Gross Receipts Impact on ERTC Qualification
Many businesses don’t realize there is still time to claim employee retention credit. However, to qualify, employers must fulfill certain conditions.
One of the most complex is proving a significant decline in business via gross receipts from 2020 and 2021 against corresponding quarters from 2019.
This can be challenging because not all gross receipts are included, and the calculations vary for 2020 and 2021.
Read on to learn more about the eligibility criteria for ERTC, how to calculate ERTC gross receipts, and the ERC gross receipts test for 2020 and 2021.
Does Your Business Qualify for ERTC?
The Employee Retention Tax Credit (ETRC or ERC) was a relief program introduced in the 2020 Coronavirus Aid, Relief, and Economic Security (CARES)Act.
It provided businesses with credit so employers could keep their people on the payroll during the pandemic shutdowns. Despite expiring on October 1, 2021, the IRS is still accepting retroactive claims for the tax filing year of 2020 and Q1, Q2, and Q3 of 2021.
Current guidelines state that on qualifying employee wages, a business can claim up to 50% per employee for 2020 and 70% per employee for 2021 on a maximum salary of $10,000.
This means business owners can be refunded up to $5000 per employee per quarter for 2020 and up to $7000 per employee per quarter for 2021.
The current eligibility criteria for businesses are given below.
- The business is private, not part of the government, and not classified as “essential.”
- The business was closed or partially closed during the pandemic.
- There is more than one employee, and it is not a sole proprietorship or self-employment.
- For 2020 startups:
- It opened after February 15, 2020.
- ERTC’s gross receipts are under $1 million.
- ERTC Gross receipts declined significantly from March 20, 2020 – September 30, 2021.
- This decline is per quarter and compares gross receipts to the corresponding quarters of 2019.
- Minimum decline limits are 50% for 2020 and 20% for 2021.
- The first quarter of business is used as the reference point for a startup.
Which Employee Wages Count
If your business is eligible, employee wages that count are based on the following terms:
- For less than 100 employees, all wages qualify.
- For 100 – 500 employees, only full-time employee wages qualify.
- For over 500 employees, only the wages of full-time employees who were not working qualify.
To understand how much credit you may claim, look at the following example:
Example for Calculating Potential ERC
- The business has 15 employees on payroll during the pandemic shutdown. Therefore, all employee wages count.
- Under the ERC gross receipt tests:
- Q2, Q3 and Q4 of 2020 qualify
- Q1 and Q2 of 2021 qualify
This business can therefore claim a maximum of $5000 for the three quarters of 2020 and a maximum of $7000 for the two-quarters of Q2. This business can potentially claim up to $435000 in ERC.
However, it is important to know that any wages rebated by a PPP loan are excluded from this calculation.
If you need any help with ERTC and gross receipt calculations, please check out the form for our pre-qualification check.
What Are Gross Receipts
According to the IRS, a company’s gross receipts are the total amount collected throughout an accounting period for the year without subtracting any expenses, costs, or other deductibles.
They include income from all sources like product sales, services, fees, rents, interest, royalties, commissions, allowances, and dividends.
Gross receipts are also the total income of a business or the gross income of a self-employed person or sole proprietorship.
In certain states, businesses must pay a gross receipts tax, but this varies from state to state. Understanding these regulations and resolving unpaid amounts is important because any discrepancies can adjust ERC claims.
What Are ERTC Gross Receipts
Not all gross receipts count towards ERTC gross receipts. As per Section 171.103 of the IRS Tax Code, the gross receipts that count towards employee retention credit include:
- Any sale of a product
- Any service except for those that collect servicing debts
- Any rent
- All employment tax returns
- Fees collected from copyright, franchises, logo, or licensing
- Every real estate transaction, including any royalties from gas, oil, and mineral assets
What Is NOT included in ERTC Gross Receipts
Certain sources of inflow are not included in the gross receipts for ERC. These are listed below:
- Any Shuttered Venue Operator Grants or Paycheck Protection Program (PPP) loans from the Tax Relief Act of 2020
- Any Restaurant Revitalization Fund (RRF) aid from the American Rescue Plan (ARP) Act of 2021
Even though these amounts would count towards a company’s gross receipts, they are excluded from ERTC calculations as they are part of other relief packages.
