The ERC tax credit has different requirements for the 2020 and 2021 tax years. Business owners who qualify for the 2020 tax year should check the 2021 tax year requirements to determine whether they qualify for another refundable tax credit.
In 2021, the ERC tax credit provides the opportunity to apply for an even greater amount of up to $10,000 per employee per quarter, as opposed to up to $10,000 per employee per year.
2020 ERC Qualifications
To qualify for the ERC tax credit for the 2020 tax year, business owners must meet the following eligibility requirements:
A full or partial suspension of business operations because of coronavirus-related government orders or restrictions
Over a 50% decrease in gross receipts for any given 2020 calendar quarter when in comparison to the same calendar quarter of 2019
In addition to the above requirements, only certain businesses are allowed to apply for the ERC tax credit. No business applying for the ERC tax credit can exceed 100 full-time employees for the 2019 tax year. Business owners can apply if they operate a trade, business, or tax exempt organization.
Government, government agencies, and government instrumentalities do not qualify for the ERC tax credit. For example, a town recreation department that helps maintain public facilities, such as parks, would not qualify for the ERC tax credit, as they are funded by a municipality and their projects are approved by members of a governing body. However, if you are a privately-owned organization that creates events to help clean up local parks and other recreational areas, you still qualify for the ERC tax credit, as you are not run or funded by the governing body of a municipality.
2021 ERC Qualifications
Under the Relief Act of 2021, the ERC tax credit was extended, allowing applications to apply using qualified wages for the period between January 1, 2021 and June 30, 2021. Unlike the 2020 tax year, the 20201 qualifying period between January and June allows the following businesses to apply in addition to qualifying businesses from 2020:
501(a) tax-exempt organizations described under section 501(c)
Colleges and universities
Organizations whose principal purpose provides hospital or medical care
Another difference from the 2020 tax year is that 2021 businesses are eligible if they experienced an over 80% (as opposed to 50% in 2020 tax year) decline in gross receipts when in comparison to the same calendar quarter in 2019. If and only if a business, such as a startup, was not established by that calendar quarter in 2019 yet, that business can compare their gross receipts to the same calendar quarter of 2020.
Can I Apply for Both 2020 and 2021 Tax Years?
As long as you qualify for both 2020 and 2021 tax years, you are allowed to apply for both years for the ERC tax credit. However, the rules for the ERC tax credit are different for 2020 and 2021, so it’s important to understand which calendar quarters and tax years you qualify for. For this reason, hiring an experienced ERC consultant is essential.
Some ERC mills scam business owners by helping them apply for tax years or calendar quarters that they are not eligible for. The IRS has warned about the existence of these ERC mills creating a surplus amount of applications for them to go through. Five Star ERC Experts helps you avoid this by pairing your business with our team of certified tax consultants and tax attorneys knowledgeable in the ERC tax credit handlings for both tax years.
What Businesses Are Excluded from ERC in 2021?
Not every business that qualified for the ERC tax credit in 2020 will qualify for the ERC tax credit in 2021. For example, a business whose gross receipts declined by 60% in 2020 and declined 72% in 2021 may only qualify for the 2020 tax year using gross receipts. For the fourth quarter of 2021, only businesses considered as startup businesses qualify for the ERC tax credit.
2021 Quarters 3 and 4
Only a business that is considered to be a “recovery startup business” is eligible for the ERC tax credit in quarters 3 and 4 of 2021. Under this rule, only businesses who opened for the first time on or after February 15, 2020 qualify for these quarters.
Between October 1 and December 31, 2021, recovery startup businesses are eligible for qualified wages under the Infrastructure Investment and Jobs Act (IIJA). These businesses could see a refundable tax credit of up to a $50,000 total credit per calendar quarter.