The eligibility for ERC is far broader than is generally understood, and an SMB or charity can qualify, if they’ve experienced at least one of the three impacts: (1) A 20% YoY reduction in revenues (2) More than nominal operational impacts due to a Covid-related federal, state, or local government regulatory order (space/distancing requirements; cleaning requirements, etc.) (3) Supply chain disruptions and disturbance in manufacturing schedule and costs. The key is to understand the “more than nominal impact” test. Parsing out the non-nominal impacts is where the bulk of SMBs will qualify – for instance, if an SMB or charity has been subjected to one of the 10,000 federal/state/local or regulatory government orders related to Covid-19, they would pass this test. With the number of Covid-related orders that are out there impacting business – many business owners may possibly have a claim for this credit.
It’s important to note that the “more than nominal impact” test also encompasses businesses that have not seen a downturn in revenue. There are thousands of businesses who qualify for the ERC and were subjected to a government Covid-19 order all the while still hiring and expanding. After all, the intention behind Congress enacting the ERC was to encourage employers to retain employees and hire new ones.
The IRS recognized that Congress meant for the ERC to assist a vast number of businesses and charities, so the agency put forward taxpayer-friendly guidance for businesses to claim it. With the broad qualifications and filing guidance, the IRS expected roughly 70-80% of SMBs to qualify and claim the ERC. Unfortunately, the actual number of SMBs and charities taking advantage fell far below that due to misinformed business owners lacking a full understanding of the credit and its qualifications.
Mistakes and Misunderstandings Business Owners and Charities Make
The top mistake SMBs and charities make regarding the ERC include much of what has been discussed above. However, other key mistakes and misunderstandings include:
(1) Businesses who partook in the Paycheck Protection Program (PPP) or had a PPP loan forgiven cannot claim the ERC.
- False. Congress changed the law and removed this specific limitation.
(2) A business must have been shut down to qualify for the credit.
- False. As discussed above, even a partial suspension order (or operational disruption that was more than nominal), makes you a good candidate for the ERC.
- Businesses must ask themselves: due to a government order, were we unable to continue activities in a comparable manner and did that result in a more than nominal impact on our business.
(3) Businesses deemed “essential” cannot qualify.
- False. Even essential businesses that experienced a disruption may still qualify for the ERC, due to partial shutdowns or other orders impacting varying aspects of business operations.
(4) A business that is in losses or doesn’t have a tax liability is ineligible.
- False. This is a refundable credit.
(5) ERC recipients are made public.
- False. Unlike the PPP, ERC recipients are not publicly disclosed.
- Tax provisions are confidential (just like WOTC, R&D and a host of others)
(6) A company with over 500 employees cannot qualify.
- False. The employee count is based on full FTE, but the ERC is based on all employees partial and full.
- Some companies with over 500 employees have an FTE calculation which puts them below 500.
- Also, if a company paid any employees to not work, or to work less than the hours for which they were paid, then the employee count restriction would not apply for those employees.
(7) The ERC is not applicable to charities.
- False. Charities are excellent candidates for the ERC, especially if they couldn’t hold services or fundraisers and faced disrupted operations.
Good Candidates For ERC
There are thousands of SMBs and charities across the country spanning dozens of industries, all of which are good candidates for the ERC. Particularly strong candidates include those within the food industry, manufacturing, construction, and healthcare, and others working with their hands (dental, massage, therapy, etc.).
Just as SMBs, businesses with more than 500 employees strong should still take a hard look at whether they can qualify based on FTE headcount and other factors, very small businesses should also look closely at the value of the ERC for them. Companies with as small as 5 to 10 employees have claimed the credit, which is still a huge lift when imagining that 10 employees would be a $70,000 credit for one quarter alone. With these (extra) small businesses in particular, the ERC has proven a godsend.
ERC real-use cases, for one quarter include:
- A dental lab with 17 employees received a credit for $60,000
- A construction business with 425 employees received a credit of $1.61 million
- An agriculture feed company with 33 employees received a $123,000 credit
- For charities, a museum with 19 employees received a credit of $60,000
Needless to say, the funds received have made all the difference to these SMBs and charities – helping keep doors open and bring in new hires.
