Updated: Jul 25
The Employee Retention Tax Credit (ERC) was established under the CARES Act to incentivize businesses to keep employees on payroll during the pandemic. This refundable tax credit is available to businesses who qualify under certain eligibility. Included in this eligibility is a decline in gross receipts. If you think your business qualifies for the ERC tax credit, you will need to determine whether your business is eligible under a gross receipts test before applying.
What Are Gross Receipts?
The term “gross receipts” refers to all income and revenue earned by an organization regardless of its source. Gross receipts will include sales made by the organization, royalties, rents, commissions and any other source of earnings. Gross receipts are a crucial part in calculating whether or not your business will be eligible for the Employee Retention Credit (ERC) as they determine the extent of revenue decline and serve as a key factor in assessing eligibility for the ERC.
ERC Eligibility Through a Decline in Gross Receipts
In order for your business to be eligible for an ERC return, your gross receipts must meet certain requirements. For ERC eligibility in the tax year of 2020, your gross receipts for any quarter must be less than 50% of what they were for the same quarter in 2019. For example, if your gross receipts totaled up to $100,000 in Q1 of 2019, then dropped to $40,000 by Q1 of 2020, your business would be eligible. Eligibility ends whenever your gross receipts in 2020 are higher than 80% of what they were in the corresponding quarter in 2019.
For ERC eligibility during the 2021 tax year, similar rules apply. Rather than requiring gross receipts to have dropped below 50% of their 2019 counterparts, they need only to have dropped below 80%. To use the example from before, if your business reported $100,000 in Q1 of 2019, $80,000 or less needs to be reported in Q1 of 2021 to qualify for ERC.
What Is the Small Business Gross Receipt Test?
The gross receipts test in regards to small businesses applying for ERC generally refers to a method of determining whether a business can be identified as a “small taxpayer.” Small taxpayers benefit from a wide variety of exemptions that larger businesses don’t get access to, making it a desirable classification for any small business. Passing the gross receipt test is simple: a business’s gross receipts over the last 3 years must not exceed $29 million dollars in total as of 2023.
What Counts as Gross Receipts?
Gross receipts encompasses all forms of income made at your business. This includes all the sources mentioned previously such as sales of services or products, royalties, rents, and commissions, as well as interest, fees and dividends. Keep in mind that gross receipts is only revenue, and does not include the subtraction of any costs or expenses accrued by your business. There are a few exceptions as to what falls under the umbrella of gross receipts. One exception is any taxes collected by your business that are to be paid to a taxing authority, like sales tax collected on sales to customers. Additionally, loans, intercompany transactions, or money earned back from refunds or returns is not to be considered as part of a business’s gross receipts.
Gross Receipts for For-Profit Businesses
For businesses operating for-profit, gross receipts are simply the total accrued income from the business. It represents the total amount of money earned by the business before deducting any expenses, taxes, or other costs. Gross receipts are a key financial metric used to assess the business's overall revenue and financial performance.
Gross Receipts for Nonprofit Businesses
For nonprofit organizations, the term “gross receipts” takes on a slightly different connotation. Rather than defining the term as the total revenue earned by the business via sales or other commercial activities, it instead focuses on the total amount of money raised. In order to stay financially healthy, nonprofit organizations rely on funding from various sources such as donations, grants and fundraising activities, which end up being the main sources of revenue counted in their gross receipts.
Aggregation Rules for Gross Receipts
Aggregation rules refer to guidelines that determine how multiple businesses or entities should combine their revenue or income for the purpose of calculating gross receipts. These rules become relevant in situations where numerous businesses may be controlled by one entity or are part of a controlled group, and exist in order to prevent larger businesses from dividing themselves or their income artificially in order to be eligible for small business exemption. Be sure to follow any aggregation rules that may apply to your business when performing a gross receipts test or when calculating your eligibility for ERC.
How the Gross Receipts Test Adjusts for Inflation
The $29 million dollar figure used as the threshold for determining eligibility for exemptions under the gross receipts test is adjusted each year for inflation. In 2021, the figure was $26 million, which increased to $27 million in 2022. The IRS reported that for taxable years beginning in 2019 and 2020, the inflation-adjusted average annual gross receipts was $26 million. In the coming years, expect these numbers to continue to rise alongside inflation.
Hiring a boutique firm like Five Star ERC Experts ensures you that you are in the right hands. Our team of certified tax attorneys and tax consultants have dedicated their careers to gaining experience with the IRS and they will work closely with you every step of the way.