2021 must be at least 20 percent.
- A comparison of each quarter with the corresponding quarter of 2019 is required.
For the purpose of determining eligibility and continuing eligibility throughout each quarter, additional methods may be utilized.
Companies who had their operations completely or partially halted as a result of emergency orders issued by a government authority that experienced trade, travel, or group gatherings may be full for this program. The vast majority of aerospace companies, on the other hand, are regarded as important industries and, as a result, were not normally subject to any suspensions of this kind, with some probable exceptions.
ERC Employee Requirements
The ERC’s primary goal is to be of the greatest assistance to companies of both a small and a medium size. As a result, there are restrictions regarding the typical number of full-time employees for the calendar year of 2019.
Employee Requirements for the ERC in the Year 2020
If a company has less than one hundred full-time employees, it is eligible to apply the credit to the wages of all of its employees, including those workers who were not performing any services.
The ERC’s employee Requirements for the Year 2021
If a company has less than 500 full-time employees, it is eligible to apply the credit to the wages of all of its employees, including those workers who were not rendering any services at the time.
Important Considerations
The number of full-time workers is tallied using the 2019 calendar year as the basis period for the calculation.
It is still possible for companies that use PEOs (professional employer organizations) to claim for the credit. However, the utilization of a PEO may cause the procedure to become more convoluted.
When deciding whether or not an aerospace company meets or exceeds these full-time employee limits for 2019, there are often important intricacies that come into play. In most cases, the procedure involves the involvement of expert analysis in order to guarantee that the accurate number of full-time employees has been identified.
Limitations and Considerations of the ERC That Are Applicable to Aerospace
Companies who are considering participating in the ERC need to be mindful of the following factors:
- Complicated regulations for regulated groups
- Interactions with tax credits offered by other states and the federal state
- Implications for the ERC’s accounting system
- Examinations of the ERC’s allegations
ERC Credit and the Rules for Complicated Controlled Groups
The criteria for a decline in revenues as well as the headcount of full-time employees in 2019 are both subject to the controlled group regulations. Consolidation of income and employee counts is required under these laws for some parent and subsidiary companies, as well as brother-sister entities that share a specific percentage of common ownership. Both of these situations are rather common in aerospace companies.
Companies in the aerospace industry that have worldwide operations confront extra challenges brought on by unclear standards. In most cases, companies of this nature are required to list just their domestic employees within their total employee. When determining eligibility, it is possible that it will be necessary to take into account the revenues that are linked with related overseas businesses.
Additional ERC Factors to Take Into Consideration for Private Equity Firms
It is crucial to highlight that while though many midsized aerospace companies are owned by private equity (PE) firms, this often does not lead to issues with the controlled group criteria.
Private equity firms often do not have ownership stakes in the companies they manage. These companies, on the other hand, are typically a component of a widely held fund, which does not necessitate the implementation of consolidation among its portfolio companies.
Interaction between the ERC Credit and Other Tax Credits
Interactions with many other state and federal tax credits are another factor that should be considered in relation to aerospace companies.
Other wage-based tax advantages, such as the Research and Development tax credit and, to a lesser extent, the Work Opportunity Tax Credit, are frequently utilized by aerospace companies.
There are provisions within the ERC regulations that require it to be impossible to utilize the same wages that were used for the R&D credit for the ERC for the tax year 2021. Because of this, wages that were used to compute the ERC need to be removed from the computation for the R&D credit.
It is fortunate that this generally does not have a significant impact on the R&D credit because there are a variety of measures available to assist limit the adjustment to R&D credit wages.
Additional Financial Consequences Associated with ERC Credits
The ERC is associated with a large number of additional accounting ramifications, many of which are technical in nature.
The ERC is considered to be taxable for the purposes of the federal income tax in the tax year that the quarter comes within. Although the amount of the credit is not subject to taxation as income, the taxpayer is compelled to forego any labor deductions in the amount of the credit, which results in the credit being subject to taxation.
In most cases, there is no need to make any modifications in order to comply with state requirements. In order to properly account for the credit from a GAAP standpoint, a number of elements that are unique to each company will need to be considered.
Auditing of Credits Issued by the ERC
The claim can be strengthened for both internal and external audit reasons by the contemporaneous documenting of ERCs at the time the filing was made.
The Internal Revenue Service (IRS) has not yet begun considerable audit action regarding ERC credit claims as of the 26th of May, 2022; however, it is anticipated that it will begin auditing these applications soon. In the meanwhile, many companies are hiring external financial statement auditors to analyze their ERC claims in order to determine whether or not these claims are substantially correct and have sufficient supporting documentation in order to get ready for a potential audit by the IRS.
This is done in order to determine if a contingent liability or a reserve has to be recorded to balance the credit, as well as whether or not extra disclosures on the financial statement are required.
What Exactly Is Checked During an ERC Credit Audit?
In preparation for IRS audits that would concentrate on the same fundamental concerns, external auditors of financial statements have principally been evaluating the veracity of the following parts of ERC claims:
- Eligibility, taking into account the possibility of controlled groupings
- Concerns regarding headcount in light of the possibility of implementing restricted groupings
- Wage qualifications
- Compliance with the procedures for ERC credit
- Coordination with the provisions of the CARES Act that came before it