The Employee Retention Credit (ERC), established by Congress in the CARES Act in March 2020, is for businesses subject to closure due to COVID-19. ERC is a refundable payroll tax credit that eligible employers may claim for qualified wages paid to employees in 2020 and 2021—up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for Q1 - Q3 in 2021. Because the CARES Act as originally drafted prohibited an employer from receiving both a PPP loan and ERC, many companies have overlooked ERC as an option for relief. Still, many others may not have seen the need at the time or did not know that 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 forgiven payroll costs in its ERC calculations.
An employer eligible for the credit must satisfy either: (1) the gross receipts test or (2) the governmental order test. The gross receipts test looks to whether gross receipts for a calendar quarter declined by 20% or more as compared to the prior calendar quarter. An employer will satisfy the governmental order test if its business operations were fully or partially suspended during the applicable calendar quarter due to a governmental order limiting commerce, travel, or group meetings due to COVID-19. Notably, the governmental order test does not require a decline in gross receipts for an employer to be eligible.
There are various factors to consider when assessing eligibility under the governmental order test and eligibility often hinges on whether a company experienced a partial suspension. Generally, a partial suspension of operations means that either: (1) more than a nominal portion of business operations is suspended by a governmental order and those operations cannot be performed remotely in a comparable manner or (2) business operations continue, but the operations are subject to a modification due to a governmental order that has more than a nominal effect on the business operations. Identifying such a qualifying partial suspension requires a fact- and data-intensive inquiry tied to specific governmental orders that can vary by jurisdiction.
Actions to Consider Now
The IRS allows for up to three years for companies to amend a filed Form 941x, which is the tax filing that initiates the ERC rebate process. If small businesses have not already done so recently, it is a good time to reevaluate, or evaluate for the first time, eligibility for ERC, especially for the 2021 period. As is the case with other COVID-19 government programs, appropriate documentation of that evaluation is a key part to satisfying all legal requirements in the Act.