When the COVID-19 pandemic began, numerous businesses were forced to full or partial shut down due to adherence to COVID-19 executive orders and supply chain disruptions that resulted from COVID-19 executive orders. Financial assistance was provided to employers impacted by the pandemic through the CARES Act, under which the Employee Retention Credit (ERC) was introduced in 2020. The ERC, sometimes called the employee retention tax credit, can benefit healthcare organizations—even if they didn’t have to close their doors.
Healthcare organizations saw some of the greatest impacts during the pandemic, but many have yet to realize the full potential of the employee retention tax credit. While some took advantage of the PPP (paycheck protection program), others have continued to overlook or believe they do not qualify for the ERC.
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Despite most being deemed essential and continuing to operate, many healthcare organizations were severely disrupted by partial shutdowns of in-person services and other COVID-19 restrictions. Hospitals and clinics were required to create new, or expand on existing safety protocols, pivot to offerings like telemedicine, and impose greater restrictions on staff to minimize the spread of COVID-19 among staff and patients. Other non-emergency medical facilities or services that were allowed to resume work during the pandemic were also heavily impacted by both capacity restrictions and sanitation requirements.
Healthcare institutions that qualify for employee retention tax credit include nonprofit and for-profit hospitals, instrumentalities including district or county-owned hospitals or medical centers, and independent medical practices.
Any healthcare facility that faced a greater than 10% restriction on business operations due to COVID-19 executive orders or a 20% or more decline in gross receipts is eligible for ERC funds. Some specific impacts that lead healthcare facilities to qualify for the ERC include:
Due to the lack of regulatory guidance when the employee retention tax credit was first launched and enacted, there were many misconceptions about the ERC. These misconceptions resulted in many medical facilities not participating in the program.
Some of the most common misconceptions that keep healthcare organizations from applying for the ERC include:
One common misconception in the healthcare industry about employee retention tax credit is that the organization has too many employees to qualify. Per the IRS, employers needed to have less than 100 full-time employees in 2019 to qualify for the 2020 credits or less than 500 full-time employees in 2019 to qualify for the 2021 credits. However, some healthcare facilities did not take into account that this is only based on full-time W2 employees, not any full-time equivalents or part-time W2 employers.
So as long as the organization has the correct number of employees and either experienced a significant decline in gross receipts or was subject to a full or partial suspension of operations due to COVID-19 government orders, it qualifies for ERC funds.
Another misconception that prevented employers in the healthcare industry from applying for the ERC is the belief that if they received PPP funds, they were ineligible for the ERC. While this was initially a limitation when the ERC program was launched, it was removed in the Consolidated Appropriations Act of 2021, allowing employers to obtain both ERC and PPP funds. The only stipulation is that employers can not obtain ERC for the same qualified wages paid by the PPP.
If an employer received grant funding from HRSA or another organization, the employer could still claim an ERC with respect to Qualified Wages in that quarter. Unlike the PPP, there is no interplay or anti-double-dipping rule related to grant funding.
Many tax-exempt hospitals and other healthcare centers were also reluctant to apply for ERC due to the misconception that only for-profit organizations were eligible. Any nonprofit employer in the healthcare industry that suffered partial or complete suspension of operations due to COVID-19 executive orders qualifies for the employee retention tax credit.
In addition, the revised legislation in the Consolidated Appropriations Act of 2021 made it permissible for government instrumentalities to take the ERC, provided their principal purpose was to provide medical or hospital care.
Section 2301(f) of the CARES Act, as amended by section 207(d)(3)(A) of the Relief Act, provides that the ERC is not available to the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing (governmental entity). However, the language of amended section 2301(f)(2) provides that in the case of any governmental entity that is a college or university, or the principal purpose or function of which is providing medical or hospital care, the entity shall be treated as satisfying the trade or business requirement in section 2301(c)(2)(A)(i). Accordingly, these entities may be eligible employers for the first and second calendar quarters of 2021, assuming they satisfy the other requirements to be eligible employers.
Many employers believe that in order to qualify for ERC, they must have experienced a negative financial impact to gross receipts. A decline in revenue is not a requirement for ERC eligibility. Many healthcare facilities were forced to increase their staff to meet the demands of the pandemic. While they increased productivity and experienced an increase in revenue, many still suffered a partial suspension of operations due to governmental restrictions. Even if employers in the healthcare industry do not satisfy the gross receipts tests, they may still pass the government orders tests and qualify for the ERC.
Regardless of the previously discussed misconceptions, there are other areas that healthcare facilities and organizations should consider when applying for the employee retention tax credit.
If an employer faced any suspension that impacted more than a nominal portion of operations, they qualify for the ERC. Yet, for many healthcare organizations, increased staffing and increased patients make it seem like they were not impacted.
Many hospitals perceive an increase in staff and growth during the pandemic as evidence of productivity. However, to truly evaluate productivity, it is important to compare 2019 to 2020 productivity by individual employees. Suppose your facility had ten physicians in 2019 but 20 physicians in 2020 and 2021; that might appear to be an increase in productivity, but when comparing those ten physicians in 2019 to those same ten physicians in 2020-2021. In that case, individual productivity might look completely different.
Moratoriums on elective procedures and other healthcare services contribute to a partial suspension of operations. A reduction in productivity of greater than 10% to a more than nominal portion of an organization is grounds for ERC qualification. However, if a business voluntarily suspends its operations during the pandemic without being subject to a government order, it would not be eligible for the ERC based on the suspension test.
The Internal Revenue Service considers quantitative data to determine the financial impact of the pandemic on healthcare organizations. This type of data includes the maximum capacity of any departments within the business prior to COVID-19 and during 2020 and 2021 (with respect to the guidelines of social distancing). The IRS also considers the time required to treat patients, the time needed for additional cleaning, and the comparison of patient encounters before and during the pandemic.
There are many complex factors that need to be considered in determining ERC eligibility. When determining eligibility, you must look at the business at a granular level instead of as a whole. If any more than nominal part of your business was impacted, you could qualify for ERC.
If you want to learn how the Employee Retention Credit can benefit your healthcare organization, contact Sagemont Tax. We are an advisory group led by former big firm CPAs and attorneys that exclusively focus on the ERC. We have a proven track record of working with small and medium-sized businesses and nonprofit organizations. In addition, we are proud to be the only ERC provider in the country that has exclusive relationships with tax insurance brokers and providers to facilitate risk-free tax insurance policies.