Everything you ever wanted to know about the ERC but had no idea what to ask!

Once upon a time, there was a pandemic...

​

First, the CARES Act.  Also known as H.R. 748 for you technocrats, the proper name of the law is the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  Brought to you by the same law that gave the Paycheck Protection Program, the ERC is authorized under Section 2301 of the CARES Act.

​

The What:  The Act allows eligible employers to claim qualified wages of up to $10,000 per employee for the period beginning March 13, 2020 through December 31, 2020.  From these qualified wages, an eligible employer can make a claim of 50% of an employees' qualified wages to a maximum of a $5000 credit for each employee for the period beginning March 13, 2020 through December 31, 2020.  

​

The Who - What are "Qualified Wages" and what is an "Eligible Employer?"  Not surprisingly, the Act has terms of art that need to be parsed out and explained. 

​

Qualified Wages.  The meaning of this term is based upon the average number of employees the business had in 2019.  If that number is greater than 100, then Qualified Wages are the wages the business paid to employees who are at home and not working.  If the number is less than 100, then Qualified Wages are wages paid to any employee of the business in the quarter.  There are a few other limitations, especially concerning employees who are owners or family members of owners.

​

Eligible Employer.  An employer is eligible IF it was 1) Carrying on a trade or business in 2020; and either 1) Experienced a partial suspension of the business because of a COVID order issued by a government (federal, state, local); or 2) Received gross receipts of less than 50% of the gross receipts for the same quarter in 2019.  Where "significant decline in gross receipts" is a pretty objective standard, the "partial suspension of the business" qualifier has a lot more subjectivity to it.  This is why its important for a business owner to consult a tax professional who can explain the nuances of this test.  Find out more amout employer eligibility here.

​

The 2021 Amendment - COVID Relief Act.  In 2021, congress changed the rules concerning how a business can qualify for the ERC.  However, these changes only apply to Quarters 1-3, 2021; the CARES Act rules described above remain the same for 2020 claims. 

The New ERC Amount. The most significant change made by the Relief Act was to increase the amount of available credit to a business.  In Quarters 1-3, 2021, an Eligible Employer may now make a claim of 70% of qualified wages of up to $10,000 per employee for EACH of the three eligible quarters.  In other words, where the maximum credit per employee in 2020 was $5000 for the whole year, an Eligible Employer may now make a claim of up to $7000 per employee for each quarter ($21000 per employee in total).  

​

Eligible Employer Under the Relief Act Section 3134.  There are two significant changes for businesses to become eligible in 2021.  The first is the "significant decline in gross receipts" test is now based on a business receiving less than 80% of the gross receipts it received in the same quarter, 2019.  If the business was not operating in 2019, then the comparison is with the same quarter in 2020.  

​

Recovery Startup Business.  The second change concerns any business that began operations after February 15, 2020 is considered a "Recovery Startup Business."  Subject to gross receipts limitations, such a business is automatically eligible for the ERC (using the standard statutory calculations) for Quarters 3-4, 2021 with a cap of $50,000 per quarter.  

​

The How.  How does a business go about making a claim for the ERC?  Making the claim is fairly straightforward - a business simply files a 941X (amended 941 return) for each quarter it is eligible to make the claim.  However, we recommend you consult a tax professional to help you determine eligibility as well as assist you in understanding the tax ramifications of making such a claim.  Also, be sure to ask your tax pro if they are going to represent you if you get audited down the road and the IRS challenges your claim of eligibility.