Common Misconceptions about the CARES Act Employee Retention Credit (ERC)

The intent of the CARES Act ERC has not wavered, but many of the original provisions have evolved or changed which has led to misconceptions regarding the ERC. Synergi Partners’ General Counsel, Ashley Hogsette, recently discussed some common misconceptions on the ERC with Bloomberg Tax. See the below for an overview of the misconceptions.

Decline in revenue is a requirement to be eligible.

The assumption that some negative financial impact is required to be eligible from the ERC is incorrect. Many employers may be eligible for the ERC despite not having satisfied the Gross Receipts Test.

While the ERC legislation seems to make it clear that no decline in revenue is required by stating an employer may be considered eligible if they satisfy the Government Orders Test or the Gross Receipts Test, this fact is often overlooked by employers.

A complete shutdown of operations is required.

Many employers believe they are not eligible because their operations were not completely halted, but the legislation specifically provides that an employer who experiences a partial suspension of operations may satisfy the Government Orders Test.

For example, a restaurant that was forced to close in-person dining and operate only its take-out or delivery operations can demonstrate a partial suspension of operations as a result of a government order and is, therefore, eligible for the ERC.

A related misconception is that essential businesses cannot claim the ERC because their operations never completely shut down. However, the legislation does not preclude essential businesses from being eligible for the ERC if they meet one of the two eligibility tests.

Essential businesses were encouraged to operate throughout the pandemic and were vital to keep the world going; there was no intent to exclude these businesses from benefitting from the ERC. Consider a medical provider classified as an essential business and allowed to operate pursuant to a state executive order, however, this provider was prohibited from conducting elective medical procedures due to a government directive. Clearly, this employer experienced a partial suspension of its business operations and is likely eligible for the ERC in the quarter(s) where elective medical procedures were required to be ceased.

PPP loan recipients are not eligible.

Employers can take advantage of both the Paycheck Protection Program (“PPP”) loan and the ERC but many are unaware. Initially, the ERC legislation prohibited PPP loan recipients from taking the ERC. The Consolidated Appropriations Act (“CAA”), however, retroactively amended this provision to explicitly allow employers who received a PPP loan to take the ERC, just not on the same wages paid with forgiven PPP loan funds.

Public colleges, universities and medical providers are not eligible.

Unbeknownst to many businesses in the public organizations in the healthcare and education industries, legislative updates allow them to be eligible for the ERC in 2021. The original ERC legislation included a governmental employer exclusion which precluded instrumentalities of the government from claiming the ERC, regardless of whether they satisfied the Government Orders Test or Gross Receipts Test. The CAA prospectively changed that provision, specifically removing public colleges and universities, and public medical or hospital care providers from the governmental employer exclusion, allowing them to be eligible for calendar quarters in 2021 if they meet the Government Orders Test or Gross Receipts Test.

Tax-exempt organizations are not eligible.

The CARES Act specifically acknowledged tax-exempt organizations may be considered an Eligible Employer, which is fairly unique as most federal tax credits are taken against income tax liability.

Size impacts whether an employer is eligible.

Size has nothing to do with eligibility for the ERC. An employer’s headcount classification as a small or large employer only impacts the type of wages that can be qualified for the ERC calculation.

Qualified wages for the ERC vary depending on whether an employer is classified as a large or small employer based on average full-time headcount in 2019. One important caveat is no employer, regardless of size, can include certain types of wages, such as those that fall within the “double dipping” prohibition set forth in the ERC legislation; wages paid to “ineligible individuals;” or wages not subject to FICA.

Small employers may include all wages paid, as well as qualified health plan expenses during an eligible quarter. For the 2020 tax year, the definition of a small employer 100 or less full-time employees in 2019, and 500 or less full-time employees in 2019 for the 2021 tax year.

An employer considered large under the CARES Act may qualify non-service wages and a proportionate amount of qualified health plan expenses during an eligible quarter. For the 2020 tax year, 100 or more employees in 2019 is classified as a large employer. In the 2021 tax year, an employer is considered large if it had more than 500 full-time employees in 2019.

For more insight into common misconceptions, please see Synergi Partner’s recent coverage in Bloomberg Tax.

Given the complexities of the ERC, it is recommended to consult with a professional who has experience in this area when trying to determine whether your business is considered an Eligible Employer.