Overview of Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit that was introduced under the CARES Act in response to the COVID-19 crisis. The ERC is designed to encourage employers to keep employees on their payroll, even if their businesses are experiencing financial hardship due to the pandemic. This credit is available to eligible employers and can significantly help in reducing the financial burden they face in retaining employees on their payroll. In this article, we will discuss who is excluded from the ERC and why.
Who is Excluded from ERC?
Background Information:
The Employee Retention Credit (ERC) was introduced by the CARES Act to provide financial support to eligible employers who were adversely impacted by the COVID-19 crisis. The credit is a refundable tax credit that is designed to encourage employers to retain their employees even when operations have been partially or fully suspended due to government orders or a significant decline in revenue.
While many eligible employers may qualify for the ERC, certain individuals and entities are excluded from the credit. The Internal Revenue Service (IRS) has set out several guidelines, including "constructive ownership rules" and "familial attribution rules," which determine who is prohibited from receiving the ERC.
One of the exclusions from the ERC is business owners themselves. This includes "direct majority owners" who own more than 50% of the company, as well as "indirect ownership" through related entities. For instance, if an owner has ownership in Corporation A and Corporation B, the combined ownership may not qualify for the ERC.
In addition, family members of business owners may also be excluded under the IRS's attribution rules. The attribution rules apply familial relationships to determine the amount of ownership and control, which can minimize the credit availability. For instance, if a majority of the ownership of a company is held by a family member who is related to another family member through a trust, it may result in the loss of eligibility for the ERC.
Moreover, individuals who are related to owners or their family members by blood, marriage, or adoption may also be excluded from the credit. IRS familial attribution rules treat the stock owned by one family member as owned by another related person, which can affect ownership percentages and result in the ineligibility of the credit.
In conclusion, if you are a business owner, or related to one, you may not qualify for the ERC. It is advisable to consult a tax professional for advice on eligibility requirements, particularly when it comes to ownership structures and complex attribution rules to avoid facing penalties for wrongful ERC claims.
Qualified Wages
Qualified wages are an essential aspect of the Employee Retention Credit (ERC) eligibility requirements. The ERC is available to eligible employers who have faced a significant decline in revenues or had their operations partially or fully suspended due to the COVID-19 crisis. The credit is calculated based on qualified wages, which can include certain health plan expenses, and it is refundable, making it an attractive option for distressed employers. However, not all wages paid to employees are considered qualified wages for the purpose of claiming the ERC.
Definition of Qualified Wages
Qualified wages are one of the key components in determining the Employee Retention Credit. In general, qualified wages are wages paid by eligible employers to eligible employees during a specific period of time. These wages can be used to calculate how much of a credit an employer may be able to receive.
To determine if a wage qualifies as "qualified", it must meet certain requirements. First, the wages must be paid between March 13, 2020, and December 31, 2021. The wages must also be paid to an eligible employee, defined as an employee who was not terminated or furloughed during the applicable period.
The calculation of qualified wages can be a bit complex. For employers with fewer than 500 employees, all wages paid during the applicable period to eligible employees are considered qualified wages (up to a maximum of $10,000 per employee per quarter). For employers with over 500 employees, different rules apply depending on whether the employee is working or not.
There are some exclusions and limitations to be aware of when calculating qualified wages. For example, wages paid to majority owners and their family members are generally excluded. Additionally, wages paid to employees who are unable to work due to a partial or full suspension of operations also do not qualify.
One important consideration when calculating qualified wages is the inclusion of healthcare expenditures. In general, healthcare expenditures paid by eligible employers that are properly allocable to qualified wages may also be included in the credit calculation. This includes both the cost of providing health insurance and the cost of providing health benefits to employees.
In conclusion, qualified wages are an essential part of determining the Employee Retention Credit. These wages must meet certain requirements to be considered qualified and may be subject to exclusions and limitations. Additionally, healthcare expenditures may also be included in the credit calculation. Employers should consult with a tax professional to ensure they are properly calculating qualified wages and maximizing their potential credit.
Paycheck Protection Program (PPP)
As part of the COVID-19 relief efforts, the Paycheck Protection Program (PPP) was instituted to provide forgivable loans to eligible small businesses as a way of mitigating the economic impact of the pandemic. However, PPP loans have had implications on the eligibility of small businesses for the Employee Retention Credit (ERC).
One of the requirements for ERC eligibility is that an employer must not receive a PPP loan. This means that if a small business received a PPP loan, they are not eligible for the ERC. The IRS has provided safe harbor guidance on the treatment of forgiven PPP loan amounts, which now allows for small businesses to exclude the forgiven amount from their gross receipts for the purpose of determining ERC eligibility.
The safe harbor means that eligible employers can exclude the forgiven PPP loan amounts from gross receipts, thereby increasing their chances of qualifying for ERC. As a result, many small businesses that had previously been excluded from ERC eligibility due to their PPP loan status are now able to claim the credit.
