A decline in gross receipts test may not be due to COVID-19, it is mechanical. The gross receipt test delivers the maximum ERC money as it applies to the complete quarter. On the contrary, ERC partial or full government suspension money comes only from the days you were affected by the local, state, or federal lockdown or suspension order.
You are eligible for 2020 ERC of a maximum of $5,000 per employee if:
1. Your 2020 quarterly gross receipts are lower than 50 percent of your gross receipts for the same calendar quarter in 2019, and
2. Your 2020 quarterly gross receipts following the quarter mentioned above are below 80 percent of your gross receipts for the same calendar quarter in 2019.
The 2021 ERC is available for first, second and third quarters for a maximum of $7,000 per eligible employee per quarter. This is $21,000 of potential ERC per employee in comparison with $5,000 in 2020.
To become eligible under the gross receipt test, the 2021 calendar quarter gross receipts are compared with the same quarter of 2019. If the 2021 gross receipts are lower than 80 percent of 2019 gross receipts for the same quarter; you qualify for that quarter.
When the gross receipts test for a 2021 calendar quarter shows that you do not qualify for that quarter, you still stand a chance for the ERC under the “election to use the alternate quarter” rule.
Under the 2021 rule, you can look back to the previous month. If you qualified for the previous month, you are also eligible for the current month. While considering the first quarter of 2021, your lookback month is December 2020 for 80 per cent qualification.
If the above rules do not work, you can still qualify because of the government’s full or partial shutdown order. There may be no problem identifying a full or partial shutdown by the local, state, or federal government order. But remember that when you qualify for ERC under the full or partial shutdown, you earn the ERC for wages paid during the shutdown period only. To determine if your business suffered partial suspension of operations from a government order, you should have more than a nominal portion of your business suspended.
It is safe to rely on the IRS safe-harbor 10 percent definition of “nominal portion”.
The effect of the government order is deemed to constitute more than a nominal portion of your business operations in any of the following cases:
1. The gross receipts from that portion of the business operations are not less than 10 percent of the total gross receipts determined using the gross receipts for the same calendar quarter in 2019, or
2. The service hours performed by the employees in that portion of the business are not less than 10 percent of the total number of hours of service performed by all employees in the employer’s business, determined using the number of hours of service performed by employees in the same calendar quarter in 2019.
The time you meet the gross receipts or work hours test, the IRS deems through its safe harbor that you suffered a more than nominal effect on your business operations and hence qualify for the ERC for that time period.
In partial shutdown option the affected operations were determined by physical space but for 10 percent “inability to provide goods or services” safe harbor needs facts and circumstances, good judgment and spreadsheet format backed by proof.
The following are the two situations where inability to provide goods and services could come into play during the time your business operations were shut down:
1. The government order limited your use of physical space
2.The government order limited the gathering size affecting your business operations
The government offers various programs for those running a business during COVID 19 and the most important among them is ERC. The ERC was dominated by other government programs making many deserving businesses unable to qualify for ERC. For those who cannot qualify with a favorable gross receipt, the following options are available: