Don’t Forget About the Employee Retention Credit If You’re a Cash Basis Business Taxpayer

The Employee Retention Credit (ERC), originally introduced under the CARES Act, is a refundable tax credit available to employers that experienced a decline in gross receipts or were required to fully or partially shut down their business as a result of COVID-19. The ERC can represent a significant tax savings opportunity for many businesses for calendar years 2020 and 2021, since it offers a fully refundable payroll tax credit up to a maximum of $5,000 for each employee in 2020 or $7,000 per employee per quarter in 2021.

The ERC was subsequently amended under the Consolidated Appropriations Act to make Paycheck Protection Program loan recipients – for round one or round two loans – eligible to receive the credit.

In speaking with our Architecture & Engineering clients during this tax filing season, we have learned that many have not fully evaluated their eligibility for the ERC or assumed they would not qualify. After conducting an analysis, we have been able to identify a sizable number of credits for some of these clients, representing a significant tax savings!

To determine whether your business qualifies for the Employee Retention Credit, consider the following:

  • Did your business have a 50 percent reduction in gross receipts in any quarter in 2020 compared to the same quarter in 2019?
  • Was your business required to be partially or fully shut down under a state or local order at any time between March 12 and September 30, 2021
  • Did your business have a 20 percent reduction in gross receipts in the 4th quarter of 2020 compared to the 4th quarter of 2019?
  • Did your business have a 20 percent reduction in gross receipts in the 1st quarter of 2021 compared to the 1st quarter of 2019?
  • Did your business have a 20 percent reduction in gross receipts in the 2nd quarter of 2021 compared to the 2nd quarter of 2019?
  • Did your business have a 20 percent reduction in gross receipts in the 3rd quarter of 2021 compared to the 3rd quarter of 2019?

The term “gross receipts” has caused some confusion when evaluating whether a business qualifies for the ERC. Many of our clients automatically reviewed their accrual-based financial statements and compared applicable quarters to determine their qualification status, and decided that they did not qualify.

However, gross receipts for purposes of the ERC is determined by the method of accounting a company uses when filing its federal tax returns. Many Architecture & Engineering firms use the cash basis method to file their tax returns, and so gross receipts should be evaluated at the cash basis level.

If you are a cash basis taxpayer and have only evaluated the ERC at the accrual basis level, you may want to consider scheduling a more in-depth discussion with our Tax Strategies professionals about whether your business could actually qualify for this credit.

Kreischer Miller can assist you through the Employee Retention Credit process by:

  • Conducting an analysis to establish whether your business qualifies for the credit.
  • Determining how to calculate the credit.
  • Navigating the interplay between the Employee Retention Credit, the Payroll Protection Program and R&D tax credit.

For more information and to schedule a complimentary evaluation, please contact Thomas Yankanich, Director, Audit & Accounting and Architecture & Engineering Industry Group leader at Email or 215-441-4600.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.