CPA Explains Employer Tax Credit (ERC) Eligibility for Small Businesses

Date: March 03, 2022

Featured expert Kristi Stone, CPA, goes in depth about the under-used program

In a webinar yesterday, NFIB was joined by Kristi Stone, a CPA, who answered small business owners’ most frequently asked questions about the Employee Retention Tax Credit (ERC or ERTC) – a federal program that can provide significant refundable payroll tax credits for small businesses. Although the ERC program has ended, owners can still claim it retroactively for wages paid in 2020 and the first three quarters of 2021. 

For 2021, the ERC eligibility extends to businesses and tax-exempt organization with W-2 employees that carries on a trade or business that: 

  • Experienced significant decline in gross receipts. In 2020 this was defined as gross receipts that declined by at least 50% compared to the same quarter in 2019. In 2021 gross receipts must have declined by at least 20%. Eligibility will not end until you have a quarter where gross receipts get back up to greater than 80% of 2019 quarter levels. 

              OR 

  • Fully or partially suspended operations due to a government order related to COVID-19.

Kristi notes that it’s better to qualify under gross receipts than under partial suspensions. “The reason this isn’t quite as beneficial as the gross receipts drop,” she explains, “is because with a gross receipts drop, if you have that, you get to take ERC for that entire quarter. Whereas with the partial suspension of operations, if you have that, you can only take ERC for the period of time during which you were partially suspended. For example, if you had a partial suspension from March 15th until May 1st, 2020, you could only take the ERC for wages paid in that window – you don’t get to take all wages paid during Q2 2020.” Kristi also notes that the ERC doesn’t distinguish between shutdowns as a result of federal, state or local ordinance. 

The total credit can be up to 70% of $10,000 of eligible employee wages for each of the first three quarters of 2021, for a maximum total credit of $21,000. In 2020, the credit can be up to 50% of the $10,000 of eligible employee wages for the year, for a maximum total credit of $5,000. 

The ERC originally extended to all of 2021, but as of the Infrastructure Investment and Jobs Act passed in November 2021, Q4 2021 wages are no longer eligible from the ERC. The exception to this is businesses that are considered “recovery startup businesses,” defined as businesses that fulfill all three of these criteria:

1. Began carrying on any trade or business after February 15, 2020. 

Kristi defined carrying on a trade or business as, “…when you begin performing the activities for which you were organized. So this is important because I know that there’s some businesses that may have incorporated before February 15th, 2020, but they did not begin performing the activities for which they were organized. So let’s say you didn’t even open your doors until after February 15th, you would be considered a recovery startup because you did not begin those activities until after that date.” 

2. Did not exceed $1 million in average annual gross receipts for the prior three tax years.

3. Is not otherwise eligible for the ERC due to a full or partial suspension of operations. 

Kristi notes this is significant because if you’re already eligible for the ERC, it doesn’t matter if you’re a recovery startup business. In addition, recovery startup businesses are capped at claiming up to $50,000 per quarter for the ERC, while other businesses are not. 

Another significant note: Kristi stresses that those who own multiple businesses will not be able to declare their businesses as recovery startup business due to IRS rules. “They’re very clear that if you own multiple businesses, but you purchased one of those businesses after February 15th, you have to aggregate that business with the other pre-existing businesses,” she said. “This means that you would not meet the recovery startup business requirements because those pre-existing businesses were in place before February 15th.” 

Kristi went on to answer additional frequently asked questions about the ERC, and then take questions from the attendees. 

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