As if the world of taxes could be any more confusing for business owners, COVID has truly turned things on their heads. PPP, ARP and ERC are just a few of the programs in this alphabet soup that are designed to aid employers during difficult economic times.
What Is the Employee Retention Credit?
The Employee Retention Credit (ERC) permits eligible employers, including tax-exempt organizations, that pay wages after March 12, 2020 and before January 1, 2022 to file for a “refundable” payroll tax credit. Organizations can become eligible by either meeting a gross receipts test or by being impacted fully or partially by Federal, state or local government orders suspending operations. To be eligible based on decline in gross receipts, an organization must compare calendar quarters in 2020 and in 2021 to the same calendar quarters in 2019 (pre-pandemic). If, when comparing those quarters, the organization has a 50% decline (2020 quarters) or a 20% decline (2021 quarters), it could be eligible for the ERC.
Clarity on “Gross Receipts.”
IRS Rev Proc. 2021-33 shines some light on safe harbors that allow employers to exclude certain items from “gross receipts” when determining eligibility for the ERC. The items covered by this safe harbor are: (1) the amount of the forgiveness from the Paycheck Protection Program (PPP) loan, (2) Shuttered Venue Operators Grants (“SVOG”) under Section 324 of the Economic Aid Act, and (3) Restaurant Revitalization Grants (“RRG”) under Section 5003 of the American Rescue Plan Act. Employers are required to apply this safe harbor consistently for each relevant quarter.
This guidance reflects Congress’s intent that an employer be able to participate in relief programs and be able to claim the ERC. Including the amount of the forgiveness of a PPP loan or the amount of previously stated grants in gross receipts for determining eligibility to claim the ERC would frustrate this intent and make it more difficult for small businesses to qualify for the ERC. An employer is not required to apply this safe harbor. Application or revocation of this safe harbor election may be done at the employer’s discretion, so long as applied consistently.
With this guidance, the IRS has provided taxpayer-friendly guidance to organizations that may have otherwise not been able to qualify for the ERC under the gross receipts test. The Tax Advisory group at Schneider Downs has significant experience consulting with organizations on all aspects of the ERC. For more information on how your business may qualify for the ERC and other relevant grants under COVID-19 legislation, please contact Matthew Werner, Ross Alessandro or your current Schneider Downs representative for additional information.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.