Under the original ERC legislation released with the CARES Act, a somewhat obscure “look-forward” rule was introduced that effectively prescribed that if an employer met the 50% decline in gross receipts test in a given quarter, they would automatically qualify until at least the end of the following quarter. In fact, the employer can continue to dip in future quarters until such employer had “rebounded” back to 80% of comparable 2019 gross receipts.
For example, an employer with a 51% decline in Q2 2020, 24% decline in Q3 2020, and a 2% decline in Q4 2020, surprisingly will qualify as an eligible employer for all three quarters in 2020. This is a result of the employer not “rebounding” back to 80% in Q3 of 2020. On the other hand, if such employer had reached 81% in Q3 of 2020, they would not have spilled their eligibility into Q4 2020 and eligibility for 2020 will end at the end of Q3 2020. As a result of this generous rule, qualifying in any quarter of 2020 under the 50% revenue test will automatically qualify an employer for the quarter it meets the 50% decline as well as the subsequent quarter (i.e., 6 months of eligibility).
Under the revised ERC legislation released with the CAA, the creative lawmakers on Capitol Hill decided to keep businesses and their advisors on their toes by swapping out the “look-forward” rule with a “look-back” rule (which they coined the “Alternative Quarter” test). Under this law, an employer looking to qualify as an eligible employer in Q1 or Q2 of 2021 was now permitted to qualify using a 20% decline threshold in either the current quarter or by reference to a 20% decline in the previous quarter. If you flip this look-back rule on its head, it turns out looking almost identical in practice to the look-forward rule, as a 20% decline looks a lot like (or exactly like!) the “un-rebounded” period described in the original ERC legislation (e.g., less than 80% recovery).
If your head isn’t already spinning, just keep the general rule of thumb that whether you think of it as a look-forward, or look-back rule, qualifying in any given 2020 quarter using a 50% threshold, or any given 2021 quarter using a 20% threshold will in most cases push your business into 6 months of eligibility. The lone exception? Unfortunately, Q3 2021 does not allow claims to spill into Q4 2021, and Q4 2021 does not allow claims to spill the ERC into 2022.
But what about using a 20% test in the 2020 quarter? If you look closely enough at the CAA, combined with guidance from the IRS, it is actually possible to qualify Q1 2021 by reference to a look-back to Q4 2020, comparing the latter to Q4 2019 using the 20% threshold. Said differently, if you had a 20% decline in more in Q4 2020, you can qualify for Q1 2021 using the Alternative Quarter test.
It is important to note that in 2021 the ERC bumps up from $5,000 to $7,000 per employee. Even more, the maximum credit of $7,000 per employee can be realized in each 2021 quarter (Q1-Q3), as opposed to the $5,000 credit that was available only once over the 2020 calendar year. Additionally, the IRS announced in Notice 2021-49 that the “look-back” test does not have to be used consistently over 2021. Therefore, as noted above, an employer might qualify for Q1 2021 by reference to a 20% decline in Q4 2020, and then can still qualify for Q2 2020 based on Q2 2021’s standalone results against Q2 2019.
Partner with Sagemont Tax to File Your Claim
Consulting with experienced, qualified tax and legal professionals is the first step to determining ERC eligibility and filing a legitimate claim for the credit.
Expert ERC firms are led by certified public accountants and tax attorneys with extensive experience in the legal test related to the ERC as well as navigating IRS audits. With an arsenal of professionals on hand, qualified advisors will ensure that all eligibility criteria are met for each applicable period before submitting a claim for the credit. They will also provide a detailed, CPA-certified, audit-ready report to their clients detailing their eligibility and wages claimed. Additionally, they will advise employers to refrain from claiming or overclaiming the credit when they do not have a clear path to eligibility.
At Sagemont Tax, we pride ourselves on delivering white glove, customized service to every client regardless of business size. We believe in proving the value of our service prior to our clients signing a contract and always conduct an initial no-obligation, cost-free analysis of eligibility. Once an agreement is signed, we stand by our work and take responsibility for our clients’ tax positions that extend beyond the filing itself. We sign every ERC filing as the paid preparer and provide a CPA and attorney-certified Eligibility Report that’s audit-ready to provide our clients with peace of mind.