Determining When an Employer is Considered to have a Significant Decline in Gross Receipts

The Employee Retention Credit (ERC) is a refundable tax credit designed to help eligible employers keep employees on their payroll during the COVID-19 pandemic. To qualify for the ERC, employers must meet certain requirements, including experiencing a significant decline in gross receipts. In this blog post, we’ll explore what it means to have a significant decline in gross receipts and how employers can determine if they meet this requirement.

What is a Significant Decline in Gross Receipts?

A significant decline in gross receipts occurs when an employer’s gross receipts for a calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019. Once an employer has a significant decline in gross receipts for a calendar quarter, it is treated as having a significant decline in gross receipts for all subsequent calendar quarters until the employer’s gross receipts for a calendar quarter exceed 80% of its gross receipts for the same calendar quarter in the prior year.

For example, if an employer’s gross receipts for the second quarter of 2019 were $1 million and its gross receipts for the second quarter of 2020 were $400,000, it would have a significant decline in gross receipts for the second quarter of 2020.

Calculating Gross Receipts

Gross receipts include all of an employer’s receipts from all sources, including sales of products or services, interest, dividends, rents, royalties, and fees for services. Gross receipts are generally determined using the employer’s method of accounting, such as the cash or accrual method.

Employers that are part of a larger controlled group or an affiliated service group must aggregate their gross receipts when determining whether they meet the significant decline in gross receipts test. This means that all gross receipts of the group must be combined for purposes of calculating the decline in gross receipts. If the group as a whole meets the significant decline in gross receipts test, all members of the group are eligible for the ERC.

Determining the Quarterly Comparison

Employers must compare their gross receipts for a calendar quarter in 2020 to their gross receipts for the same calendar quarter in 2019 to determine if they have a significant decline in gross receipts. If an employer was not in business for the entire quarter in 2019, it may compare its gross receipts for the quarter in 2020 to the average gross receipts for the same calendar quarter in 2019.

Employers that are part of a larger controlled group or an affiliated service group must also use the same calendar quarter in 2019 that the group used to determine its gross receipts. This means that if the group used the second quarter of 2019 to determine its gross receipts, all members of the group must use the second quarter of 2019 to determine if they have a significant decline in gross receipts.

Conclusion

Determining whether an employer has a significant decline in gross receipts can be a complex process, especially for employers that are part of larger controlled or affiliated service groups. Employers should consult with a tax professional to ensure that they meet the eligibility requirements for the ERC and are calculating their gross receipts correctly. By doing so, they can maximize their potential for receiving this valuable tax credit and keeping their employees on the payroll during these challenging times.