Calculating ERTC Gross Receipts
To calculate the ERC gross receipts, you will need to go through your past bookkeeping records and reports to determine all relevant income by specific period, in this case, 2020 and Q1, Q2, and Q3 of 2021.
Calculations may vary if your company uses accrual accounting over cash:
- All products and services sold are counted where cash payments received during the specified periods count
- Only sales from products delivered or services completed count in accrual accounting
Wages for the same period must also be calculated per qualified employee, considering any health insurance costs per quarter. Those must be subtracted in to claim ERC.
What Is a Gross Receipt Test
A gross receipt test is a requirements list that must be fulfilled to claim ERC. It calculated the significant decline required to qualify and is calculated per quarter.
The ERC Gross receipts test 2020 differs from the ERC gross receipts test 2021 because the two years have varying conditions.
ERC Gross Receipts Test 2020
This test considers the accounting period from March 12, 2020, to January 1, 2021. All eligible gross receipts from this time are calculated per quarter and compared to the corresponding quarters of 2019.
If the quarterly gross receipts are less than 50% of the same 2019 quarters, it qualifies as a significant decline in revenue. Based on this, 50% of qualifying wages are refundable.
However, qualifying quarters are those until the first quarter, when the gross receipts exceed 80%, compared to the corresponding 2019 quarter.
Example for ERC Gross Receipts Test 2020
Taking a business with less than 500 employees, records show the following gross receipts:
2020 Q1 = $100000, Q2 = $190000, and Q3 = $230000
2019 Q1 = $210000, Q2 = $230000, and Q3 = $250000
Comparing corresponding quarters, this business’s gross receipts for Q1, Q2, and Q3 are 47.6%, 82.6%, and 97.8%, respectively.
This shows that the gross receipts significantly declined from the first day of 2020 Q1 until the first day of 2020 Q3 as gross receipts increased above 80% in Q3.
Therefore the business owner is entitled to claim ERC for Q1 and Q2 of 2020.
If you need assistance with ERTC, click here to learn more.
ERC Gross Receipts Test 2021
This test takes the accounting period from January 1, 2021, to September 30, 2021. It excludes Q4 of 2021.
During this period, if the quarterly gross receipts are less than 80% of the same 2019 quarters, i.e., a drop of at least 20%, it qualifies as a significant decline in revenue. Based on this, 70% of qualifying wages are refundable.
Example for ERC Gross Receipts Test 2021
For a business with less than 100 employees, accounting records show the following gross receipts:
2021 Q1 = $95000, Q2 = $77000and Q3 = $68000
2019 Q1 = $105000, Q2 = $100000, and Q3 = $95000
Comparing corresponding quarters, this business’s gross receipts for Q1, Q2, and Q3 are 90.4%, 77%, and 71.6%, respectively.
This shows that the business had a significant decline after the last day of 2021 Q1, as gross receipts were above 80% in 2021 Q1. The decline starts from the first day of 2021 Q2 until the last day of 2021 Q3.
Therefore the business owner is entitled to claim ERC for Q2 and Q3 of 2021.
ERTC Assistance Available
If your business was forced to close, partially close, or had a reduction in revenue during the pandemic, you still have time to claim ERC. However, you need to start now.
But be prepared. Going through 2020 – 2021 records to calculate ERC gross receipts test is going to be a long, arduous task.
After this, you are still faced with the challenge of determining qualifying wages per employee per quarter. Once this is complete, it is an even more difficult task to calculate ERTC in its entirety. This will become a very difficult feat, especially while you are running your business. So, let us help you get everything in order.
Our done-for-you service will take all the trouble out of your hands.
We will review your paperwork with a fine tooth comb to assess your ERTC eligibility, calculate your total claim, and get your Form 941 x filed with the IRS.
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