By Jeffrey T. Rogers, CPA, MST
It has been nearly two and half years since the Employee Retention Credit (“ERC”) was first introduced as part of the CARES Act. Despite that extended timeframe, there have been several reports that have indicated that many eligible Taxpayers have not pursued the credit. The most common reason has been attributed to a misunderstanding of how the rules work with the main reason for that resulting from the fact that Congress significantly changed the eligibility requirement midstream and the Treasury was relatively late in issuing formal guidance.
This article is assuming a basic understanding of the credit and how much it could have potentially been worth (up to $26,000 per employee!). For a more detailed review of the guidelines, we would encourage you to read this article.
If any of the below statements describe your understanding of the eligibility criteria, now may be a good time to re-assess whether you might have left money on the table:
“My business was not eligible for the ERC because we received a Paycheck Protection Program (“PPP”) loan.”
“My business was not eligible because we did not experience a decline in profitability.”
“While my business did experience revenue decline during some quarters, we were not eligible because we were never down by 50%.”
“My business was not eligible because we were deemed to be essential and therefore never shut down.”
“My business was not eligible because we had more than 100 employees.”
“My business would have been eligible for ERC during certain time periods but those periods also fell within our PPP covered period.”
“My business was eligible for the credit but we deemed it not worth pursuing because we didn’t have a tax liability due to our losses.”
To clear up a few of these misconceptions, it is true that when first introduced, receipt of a PPP loan prohibited the ability to pursue the ERC. In addition, the original iteration of the ERC stipulated 50% revenue declines and 100 full-time employees as eligibility thresholds. However, this changed with the passing of the Consolidated Appropriations Act (“CAA”) in late December 2020. A PPP loan no longer barred eligibility for ERC, instead the same wages could not be used for both incentives. In addition, the CAA prospectively (for 2021 calendar quarters) replaced the 50% revenue decline requirement with a 20% requirement and increased the full-time employee threshold from 100 to 500. This adjustment was made to make many more businesses eligible for the credit. Keep in mind, the full-time employee headcount was always based on the average monthly full-timers in 2019.
There was never a requirement that a company needed to see a decline in profitability to be eligible or that a lack of a tax requirement should serve as a deterrent since it is a refundable credit, which means that a refund would be payable regardless of the existence of a tax liability.
There are two misconceptions that stand out above the rest.
Wages paid during a PPP cover period need not be excluded from ERC consideration. For sure, the same wages may not be used for both benefits but if there are enough wages, they may be bifurcated.
An essential business, as many construction companies were deemed to be, may still qualify for ERC under the partial government shutdown guidelines.
Regarding the first point, the wage interplay between PPP and ERC, many companies have had wages excluded from their ERC calculation that should not have been. EJC would recommend taking a second look to confirm whether you claimed all that you were entitled.
As it relates to the partial government order requirement, what needs to be evaluated is whether an order from a government body imposed a limitation that had a more than nominal effect on the business’ operations. Many construction contractors had to deal with the challenges of government-mandated jobsite shutdowns for a period but, even upon returning to the site, were faced with capacity and other job site restrictions limitations, project delays and permitting issues, and inability to timely gain access to equipment and materials from suppliers due to their own adherence to government shutdown orders. All of this is subjective in nature and requires the development of position based upon on all of the relevant facts and circumstances, but the benefit can be significant so if proper attention has not been given to this point, now may be the time to take a deeper look.