The initial ambiguity around eligibility for the CARES Act’s employee retention credit was worsened by subsequent legislative revisions. According to Ashley Hogsette of Synergi Partners, navigating these complexities is required to confirm eligibility and calculate an appropriate ERC.
With no recent legislative history, Congress passed the Coronavirus Aid, Relief, and Economic Security Act’s employee retention credit in under 12 days in March 2020. The IRS has not issued formal regulatory guidance and will not release it in the future, leaving some murky areas and numerous unanswered problems for taxpayers.
The initial uncertainty about qualifying for the employee retention credit was exacerbated by legislative revisions to the CARES Act. This resulted in an eligibility matrix that employers had to traverse with no direction.
Understanding the specifics of the legislation can be tricky—it can be complex, unclear, and even contradictory. It is vital to navigate and interpret these complexities to assess eligibility and calculate an appropriate ERC. It’s simple to see why there are so many misconceptions after reading the highlights of legislative updates since March 2020 below.
So, how can employers know if they are qualified for the ERC? Through my experience working with customers, I’ve uncovered six of the most typical misconceptions about ERC eligibility.
1. Revenue decreases are a must.
The presumption that the ERC must have some negative financial impact is wrong. Despite not meeting the gross receipts threshold, many firms may be eligible for the ERC. While the CARES Act states that no revenue reduction is required by noting that an employer may be considered qualified if they meet the government orders test or the gross revenues test, this fact is frequently missed by companies.
2. There must be a total stoppage of operations.
Many employers assume they are ineligible because their operations were not entirely suspended, although the legislation states that a partial suspension of operations may pass the government orders test. For example, a restaurant forced to close in-person dining and only conduct its takeout or delivery operations due to a government order can demonstrate a partial suspension of operations and is thus eligible for the ERC.
Another common misperception is that critical enterprises are ineligible for the ERC since their operations are never totally shut down. Despite the IRS FAQs saying they should not be relied on as legal authority and are outdated, this misperception was exacerbated when the IRS produced FAQs stating that vital enterprises could not qualify for the ERC. This FAQ has been updated since then.