Photo by Mikhail Nilov
If you’ve heard of the Employee Retention Credit (ERC)—which allows qualified small businesses to claim up to $26,000 per employee as a fully forgiven tax credit—you might have been told by your accountant your practice didn’t qualify for it.
When the ERC—created under the Coronavirus Aid, Relief and Economic Security (CARES) Act—was first introduced, many people thought they couldn’t get it because there were so many restrictions attached to it. For example, at first, companies couldn’t claim ERC credits if they’d received Paycheck Protection Program (PPP) funding. But the rules have changed many times; and this is no longer the case.
And there lies one of the key reasons this significant tax credit is vastly underutilized: many businesses—like dental practices—don’t realize they qualify.
Qualifications
Employee retention credits are available to businesses that were able to retain their employees during the last few challenging years and have under 500 employees. The credit is based on the wages paid to W-2 employees.
The IRS updated the ways your business can qualify; there are three—all focused on how the pandemic impacted your business. You can visit the IRS website for the details, but in general, your practice qualifies if it experienced one or more of the following: revenue reduction, supply chain disruptions, or full or partial suspensions (shutdowns).
Revenue Reduction
For 2020, you must have experienced a 50% reduction in gross sales in a quarter compared with the same quarter in 2019. When and if the revenue (in 2020) reaches 80% of the corresponding quarter in 2019 revenue, the qualification ends.
For 2021, you qualify if you had a 20% reduction of gross sales for a quarter, compared to the same quarter in 2019.
Supply Chain Disruption
This is a common qualification for businesses that rely on vendors and suppliers to deliver critical goods to function properly. The disruption must have resulted from a government suspension order to your supplier; but may have continued beyond the original suspension order.
If an office was unable to get the supplies needed to carry on normal office activities and production (such as gloves), this would qualify the office for ERC.
Another solid example of this for the dental industry involves chair packages. These used to take 4-6 weeks to arrive, but now take 4-8 months. Had practices been able to receive equipment as they normally had, they would have been able to increase production.
An existing office that was remodeling, expanding, or building a new office likely experienced many delays related to issues contractors and their subcontractors faced.
The impact of the disruption needs to have created a more-than-10% effect on business operations. These impacts qualify a company regardless of revenue gain or loss.
Shutdown (Full or Partial)
This qualification is based on a “suspension test” to demonstrate your operations were partially or fully suspended due to a COVID-19 governmental order. Dental practices were limited to emergency or urgent dental care from March 22, 2020, to April 30, 2020, by executive order from Governor Greg Abbott. This would pass the suspension test.
Also, a government restriction may have had a direct impact on your operations even though the shutdown order wasn’t given directly to you. For example, from April 30, 2020, through Aug. 24, 2020, Texas mandated hand scaling to limit aerosols generated through use of a Cavitron. This in turn limited the number of patients most hygienists could see. Practices that adhered to the mandate should note this for the corresponding quarters of 2020.
When considering the gross receipts of your business in 2019, there must have been a more-than-10% cumulative impact on your business operations during the period of the full or partial suspensions. This does not mean your revenue must have decreased to use this qualification.
Stipulations for Startup Business
If your practice is a startup, you could qualify for the ERC as a recovery startup business. There are only a few stipulations you must meet.
- You must have begun business operations on or after Feb. 15, 2020.
- You must have maintained average gross receipts that do not exceed $1 million for both 2020 and 2021.
- You must employ one or more employees (other than 50 percent owners).
- You may not qualify for the ERC through previously issued qualifying events (full or partial suspension due to government orders or decline in gross receipts).
Limitations
There are limitations to these qualifications. If you own multiple companies or have a common ownership arrangement, for example, the requirements are different. (A future article will cover this topic.)
Additionally, recovery startup businesses can’t claim ERC for any of calendar year 2020. They could qualify for up to $50,000 in ERC credits for 2021—but only for quarters 3 and 4 (not 1 and 2).
However, the credit can be claimed for these periods if the practice meets the revenue reduction or suspension test criteria (see “shutdown” and “revenue reduction” sections above).
Final note
A final important consideration should be made: it’s important practices don’t simply go through the filing process without careful consideration of the qualifications, or they may miss out on funds they’re entitled to receive.