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Are you curious about receiving the refundable payroll tax credit, also known as the Employee Retention Credit (ERC)?
To determine eligibility, your business must first undergo a few governmental means tests, including the ERC Gross Receipts Test and the Full or Partial Suspension Test. These tests are designed by the IRS to measure if the COVID-19 pandemic adversely affected your business.
While these tests are complex and have many moving parts, with the right preparation and help from an ERC company like Innovation Refunds, they have the potential to help eligible businesses receive a significant payroll refund.
The Employee Retention Credit remains vastly underused by small and medium-sized eligible employers. Tax-exempt churches, religious organizations, and nonprofits are also considered to be qualified employers.
As one of the applicable conditions for claiming the ERC credit, a business must have experienced a decline in gross receipts in 2020 or 2021 when compared to 2019.
Many businesses think because their revenue increased during the pandemic, they may not qualify for the ERC. This is a common misconception, which we’ll discuss below.
Keep reading, because we’ll talk about how to understand the ERC Gross Receipts Test – and how to start your claim today.
What Are Gross Receipts?
Gross receipts are defined by the IRS as “the total amount the taxpayer receives from all sources during its annual accounting period, without subtracting any before deducting any costs or expenses.” In summary, gross receipts are all revenue from whichever source, including from the sales of products, services, interest, dividends, rent, fees, commissions, etc.
If you’re a nonprofit or religious organization, ERC gross receipts can also be defined as the contributions it received.
In layman's terms, gross receipts are the income you receive from your business.
What is not included in gross receipts for the ERC?
While the government has made it possible to qualify for the ERC even if you received a PPP loan or other funds or grants, those wages may not be used for ERC purposes. This means you cannot claim the ERC on PPP wages used for PPP loan forgiveness, Shuttered Venue Operator Grants, and other grants and incentives.
The ERC Gross Receipts Definition
As we explained above, gross receipts are the income you receive from your business. Per the IRS, you should keep supporting documents that show the amounts and sources of your gross receipts.
Records for gross receipts include the following:
-Every sale of tangible property
-Every service completed
-Employment tax returns
-The use of an invention, copyright, logo, franchise or license in this state
-Every transaction of real estate in this state, including royalties from oil, gas, and other mineral holdings
-Other transactions can be included
For example, a church or nonprofit, documents for gross receipts might include the following:
-Cash register tapes
-Deposit information (cash and credit sales)
The Gross Receipts Test for the ERC Explained
There have been several substantive changes to the ERC (as well as other relief legislation) since the pandemic began in early 2020.
What quarters can you claim the ERC?
The initial ERC only went through the end of 2020, and the credit was extended multiple times to Dec. 31, 2021. It also increased qualified wages, from 50% of up to $10,000 to 70% of up to $10,000. The definition of “Large Employer” was also changed, from 100 full-time employees to more than 500 full-time employees.
As it relates to gross receipts, employers may qualify for the ERC if they have a 50% or 20% decline in gross receipts (not profit, not revenue) on a quarterly basis for 2020 and 2021, respectively, compared to the corresponding quarter in 2019.
Two things that are important to note:
1.) Your business can satisfy the ERC gross receipts test if its average annual gross receipts for the three taxable years immediately before that taxable year did not exceed $25 million when adjusted for inflation.
2.) An increase in revenue during the eligible quarters will not disqualify you. The ERC is determined on a quarterly basis, and failure to meet the gross receipts test in one quarter doesn’t prohibit qualification from another quarter.
How to Calculate Gross Receipts for the Employee Retention Credit
The simple answer is to add up all products and services you sold throughout the particular time period you’re applying for. Here’s a general process to calculate gross receipts:
1.) Determine the period: The gross receipts calculation for the ERC is based on a calendar quarter. Identify the specific quarter for which you want to calculate gross receipts.
2.) Identify all sources of revenue: Gather information about all the sources of revenue your business generated during the chosen quarter. This includes sales, services rendered, rental income, interest income, and any other forms of revenue.
3.) Calculate gross receipts: Add up the total revenue from all sources identified in the previous step. This sum represents your gross receipts for the chosen quarter.
2020 Gross Receipts
If your business had more than a 50% decline in gross receipts for the 2nd, 3rd, or 4th quarters in 2020 when compared with comparable quarters in 2019, the gross receipts test is satisfied.
2021 Gross Receipts
If your business had more than a 20% decline in gross receipts for the 1st , 2nd , or 3rd quarters in 2021 when compared with comparable quarters in 2020, the gross receipts test is satisfied.
What is the Full or Partial Suspension Test
As one part of eligibility for the ERC, businesses are required to have experienced a full or partial shutdown of their business due to government regulation.
Examples would be a church that was required to hold services online – or a non-profit that was required to move its operations to a drive-in-only model.
Another example is if your church or religious organization is deemed an essential business but the government orders still limited its capacity of religious facilities to 50%, it may still meet the partial shutdown test.
Nearly any limitation on the ability to perform or render services at capacity can be considered a partial shutdown and could help qualify you for the ERC.