The Employee Retention Tax Credit (ERTC or ERC) is a fantastic opportunity for businesses that have been impacted by the COVID-19 pandemic. The program, established as part of the CARES Act, provides a credit of up to $26,000 per employee for businesses that have experienced a significant decline in revenue or have been forced to fully or partially shut down. But did you know that businesses may still qualify for the ERTC even if they don’t meet the traditional gross receipts test? This is where the “material impact” provision comes in.
The “material impact” provision expands the eligibility criteria to include businesses that have been impacted by the pandemic in a material way, even if they don’t meet the traditional gross receipts test. This means that businesses that have been forced to close or limit operations, had supply chain disruptions, or experienced significant changes in consumer demand due to the pandemic may still qualify for the ERC.
To qualify for the ERC, businesses must meet certain requirements. First, they must have carried on a trade or business or were a tax-exempt organization from January 1, 2021, through June 30, 2021. Additionally, to qualify for 2021 credits, an eligible employer must be considered small if they have 500 or fewer average full-time employees (FTEs). For the 2020 ERC, businesses that qualify need less than 100 full-time employees.
To qualify for the ERC, employers must also pass one of the following tests that demonstrate “material impact”:
Reduced Gross Receipts Test: An employer experiences a significant decline in gross receipts—which includes all receipts received including PPP loan forgiveness. In 2020, the decline is defined as at least 50 percent in any calendar quarter when compared to the same quarter in 2019. In 2021, the decline is defined as at least 20 percent in any calendar quarter when compared to the same quarter in 2019. If a business wasn’t in operation in 2019, they can use 2020 as their comparison year.
Government Order Test: A business must experience a calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19.” This includes businesses that have had to reduce operations, change layouts to accommodate social distancing, or experienced supply chain disruptions.
It’s important to note that the government order test is perhaps the most overlooked and misunderstood qualification. Many business owners may not realize that they qualify for ERC under this provision. For example, a business may have been able to maintain operations during a government shutdown order, but if they had to reduce hours, change layouts to accommodate social distancing, or experienced supply chain disruptions, they may still qualify for ERC.
When it comes to the ERC, it’s important for business owners to consider all of their options. If your business has been impacted by the pandemic in a material way, but you don’t meet the traditional gross receipts test, the “material impact” provision might be the right move. It’s worth taking the time to explore all of your options and see if you qualify for the ERC, as it can provide valuable cost savings and support for your employees during these challenging times. Contact ERC Opportunities on our website www.ercopportunities.com to help you navigate the Employee Retention Credit Program benefits for 2023!