In today’s challenging business landscape, where many organizations have faced unprecedented disruptions due to the global pandemic, understanding and utilizing available government support programs can make all the difference.
One such program that has provided vital relief to businesses is the Employee Retention Credit (ERC). Designed to incentivize businesses to retain their employees, the ERC offers substantial financial benefits to eligible employers. However, determining eligibility for this credit requires considering various factors, and one crucial aspect is calculating gross receipts.
In this article, we delve into the intricacies of the ERC, focusing specifically on the significance of gross receipts in determining eligibility. We also explore who qualifies for the credit and the methodology behind calculating gross receipts.
The Employee Retention Credit: A Brief Overview
The Employee Retention Credit, established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020, has been a lifeline for countless businesses grappling with the economic fallout caused by the pandemic. Initially enacted as a temporary measure, the ERC has been extended and expanded through subsequent legislation, providing ongoing relief to businesses navigating through the recovery phase.
The primary objective of the ERC is to incentivize employers to retain their employees during challenging economic times. By providing eligible businesses with a refundable tax credit, the program aims to alleviate financial strains, enabling organizations to maintain their workforce and promote economic stability.
The Role of Gross Receipts in ERC Eligibility
Determining eligibility for the Employee Retention Credit involves two categories: full or partial suspension and significant decline in gross receipts. Gross receipts are a critical indicator of a business’s overall financial health and are defined as the total revenue earned from all sources, including sales of goods, services, or other business activities, before deducting any expenses.
Under the ERC guidelines, businesses must meet specific requirements related to their gross receipts to qualify for the credit. The calculation of gross receipts serves as a measure of a business’s revenue performance and helps determine if an organization has experienced a significant decline that meets the eligibility criteria.
The initial eligibility criteria for the Employee Retention Credit (ERC) required businesses to demonstrate a significant decline in gross receipts during any calendar quarter in 2020. This decline was defined as gross receipts for a quarter being less than 50% of the corresponding quarter in 2019. However, subsequent amendments have been made to the criteria, particularly regarding the decline in gross receipts.
Under the current guidelines, employers now need to showcase a decline in gross receipts for a calendar quarter in 2021, where the gross receipts were less than 80% of the same quarter in 2019. In cases where employers did not exist in 2019, the comparison substitutes the year 2020 for 2019.
You can read more about these changes in our Employee Retention Credit 2020 vs 2021 article.
Gross Receipt Inclusions and Exclusions
Before diving into the calculation of gross receipts for the ERC, it is crucial to have a clear understanding of what constitutes gross receipts. In general, gross receipts encompass revenue received from various sources, such as sales of products or services, fees, commissions, royalties, rents, and more. The Tax Code also provides specific definitions for gross receipts under the ERC, including:
- Sales of tangible property to a buyer.
- Services rendered, excluding receipts obtained from servicing real property-backed debts within a particular area.
- Rental income from properties.
- Employment tax returns.
- Use of intellectual property, such as inventions, copyrights, logos, franchises, or licenses within a given state.
- Real estate transactions within a particular state, including royalties from oil, gas, and other mineral rights.
- Other types of transactions.
It’s important to note that under the Tax Relief Act of 2020, PPP loans and Shuttered Venue Operator Grants (SVOG) are not considered taxable income. Similarly, under the American Rescue Plan (ARP) Act of 2021, subsidies received from the Restaurant Revitalization Fund (RRF) are also excluded from gross receipts. However, concerns have been raised about the inclusion of these items as tax-exempt income in the calculation of gross receipts.
To provide clarity, Rev. Proc. 2021-33 offers definitive guidance. It states that these amounts (PPP loans, SVOG, and RRF subsidies) are usually included in gross receipts. However, a Safe Harbor provision allows businesses to exclude all three amounts when determining gross receipts for ERC eligibility.
How To Calculate Gross Receipts For ERC
Step 1: Gather Financial Records: To begin the calculation, collect all relevant financial records for the specified time period. This includes sales invoices, receipts, revenue reports, rental income statements, and any other documentation related to your business’s revenue streams. Ensure you have comprehensive records that cover the calendar quarters you will be assessing.
Step 2: Identify Gross Receipts Sources: Next, identify all sources of gross receipts within the specified time period. This may include revenue from product sales, service fees, commissions, royalties, rents, and other forms of income related to your business operations. Make a list of these sources to ensure you don’t overlook any potential revenue streams.
Step 3: Exclude Exempt Income: Now, review the exclusions outlined under the ERC guidelines. Certain types of income, such as PPP loans, SVOG, and RRF subsidies, are not considered taxable and should be excluded from your gross receipts calculation. Rev. Proc. 2021-33 provides a Safe Harbor provision for this exclusion. If your business has received any of these forms of assistance, make sure to deduct them from your gross receipts total.
Step 4: Calculate Gross Receipts: With all the necessary information at hand, it’s time to calculate your gross receipts. Add up the revenue from each source identified in Step 2, excluding any income that falls under the exclusions mentioned in Step 3. Summing up all your eligible gross receipts will give you the total amount for the specified time period.
Step 5: Compare Gross Receipts to the Reference Period: Now that you have the total of your gross receipts, compare them to the reference period mentioned in the ERC eligibility criteria. This reference period will depend on the applicable legislation. For businesses in existence during both 2019 and 2020, compare the gross receipts for the specified quarters in 2021 to the corresponding quarters in 2019. If your business was not in operation during 2019, use 2020 as the reference year for comparison.
Step 6: Assess the Decline: Determine if there has been a significant decline in your gross receipts based on the comparison in Step 5. The specific threshold for a decline may vary depending on the legislation in effect. For example, under the current guidelines, businesses must demonstrate a decline of at least 20% in gross receipts when comparing the specified quarters in 2021 to the reference year.
Calculating gross receipts accurately is a crucial step for businesses seeking to determine their eligibility for the Employee Retention Credit (ERC). As one of the two key factors considered for ERC eligibility, understanding gross receipts is essential.
In a nutshell, gross receipts encompass all revenues from various sources. However, staying up to date with the latest tax guidance is crucial, as certain items may not be included in the gross receipts calculation.
If there are any questions or uncertainties, it is advisable to directly contact the IRS or seek assistance from a tax professional or ERC specialist. These experts can provide expert guidance and address any specific concerns related to the ERC and gross receipts calculation.