Additionally, there are other “ERC-Coordinated Grants” beyond PPP loans that small businesses can receive, which also impact eligibility for the ERC. Some of these grants include Shuttered Venue Operator Grants and Restaurant Revitalization Grants, and they too can be excluded from gross receipts for the purpose of ERC eligibility.
It is important to note that the treatment of owner wages also affects ERC qualification. For example, wages paid to owners who are not performing services for the business are not eligible for the ERC. Similarly, wages paid to owners who own more than 50% of the business are generally excluded from qualified wages as well.
In conclusion, the PPP program has had significant implications on ERC eligibility for small businesses. However, the safe harbor provided by the IRS for excluded forgiven PPP loan amounts from gross receipts has provided relief and allowed for more small businesses to qualify for the ERC. It is important to understand the impact of other ERC-Coordinated Grants and owner wages on ERC eligibility to maximize the benefits of the credit program.
Partial Suspension of Operations by Government Order
The Employee Retention Credit (ERC) is a refundable tax credit that aims to encourage businesses to retain and pay their employees during the COVID-19 crisis. One of the eligibility criteria for the ERC is a partial suspension of operations by a government order.
Partial suspension refers to restrictions imposed by the government that limit a business's ability to operate. The restrictions must have a significant impact on the business's operations, such as reduced hours, closing of specific locations, or part of the workforce being unable to work on-site. The limitations must be due to a government order related to COVID-19, including orders that affect the business directly or indirectly, such as supply chain disruptions.
To qualify for the ERC under partial suspension, the restrictions must affect more than a nominal portion of the business's operations. This means that the government order must have resulted in a significant reduction in the business's ability to perform its operations. However, there is no precise threshold or percentage of the operations that need to be affected for a business to be eligible for the ERC.
Businesses that were partially suspended due to a government order must document the dates and reasons for the suspension. They should retain any relevant governmental orders or guidance, as well as any internal records that support the suspension's impact on their operations. Providing proof of the partial suspension is crucial to claiming the ERC, as the IRS may request documentation during an audit.
It is important to note that voluntary closures or reduced demand due to the pandemic are not eligible for the ERC under partial suspension. Eligibility criteria only apply to suspensions mandated by a government order.
In conclusion, the partial suspension of operations by a government order is an essential eligibility criterion for the ERC. To qualify, a business must be able to prove that the restriction has a significant impact on its operations and was due to a COVID-19 related government order. Proper documentation is crucial, and voluntary closures or demand reductions are not eligible under partial suspension.
Eligible Employer
The Employee Retention Credit (ERC) was introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to support eligible employers during the COVID-19 crisis. The credit is refundable and provides a dollar-for-dollar reduction in payroll taxes for qualifying businesses. To claim the ERC, businesses must meet certain eligibility requirements. In this article, we will discuss who is considered an eligible employer for the ERC and who is excluded, as well as the reasons why some businesses may not qualify for the credit.
Corporate Structure Eligibility
The Employee Retention Credit (ERC) is a valuable refundable tax credit that eligible employers can claim against payroll taxes for each calendar quarter. The credit is intended to encourage business owners to retain their employees despite the current economic downturn caused by the COVID-19 crisis.
However, not all corporations or entities can qualify for the credit. In general, eligible employers are those who were in operation in 2020 and experienced either a partial suspension of operations or a significant decline in gross receipts.
But beyond these basic eligibility requirements are a set of more complex corporate structure eligibility rules that may exclude some corporations from receiving the ERC. One of these rules is constructive ownership, which may kick in when determining whether a corporation or other entity qualifies for the credit.
Under constructive ownership rules, individuals deemed to have indirect ownership of more-than-50% of a corporation's stock are treated as more-than-50% owners of the corporation themselves. The attribution rules for constructive ownership include familial attribution, which means that individuals who are related to each other may be considered to have ownership interests in the same business, even if they do not have a direct ownership stake.
The rules around constructive ownership and familial attribution can make it challenging for some closely-held corporations to qualify for the ERC. For example, if the employees of a corporation are primarily owned by a family, the members of that family may be subject to the constructive ownership rules and may ultimately be excluded from the credit.
To be eligible for the ERC, a corporation must meet several key criteria. The corporation must either have experienced a partial suspension of operations or a significant decline in gross receipts. If the decline is more than 20% compared to the same quarter in the prior year, the corporation may be eligible to claim the credit.
In addition, the corporation must have been in operation for all or part of 2020, and must not receive a Paycheck Protection Program loan. Other eligibility requirements may apply to tax-exempt organizations and recovery startup businesses, which have their own set of rules to follow.
Overall, it is essential for corporations and entities to carefully examine their ownership structures and other eligibility factors before claiming the Employee Retention Credit. These rules can be complex and may exclude some entities from claiming the credit, but with careful planning and guidance, eligible employers can take full advantage of the tax benefits offered by the ERC.
