Employee Retention Credits - It’s Not Too Late to Help Clients Now (Yes in 2022) Get Maximum Cash from 2021 and 2020

Are any of your clients part of the 50% of small businesses that are eligible to claim the Employee Retention Credit (ERC) and have not yet done so?

During much of 2020 and 2021, your clients may have qualified for the Employee Retention Credit (ERC).

With the ERC, your clients may be eligible for tax credits of up to $26,000 per employee. That’s a lot. With 10 employees, that’s $260,000.

Key Point

If they have not claimed the ERC, you can amend their 2020 and 2021 payroll tax returns for the credit. (Amending the payroll is not difficult—so no sweat on that score.)

Three Ways to Qualify

1. Decline in gross receipts (on a quarterly basis, by more than 50 percent in 2020 compared with 2019, and by more than 20 percent in 2021 compared with 2019)
2. Government order that caused a full or partial shutdown (think physical space)
3. Government order that caused more than a nominal effect (think modification of activity)

Two Types of ERC Qualifications: Gross Receipts and Government Orders

1. Gross Receipts:  First, if your client can qualify for the ERC under the gross receipts test, definitely go that route. It’s easy to prove. And they’ll get the ERC for the full quarter.

If they can’t qualify under the 50 percent or 20 percent decline in gross receipts tests, their only alternative is the government order.

1. Government Orders:  With the shutdown or modification because of a government order, a business gets the ERC only for the days that they suffered a full or partial suspension or suffered more than a nominal effect on their business. For example, if they suffered for 27 days, they can qualify for the credit for those 27 days.

Remember 2020 and 2021?

It’s hard to think that most small businesses did not suffer due to a federal, state, or local government order during this COVID-19 pandemic. Even if they are an essential business, they likely suffered to some degree.

Here’s a short list of how a government order could have caused your client’s full or partial shutdown: 

• They had to limit their hours of operation.
• They had to temporarily shut down operations.
• They had to close their workplace to some or all of their employees.
• Their employees were subject to a curfew and could not work during normal work hours.
• Their business had to shut for periodic cleaning and disinfecting.
• The government order caused a supply chain disruption that caused them to cut back operations.

Full or Partial Shutdown Safe Harbor

You likely will have no trouble identifying the full shutdown caused by a federal, state, or local government order. One thing to remember, as I mentioned before: when a business qualifies for the ERC under the full or partial shutdown, they earn the ERC only for the shutdown period.

To determine if your client’s business suffered a partial suspension of operations from a government order, they need to have had more than a nominal portion of their business suspended. The question follows: “What is a nominal portion?” Say thanks to the IRS. Rather than rely on facts and circumstances, you can rely on the IRS safe-harbor 10 percent definition of nominal portion.

It works like this.

The effect of the government order is deemed to constitute more than a nominal portion of business operations if either: 

1. the gross receipts from that portion of the business operations are not less than 10 percent of the total gross receipts (both determined using the gross receipts for the same calendar quarter in 2019), or
2. the hours of service performed by employees in that portion of the business are not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business (both determined using the number of hours of service performed by employees in the same calendar quarter in 2019).

Example. A 2020 government order requires Sam to shut down his bar and restaurant to sit-down service. Sam looks at his 2019 quarterly results and finds that his sit-down service was 73 percent of his gross receipts for that quarter. During the 61 days that Sam was shut down by this government order, he qualifies for the ERC.

The full or partial shutdown is about a physical space change. A business can also qualify for the ERC if the government order caused a modification to their business.

Nominal-Effect Safe Harbor for a Modification to a Business

Unlike the partial shutdown, where a business can identify affected operations by physical space, the nominal-effect safe harbor comes into play when there’s a modification required by a federal, state, or local COVID-19 governmental order that has more than a nominal effect on the business operations. For example: 

• The government order limited use of the physical space (e.g., keeping people and tables six feet apart).
• The government order limited the size of gatherings, which affected the business (e.g., no more than 10 people in the store).

Here, you are faced with a facts-and-circumstances situation.

But again, you can thank the IRS for another safe harbor. The IRS deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on a business if it reduced the ability to provide goods or services in the normal course of business by more than 10 percent.

Example. Linda’s restaurant had to reduce its dining capacity from 100 to 60 patrons because of a government order. For this period, Linda qualifies for the ERC because she suffered more than a 10 percent reduction in the restaurant’s ability to service customers.

Key Take-Away

If your client can establish that their business meets one of the three ways to qualify for the ERC (as listed above), given the possibility of tax credits equal to $5,000 per employee in 2020 and $21,000 per employee in 2021, it is definitely worth pursuing for your clients.