Many people thought they couldn’t get the Employee Retention Credit because when it was first introduced there were tons of restrictions. For example, initially, companies couldn’t claim ERC credits if they’d gotten PPP funding. However, the rules have changed many times, and now that is no longer the case. Employee Retention Credits are available to businesses with under 500 employees, and it’s based on the wages paid to W-2 employees. In addition to company size, businesses must show impacts from the pandemic. The IRS has updated the qualification methods, and we encourage our customers to visit the IRS website for all the details. There are three different ways for Employee Retention Credits qualification for your business: Revenue Reduction, Supply Chain Disruptions and Full or Partial Suspensions.
The first way is Revenue Reduction. For 2020 you must have experienced a 50% reduction of gross sales for the 2020 quarter as compared to the same quarter in 2019. When and if the revenue reduction in 2020 gets back to 80% of the 2019 level, the qualification ends. For 2021 you can qualify if you had a 20% reduction of gross sales for the 2021 quarter as compared to the same quarter in 2019.
The second method is Supply chain disruption. It’s a common qualification for businesses that rely on vendors and suppliers for their business to function properly. This qualification must have resulted from a government suspension order to your supplier that resulted in the supplier not being able to deliver critical goods but may continue beyond the original suspension order. For example, many restaurants weren’t able to get certain types of meat, paper towels or carryout containers during the pandemic. Delivery companies couldn’t get truck parts or scanners. Hotels were unable to receive furniture, towels and sheets due to ports being shut down, which delayed renovation plans. The impact of the supply chain disruption needs to have created a more than nominal (more than 10%) effect on the business’ operations. These impacts qualify a company regardless of revenue gain or loss.
The third is 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. Keep in mind, a government restriction may have had a direct impact on your operations even though that shutdown order wasn’t given to you directly. For example, an insurance agent used to get all of their business by visiting doctors offices and hospitals, which was no longer possible. Conventions were cancelled due to government orders, making it impossible for all types of businesses to meet and obtain new customers. The cumulative effect of the full or partial suspensions must have had a more than 10% impact on your business operations 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.
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!