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The ERTC Then and Now (2022)

August 23, 2022


Jonathan Cardella

Strike Summary

  • There are certain restrictions when taking advantage of both Sections 174 deduction/capitalization and Section 41, which can be seen in Section 280C.
  • Businesses that choose to elect Section 280C for their federal taxes could also lower their state taxes as well.
  • Taxpayers that want to use Section 280C must plan ahead because it can only be used on an originally filed return.
  • The recent passage of the Tax Cuts and Jobs Act may have have affected whether a taxpayer should use Section 280C in their tax strategy.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

Strike Summary

  • The fitness, healthcare, and restaurant industries were particularly affected by government shutdowns, and may easily qualify for the ERTC.
  • Businesses in California, New York, New Jersey, and Massachusetts maybe more likely to qualify because of their more stringent shutdown orders.
  • There is still time to retroactively claim the ERTC in 2023, and you could receive up to $26,000 per employee.

Employee Retention Tax Credit: A History

On March 13, 2020, the President of the United States issued Proclamation 9994, declaring a national emergency in response to the COVID-19 pandemic. State governments followed with shutdown orders, resulting in the full or partial suspension of many American businesses’ operations. The President’s proclamation and state shutdown orders induced an economic contraction, which impacted many industries, but especially devastated industries such as fitness, healthcare, and restaurants. 

To alleviate impending financial struggles for hard-hit industries, the Employee Retention Tax Credit (ERTC/ERC) was enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Additional legislation passed in 2021 under the Consolidated Appropriations Act and the American Rescue Act, expanded the ERTC benefit to more qualified businesses, including those that participated in the Paycheck Protection Program (PPP).

The ERTC supports small businesses that were affected by the pandemic including those affected by government-imposed shutdowns at all levels of government and across all industries. The Internal Revenue Service (IRS) defines eligible employers as those companies whose “operations that have been partially or fully suspended due to governmental orders due to COVID-19, or businesses that have a significant decline in gross receipts compared to 2019”.

Industries That Qualify for the Employee Retention Tax Credit

Most Americans witnessed the impact to numerous industries that were hit hardest by the pandemic. 

ERTC for Fitness - For example, the fitness industry was impacted by multiple orders forcing closures of indoor gyms and fitness clubs. As closures lasted anywhere from one to six months, depending on the state and local orders, gyms and fitness clubs experienced significant losses in revenue. Businesses in this industry typically qualify under both methods - full or partial suspension of their business and/or a gross receipt reduction.

ERTC for Healthcare - The healthcare industry faced unprecedented challenges throughout the pandemic. Most were deemed essential businesses and therefore were not required to shut down. However, all were required to restrict the number of patients allowed in the clinics, as well as limit the amount of time patients could be in the building. In addition, many elective procedures were postponed indefinitely, greatly impacting the revenues received by the provider. 

Businesses in this industry may only qualify by gross receipt reduction, however it is critical that these businesses conduct a thorough review of all impacted departments with a trusted expert to determine their ERTC qualification.

ERTC for Restaurants - Restaurants were impacted by numerous shutdown orders that heightened their operational safety protocols. These standards required restaurants to strictly limit indoor table service to match social distancing requirements and to restrict activities within confined spaces. Social distancing requirements mandated that tables be positioned to maintain at least six feet of distance between other tables, limiting the number of guests that could dine together. Some bars and restaurants were only allowed to seat guests at outdoor tables, but some could only offer carry-out options. 

As restaurants rely on large numbers of customers who come to eat, drink, and attend events, daily operations and revenues were significantly diminished by the COVID-19 safety measures. Businesses in this industry may qualify by either full or partial suspension or a reduction in quarterly revenue.

Some businesses were able to obtain a PPP loan to stay afloat. Initial ERTC rules made these businesses ineligible for further tax credits, but changes to legislation applied retroactively made it easier for businesses to claim both of these funds. Read more about that here - ERC & PPP Loans: Can I Claim Both?

Which States Are More Likely To Qualify?

Geographically, the northeast and west regions were the hardest hit by the pandemic, enduring the strictest and most lengthy of the shutdown orders. Governors of California, New York, New Jersey, and Massachusetts enacted the most stringent shutdown orders. Businesses in these states endured shutdown orders well into 2021, since each of these population centers have some of the highest population density in the country. 

California has 4 of the top 10 most populous counties in the United States, namely Los Angeles, San Diego, Orange, and Riverside counties. Because of both population density and local government response to COVID-19, many California businesses qualify for the ERTC. Strike reviews all “Stay at Home” executive orders issued by state/local jurisdictions to determine eligibility based on full or partial suspension. We know that eligibility can change on a city to city or county to county basis, even in the same state.

Do Supply Chain Disruptions Qualify Me for the ERTC?

Some companies faced other types of COVID-19 impacts, including supply chain disruption. Businesses experienced increased lead times of supplies and materials needed to manufacture goods. They did not anticipate shipping delays and worker shortages, or having their products sit in a port waiting for transportation. 

Some companies were even unable to source raw materials, particularly from overseas suppliers. Many businesses determined that its suppliers were experiencing shortages of materials required for production while shipping and delivery times were increasing. The consequences were increased lead time and significant reduction in sales volume. Additionally, some products were out of stock entirely, causing lead times to further increase by one to three weeks.

Under the Supply Chain Provision, if one of your domestic suppliers was shut down because of government order, and this in turn disrupted your business, you may also qualify for the ERTC. Proving that your domestic suppliers were affected by government orders will require supporting documentation, and Strike conforms to stringent due diligence standards to verify the authenticity of your claim.

Can I Still Claim the ERTC/ERC in 2022 (updated for 2023)?

Yes, there is still time to retroactively claim the ERTC in 2023. If you qualify for all eligible quarters in 2020 and 2021, you could receive up to $26,000 per employee. There is no limit to how many businesses can claim the credit. However, there is a limited amount of time to amend your tax returns to receive the amount you’re due. You have five years from the time the original Form 941 was filed. Employers must file Form 941-X to amend their quarterly federal tax return to receive refund payments for Employee Retention Credits.

Even a partial refund can make the difference between surviving and thriving this year. You can even claim the ERTC if you received PPP loan forgiveness, but you’ll need to carefully follow IRS guidelines to avoid counting income twice.

Of course, amending a quarterly tax return can seem daunting, but Strike is here to guide you through the process. We help small businesses every day claim the maximum ERTC funds they’re owed. Contact one of our tax specialists to start your application today.

Work with Strike to navigate tax changes with ease.

Schedule a MeetingBook a Consultation

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