Requirements for ERC Tax Credit Eligibility

The Employee Retention Credit (ERC) is a valuable tax incentive introduced by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and later expanded by the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARP). It aims to provide financial support to businesses that were significantly affected by the COVID-19 pandemic, allowing them to retain and pay their employees.

Eligibility Criteria

To qualify for the ERC tax credit, businesses need to meet certain requirements:

1. Business Operations

The business must be engaged in a trade or business.

2. Partial or Full Suspension

For 2020, a business must have experienced either:

• A full or partial suspension of operations due to governmental orders limiting commerce, travel, or group meetings due to COVID-19. This includes stay-at-home orders, mandatory business closures, and significant capacity restrictions.
• A significant decline in gross receipts. A significant decline means that a business's gross receipts for any quarter in 2020 were less than 50% compared to the same quarter in 2019.

For 2021, the rules have changed slightly. A business must have experienced either:

• A full or partial suspension of operations due to governmental orders limiting commerce, travel, or group meetings due to COVID-19. This covers businesses operating throughout 2021, even if they weren't affected during 2020.
• A significant decline in gross receipts. A significant decline means that a business's gross receipts for any quarter in 2021 were less than 80% compared to the same quarter in 2019 (or 2020 for those who didn't exist in 2019).

3. Size of the Business

The ERC is available to businesses of all sizes. However, the requirements differ depending on the number of employees:

• For 2020:
  • If you had 100 or fewer full-time employees on average in 2019, the credit applies to all wages paid to your employees, regardless of whether they worked or not.
  • If you had more than 100 full-time employees on average in 2019, the credit only applies to wages paid to employees who did not work during the periods of suspension or decline in gross receipts.
• For 2021:
  • If you had 500 or fewer full-time employees in 2019 or 2020, the credit applies to all wages paid to your employees, regardless of whether they worked or not.
  • If you had more than 500 full-time employees in 2019 or 2020, the credit only applies to wages paid to employees who did not work during the periods of suspension or decline in gross receipts.

4. Interaction with PPP

If a business received a Paycheck Protection Program (PPP) loan, it can still qualify for the ERC but there are limitations:

• PPP funds cannot be used for wages that are considered in calculating the ERC.
• Wages used to claim the ERC cannot be used to obtain PPP loan forgiveness.

Apply for the ERC

The ERC is claimed on the employer's federal employment tax return, usually Form 941. Smaller employers may be eligible to request the advanced credit by filing Form 7200.

To ensure accurate and lawful application, businesses should consult with a qualified tax professional who can guide them through the process and determine their eligibility.