As a refundable tax credit, the ERC was made for businesses that kept paying their employees while shut down during the COVID-19 pandemic. It also relates to businesses having a huge decline in gross receipts during the eligibility periods of 2020 and the first three quarters of 2021. Though all businesses can benefit from the program, small businesses have more advantages than larger ones. Let’s find out what qualifies you for the employee retention credit.
Impacted by decreased revenue or government-backed lockdown
A vital eligibility for employee retention credit is that your business was affected by either a decreased revenue or a government-enforced lockdown. Businesses that were affected by partial or full operation suspension during the COVID-19 lockdown during any quarter can also qualify. It also includes capacity restrictions.
This eligibility criteria can be quite complex, so you must work with people who are familiar with government orders, the enacted time frame, and its impact. Some examples of businesses that qualify include:
- Businesses were ordered to fully suspend their operations
- Essential business that opened but was limited by government-mandated limited capacity or hours like restaurants that had to use fewer tables
- Businesses unable to make deliveries due to supplier shutdown
- Businesses that shut down aspects of their business because of government mandates
Number of employees working full-time
Businesses termed as “small businesses” for the tax year can claim credit for every employee, whether they worked or didn’t. For larger employers, they can also claim the ERC, but only for some healthcare costs and wages paid to employees who didn’t work.
Huge reduction in gross receipts
As defined by the IRS, a business can also qualify if it has a significant decline in gross receipts. In the 2020 tax year, a significant decline refers to the gross receipts for a quarter that is less than 50% when compared to the identical period in the previous year 2019. In the first three quarters of 2021, the definition refers to quarterly gross receipts that are less than 80% as compared to the same period in the previous year 2019.
In the first three quarters of 2021, businesses that did not experience a 20% gross receipt decline when compared to 2019 can also choose to use the next quarter for comparison. If your business Q3 of 2021 is not eligible when compared to Q3 of 2019, you can choose to use the Q2 of 2021 and compare it with Q2 of 2019 to be eligible.
Recovery startup business
A recovery startup business refers to a business created after February 15, 2020, whose annual gross receipts are under $1 million. If you meet both criteria and have one or more W2 employees, the other eligibility criteria are not that important. However, you should note that a recovery startup business can only receive a maximum of $50,000 in ERC every quarter.
Businesses can still claim the ERC if they meet the eligibility criteria. However, there are several things that you should also consider such as laws impacting eligibility and potential credit that your business can get.