ERC Credit Explained: 3 Requirements IRS Will Look For
The Employee Retention Credit (ERC) was designed to support businesses affected by government and business closures during COVID-19. To qualify, businesses must meet three main requirements: being a qualified business, having qualified wages, and experiencing a partial or full suspension of operations that impacted revenue.
What Is a Qualified Business?
To qualify for the ERC, your business must be considered a legitimate trade or business by the IRS. This means the business should be regular and continuous, not just a hobby or sporadic venture. A key factor is having a profit motive. Businesses that have clients, advertising, and investment are more likely to be seen as legitimate. Even if your business shows a loss, you can still qualify if there is a genuine intent to make a profit.
What Are Qualified Wages?
Qualified wages are those subject to FICA taxes (Medicare and Social Security) for your employees. The IRS will examine your payroll records to ensure these taxes were withheld and paid. However, wages paid to family members of a majority owner may be excluded from the ERC calculation. Tips over $20 can be included as part of the wages. If your business received PPP funds or other grants, you must ensure that the same wages used for those programs are not counted towards the ERC, as this would be considered double counting.
Was Your Business Partially or Fully Suspended?
To meet the third requirement, your business must have experienced either a government-mandated partial or full suspension in 2020 or 2021 or a significant reduction in revenue. Specifically:
- For 2020: A 50% reduction in revenue in any quarter compared to the same quarter in 2019.
- For 2021: A 20% reduction in revenue compared to the same quarter in 2019.
Additionally, the IRS looks for a federal, state, or local government order mandating the suspension. Recommendations to close do not qualify. If your business was deemed essential, this might complicate your eligibility unless a key supplier’s closure directly impacted your operations.
Important Points to Consider
If your business applied for the Paycheck Protection Program (PPP), wages used for PPP forgiveness cannot be used for ERC calculations. Similarly, wages covered by grants for specific industries (e.g., restaurants, shuttered venues) should be excluded from the ERC calculation.
Need Assistance?
The IRS is actively auditing ERC claims, with over 300,000 requests currently under investigation. If you need help navigating an IRS audit of your ERC claim, contact John Milikowsky at Milikowsky Tax Law for expert guidance.
