How to Determine if Your Business is Eligible for the Employee Retention Credit

There has been a lot written about the Employee Retention Credit (ERC), and much of it makes reference to the fact that more guidance was expected to clarify some of the gray areas of the law. Recently, we received additional guidance in the form of a 102-page notice from the IRS: IRS Notice 2021-20. More guidance is expected.

I know most people will not read all 102 pages, or even a summary of 102 pages. I also know that the ERC can provide significant CASH benefits to many organizations, and some are missing out on that benefit due to the complexity of this program. In 2021, it can generate up to $7,000 in cash per employee per quarter, so it is clearly worth some effort. 

Rather than summarizing what we know now about all of the fine print and calculations, I am going to focus on who is eligible for the ERC, for both 2020 and 2021, and a few other key concerns. If you cannot meet the eligibility requirements, then you don’t need to worry about anything else. Get back to your business.

Eligibility for 2020

• Either:
  • 50% decline in tax basis gross receipts (think revenue) in at least one quarter of 2020 vs. the same quarter in 2019, OR
  • Operations were fully or partially shut down due to government orders related to COVID-19
• Credit will be much more valuable for companies with 100 or fewer employees
• Yes, you can now participate even if you received a PPP loan

Eligibility for 2021

• Either:
  • A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019, or a decline in gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019, OR
  • Operations were fully or partially shut down due to government orders related to COVID-19.
• Credit will be much more valuable for companies with 500 employees or fewer. This lets a lot more companies in the door!
• Yes, you can now participate even if you received a PPP loan

Still think you are eligible?

Then you will need a team effort involving your staff, consultants, tax preparer and payroll provider. There are many twists and turns, especially concerning the interplay of payroll costs used for PPP purposes and those used for ERC purposes. You cannot use the same payroll costs in both programs, so some planning and strategizing are necessary. Know that the reports provided by your payroll provider for each program may not maximize your benefits for the two programs combined.

To recap

Determine if you are eligible. If not, move on. If yes, be prepared for some work, but know that work can result in some significant cash benefits for your business!

Need guidance on how to navigate this lengthy update and determine if your company is eligible? Reach out to me- djones@fahrenheitadvisors.com or email us at Experts@FahrenheitAdvisors.com.

about the author

Doug Jones provides fractional CFO and senior financial management services to small and midsize organizations. In addition to improving his clients’ accounting and finance operations, Doug frequently serves as the link between company owners and outside advisors including attorneys, CPAs, investment bankers, appraisers, and personal financial advisors. He is skilled in identifying and integrating the full range of financial and non-financial business issues in contract negotiations and resolution of business decisions. He is a member of Fahrenheit’s Leadership Team.