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The Employee Retention Credit (ERC), established by Congress in the CARES Act in March 2020, is for businesses that may close due to COVID-19. The ERC is a refundable payroll tax credit that eligible employers can claim for qualifying wages paid to employees in 2020 and 2021 – up to $5,000 per employee for 2020 and up to $7,000 per employed per quarter for the first quarter in 2021. Because the CARES Act as originally written prohibited an employer from receiving both a PPP loan and an ERC, many companies overlooked the ERC as an option to relief. Yet many others may not have seen the need at the time or were unaware the option was available to them for other reasons.
Congress has since amended the CARES Act, however, to allow employers to claim ERC and receive a PPP loan, recognizing certain restrictions on overlapping eligibility and using waived salary costs in its ERC calculations.
An employer eligible for the credit must meet either: (1) the gross revenue test or (2) the government order test. The gross revenue test examines whether gross revenue for a calendar quarter has decreased by 20% or more from the previous calendar quarter. An employer will meet the government order test if its business operations have been suspended in whole or in part during the applicable calendar quarter due to a government order restricting business, travel, or group gatherings due to COVID-19. 19. Notably, the government order test does not require a decline in gross revenue for an employer to qualify.
Various factors must be considered when assessing eligibility for the government order test and eligibility often depends on whether a business has suffered a partial suspension. Generally, a partial suspension of operations means that either: (1) more than a nominal portion of business operations are suspended by government order and such operations cannot be conducted remotely in a comparable manner or (2) business operations are continue, but the operations are subject to a change due to a government order that has more than a nominal effect on business operations. Identifying such an eligible partial suspension requires a factual and data intensive investigation related to specific government orders which may vary by jurisdiction.
Actions to consider now
The IRS gives businesses up to three years to amend a filed Form 941x, which is the tax return that initiates the ERC refund process. If small businesses have not done so recently, now is a good time to reassess, or assess for the first time, ERC eligibility, especially for the 2021 period. As is the case with other government COVID-19 programs, proper documentation of this assessment is key to meeting all legal requirements of the Act.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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