Although it was a provision of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) at its inception, the Employee Retention Credit (ERC) did not gain widespread recognition until the 2021 Consolidated Appropriations Act made it legal for borrowers of the Paycheck Protection Program (PPP) to be eligible for the credit. This refundable payroll tax credit was further improved and made available for wages paid through the end of 2021 as part of the American Rescue Plan Act of 2021.
On the other hand, President Biden gave the Infrastructure Investment and Jobs Act, which was supported by members of both parties, his signature on November 15, 2021, making it a law. With one notable exception, the ERC was retroactively repealed by the IIJA for wages paid after September 30, 2021. This meant that the credit for fourth-quarter wages was no longer available to any employers. Due to the fact that the ERC was repealed retroactively, employers who had decreased their employment tax deposits for the fourth quarter in anticipation of claiming the ERC have been forced to seek guidance from the IRS regarding the amounts that are now required to be deposited as a result of the repeal. The Internal Revenue Service (IRS) acknowledged the problem in a statement that was released on November 24, 2021. The statement advised affected employers to “monitor guidance issued by the IRS.” In addition to that, it offered employers who had previously submitted Form 7200 some guidance on how to go about receiving an advance payment of the ERC for the fourth quarter of 2021.
Why would Congress decide to suddenly end a credit extension that was just passed into law eight months ago?
It’s possible that this is because the government is spending significantly more money on the ERC than they had anticipated. For the year 2021, the credit amount will be equal to seventy percent of the qualifying wages and the allocable portion of health insurance paid, with a cap of ten thousand dollars per employee and each quarter. There is no upper limit on the total credit amount, which means that eligible employers at businesses and nonprofits can potentially save a significant amount of business. This is in contrast to the situation for recovery startup businesses.
Many organizations walked through the ERC qualification criteria prior to the IRS issuing guidance and the numerous legislative changes. A preliminary determination that a company was ineligible should be revisited in light of IRS Notices 2021-20, 2021-23, and 2021-49. For example, below are some common misconceptions addressed in the guidance issued.
Because our workers were able to continue their shifts from the comfort of their own homes, we are not regarded to have been partially or completely shut down.
Employers may be eligible for the ERC, even though they are not recovery startup enterprises, if their activities were wholly or partially interrupted as a result of government directives connected to COVID-19 or if the employer saw a considerable decline in gross receipts.
In the IRS Notice 2021-20, several scenarios are described in which an employer may be considered to have a partial suspension of operations. One of these scenarios is when a government order causes more than a nominal portion of the employer’s business operations to be suspended, but employees are still able to work from home.
Since the company has had its best year ever, there is no way that we can be included in the revenue decline category.
One of the criteria that is used to determine whether or not an employer is eligible for the ERC is whether or not the employer had a significant decrease in gross receipts. On a quarterly basis, an examination of the decline is performed out. When compared to the same quarter in 2019, the decline must be larger than fifty percent for the year 2020; nevertheless, when compared to the same quarter in 2019, the decline must be greater than twenty percent for the year 2021. As a result, even if a business is seeing a general rising trend throughout the year, there may still be one outlier quarter in which they are not eligible for ERC funding. The calculation of gross receipts should be done using the same accounting basis as the yearly tax filing, and gross receipts are calculated using Section 448 of the Internal Revenue Code. If during a particular quarter an employer gets money from the forgiveness of their PPP loan, such revenue may be omitted from the computation of gross receipts. [Case in point]
Because the number of full-time equivalent employees (FTE) at our firm is more than the requirements, we are ineligible for the benefit, with the exception of the reduced employer that is offered to big employers.
The number of ERC employees is not determined in the same way as an FTE count would be if it were being used for PPP loan qualifying. The ERC only considers employees who, with regard to any calendar month in 2019, had an average of at least 30 hours of service each week or 130 hours of service in the month. This threshold was established in 2019. To put it another way, part-time workers are typically excluded from these calculations.
Because of the aggregation requirements and the fact that my company is owned by private equity, we are unable to qualify in any other way than as a large employer.
A comprehensive analysis of the ownership structure, the relevance of the action of the private equity sponsor, and the relevant facts and circumstances is required due to the complexity of the aggregation criteria for the ERC. The advantage of being able to qualify as a small employer would make conducting more research on your facts and circumstances an activity that may prove to be to your advantage.
Refund claims for the ERC can sometimes be large, and as a result, they require careful attention and thought. Now is the time to review the subjective qualifying criteria that were outlined in Notice 2021-20 and to conduct quarterly gross receipts comparisons until the third quarter of 2021.