Originally when the ERC was just being implemented, it was difficult as well as overly complicated for small businesses to apply and have their qualifications accepted. However, recent changes have resulted in a significant shift in the application process. Now Employee Retention Credits are available to businesses with under 500 employees based on the total wages paid to W-2 employees.
Navigating the world of Employee Retention Credit (ERC) can be a daunting task for business owners to determine if they qualify for the credit. In many cases, the language used can be confusing. Our team here at ERC Specialists focuses on helping businesses substantiate the pandemic’s impacts to fulfill the complicated task of qualifying for the credit. The technical jargon associated with IRS regulations can result in the false idea that the only way to prepare is if the firm has experienced a loss in revenue. This is simply not the case as there are three ways to qualify based on the following criteria: revenue reduction, supply chain distributions, and partial or complete shutdown.
The first way to substantiate your qualification is through the reduction of revenue. Out of the three qualifiers, loss of revenue is the one in which most business owners are familiar with. For 2020, your firm must have experienced a 50% reduction of gross sales in at least one quarter for quarters two, three, and four of the year as the COVID-19 pandemic began in the second quarter of 2020. When and if the revenue reduction in 2020 returns to 80% of the 2019 level, the qualification ends. Regarding 2021, you could qualify if you had a 20% reduction of gross sales for each quarter 1, 2, and 3 compared to the same quarter in 2019.
Supply chain disruptions are another way your business can qualify. Businesses that rely on third-party sources, such as vendors and suppliers, for their companies to function can take this route to qualify. The qualification must have resulted from a government suspension order that impacted your suppliers, resulting in the third party not being able to deliver crucial goods or components. An example of this would be restaurants that could not obtain certain products such as meats, produce, or even paper plates during the pandemic. Another qualifying instance would be construction firms that could not receive windows due to the closure and delay at ports. These impacts qualify a company, regardless of revenue gain or loss.
The third option to qualify involves your business has experienced a partial or full shutdown. This qualification is based on a “suspension test” to demonstrate that your operations were partially or fully suspended due to a COVID-19 governmental order. For this option, it’s essential to know that a government restriction may have directly impacted your operations, even if that shutdown order wasn’t given to you directly. Trade shows were canceled due to government orders, making it impossible for all types of businesses to meet and obtain new customers. For example, a cleaning service used to earn most of its revenue by disinfecting restaurants and office buildings, which was no longer possible during the mandated shutdowns. The cumulative effect of the full or partial suspensions needs to have had a more than nominal, meaning more than a 10% impact on your business’s bottom line when considering the gross receipts of that portion of your business in 2019. This does not mean that your revenue must have decreased to use this qualification.
So now you know! There are more ways to qualify than through revenue reduction alone. Want to find out if your business qualifies for ERC credits? Fill out our Qualification Form to get the process started and reach out to the person who introduced you to ERC Specialists for more help. Our team stands ready to help your company obtain these valuable credits!