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Do you qualify for Employee Retention Credit?

John Moore/Getty Images workers working in field on farm
LABOR RULES: The American Rescue Plan Act extends the Employee Retention Credit through Dec. 31.
Tax Tips: The recent stimulus package extends the credit through the end of 2021.

The American Rescue Plan Act extends the Employee Retention Credit through Dec. 31. So, how does this affect your farm or agribusiness?

A previous column I wrote covered the background and qualifications of the ERC through June 30. This article covers July through December and the qualifications under the “significant decline in gross receipts test,” since most agriculture has not been shut down.

There are two ways a business can qualify for the ERC:

• The business was either fully or partially shut down because of a government order.

• There was a significant decline of gross receipts. For 2021, this means more than 20%.

As a reminder, the credit is equal to 70% of qualified wages, up to $10,000 per employee per quarter. Where should you start to see if your farm qualifies?

First, don’t overlook the first quarter of 2021. Even if there wasn’t a decline of more than 20% in gross receipts comparing the first quarter in 2021 to the first quarter in 2019, there is a special rule that permits a business to look at the fourth quarter of 2020 to the fourth quarter of 2019 in order to qualify.

Next, for those businesses that received a second-draw Paycheck Protection Program loan, it is important to know that there is no “double-dipping” when claiming the ERC. For instance, the same wages used for PPP calculations cannot be used to claim the ERC.

There are other items that would have similar treatment as far as “double-dipping” is concerned, so it is critical that this be thoroughly analyzed. This is of particular importance since the American Rescue Plan Act (ARPA) increased the amount of time the IRS can audit the ERC to five years. Normally, the IRS only has three years to audit a return unless there is a significant omission or fraud.

If the business experiences a significant decline in gross receipts in the first quarter — not counting the special rule above — they will automatically qualify in the second quarter of 2021. If this is not the case, the second quarter will have to experience its own significant revenue decline of more than 20%.

For the third quarter of 2021, if the second quarter experienced a significant revenue decline of more than 20%, then that should by itself qualify the quarter. This is due to a special rule that allows an employer to look to the previous quarter. 

However, this special rule, while acting similarly to the special rule for the first quarter of 2021, is part of ARPA, and so the IRS will need to confirm this in its guidance like it did for ERC under previous legislation. 

If this is not the case, then the third quarter will have to experience its own significant revenue decline of more than 20%. This same analysis done in the third quarter would be the case for the fourth quarter.

Agricultural employers should also keep in mind that H-2A laborers are not subject to Social Security and Medicare taxes, and therefore do not qualify. For those employers who may qualify for the ERC, it is critical to discuss this issue with your payroll and tax specialist since the calculation can be complex.

Arezzo is a senior tax consultant at Farm Credit East.

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