Who is Not Eligible for the Employee Retention Credit?

The Employee Retention Credit (ERC) has offered companies crucial tax relief during COVID-19. However, not all employers qualify for this substantial credit. Understanding the key eligibility restrictions is important.

ERC Program Overview

First, a quick recap of the ERC program:

  • Provides up to $7,000 per employee tax credit for 2021 quarters
  • Applies to qualified wages, health expenses, and retirement contributions
  • Requires revenue decline of 20% or more compared to the same quarter in 2019
  • Offsets Social Security payroll tax liabilities and is refundable

While the ERC has broad eligibility, there are certain employers who cannot claim it.

Key Disqualifying Factors

The main factors that can make employers ineligible for the ERC include:

Lack of Revenue Decline

If gross receipts did not drop by 20% for a quarter compared to 2019 levels, the ERC cannot be claimed for that period. Detailed calculations are required.

Large Employer Status in 2020

For 2020, large employers with more than 100 full-time employees did not qualify. This threshold increased to 500 for 2021 quarters.

Forgiven PPP Loan Recipients

Employers who received a forgiven Paycheck Protection Program loan cannot claim ERC on wages used to qualify for forgiveness.

Government and Public Entities

Federal, state, local, and tribal government employers do not qualify. Certain public colleges, universities, and organizations are also excluded.

Tax-Exempt Organizations

Most tax-exempt 501(c)(3) organizations cannot claim the ERC due to lack of taxable payroll.

Additional Limiting Factors

Some other factors that may restrict ERC eligibility include:

  • Short period return in 2019 complicating revenue comparisons
  • Aggregation rules that group related businesses together
  • Excessive employee compensation levels above $10,000 per quarter
  • Lack of W-2 employees performing services

Carefully assessing if any of these disqualifying criteria apply is key to determining potential ERC qualification.

Claiming Other COVID Relief

While the ERC may be out of reach, other COVID relief like PPP loans, Restaurant Revitalization Fund grants, and the Shuttered Venue Operator grant may be available. Non-profits also have certain relief options. Discuss alternatives with your tax advisor.

Strategies for Qualifying Businesses

For businesses that may fall into a disqualifying category, some potential strategies to qualify could include:

  • Adjusting aggregated group structure or outsourcing employees to get under size thresholds
  • Limiting executive compensation below the $10,000 per quarter cap
  • Accelerating or deferring revenue between quarters to create 20% declines
  • Not claiming full PPP loan forgiveness to free up ERC-eligible wages
  • Alternative revenue test options like using prior quarter comparison

However, most of these tactics may draw IRS scrutiny. Consult a tax advisor before implementing questionable strategies.

Documenting Eligibility

For employers who do meet ERC eligibility, thorough documentation is essential:

  • Detailed calculations of gross receipts declines by quarter
  • Records tracking wages, health expenses, and retirement costs by employee and quarter
  • Proof of full-time and part-time employee counts by quarter
  • PPP loan documentation shows no overlap with ERC wages
  • Filings status information confirming eligibility

Having support ready in case of an audit can help defend large ERC claims.

Claiming Credits Retroactively

Eligible employers can amend prior quarter returns to claim ERC for those periods. But deadlines apply, so acting quickly is key.

Keeping organized records and tax information makes retroactively maximizing credits easier while windows are open. Don’t leave potential ERC funds on the table.

Getting Professional Help

Determining eligibility and documenting support for ERC claims can be challenging. Engaging a knowledgeable CPA or tax attorney may yield benefits exceeding their fees.

An expert can help navigate gray areas, develop smart strategies, and ensure all compliance requirements are met. Their guidance can prove invaluable in unleashing the full power of the ERC.

Conclusion

Understanding the eligibility rules is crucial to avoid wasted effort pursuing ERC claims that will be rejected. Focus instead on qualifying relief programs, documenting revenue declines, managing PPP overlaps, and limiting employee compensation to maximize potential credits. Planning ahead helps target areas likely to yield the best return.

Frequently Asked Questions

Who is not eligible to claim the ERC?

Key ineligible employers include government entities, most non-profits, and large employers with over 100 employees in 2020. Given that PPP loan recipients also cannot claim ERC.

What are the main disqualifying factors?

Lack of sufficient revenue decline, exceeding size thresholds, receiving a forgiven PPP loan, and status as a public entity are the main factors that can disqualify employers.

Are small employers eligible?

Yes, employers with less than 100 employees in 2020 and less than 500 in 2021 can qualify if they meet the 20% revenue decline and other requirements.

Can tax-exempt organizations claim ERC?

Most tax-exempt groups cannot claim the credit due to a lack of taxable payroll. But some cooperatives and 501(c)(12) organizations may qualify.

Do government employers qualify for ERC?

No, federal, state, local, and tribal government entities do not qualify for the ERC program.

What are some strategies to become eligible?

Adjusting business structures, limiting executive pay, accelerating/deferring revenue, and minimizing PPP loan forgiveness are some tactics that may enable eligibility.

What records should I keep if eligible?

Detailed payroll records, revenue substantiation, and documentation of all eligibility criteria should be maintained to support claiming sizable ERC amounts.

Who can help determine my eligibility?

Consulting a tax professional can provide guidance on eligibility and strategies to document compliance.

Where can I learn more about qualifying?

The IRS website provides instructions and resources to further understand ERC eligibility rules and claiming procedures.

Resources on ERC Eligibility

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