ERC Tax Credit for Managed Service IT Providers

The Employee Retention Credit Can be Very Valuable for Managed Service IT Providers

The recent revisions to the Employee Retention Credit (ERC) are proving to be very advantageous to businesses. This article will address how the changes to the ERC could affect managed service IT providers. 

What is the Employee Retention Credit?

The ERC (Employment Retention Credit) consists of refundable and retroactive credits claimed through a business’s payroll department. The credits max out at $33,000 per employee and can be claimed on a quarter-by-quarter basis throughout 2021.

Breakout by Quarter:

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How do I qualify for the ERC?

Every quarter, a business must pass either a gross receipts test or a partial suspension test to qualify for the Employment Retention Credit.

1. Gross Receipts Test: This is a safe harbor test. In other words, if a business passes this test, the IRS will not challenge its eligibility for the credit. To pass this test a business must show a 50% revenue decrease in Q-4 2020 as compared to the same quarter in 2019, and a 20% revenue decrease in any quarter in 2021.
2. Partial Suspension Test: If a business has been partially suspended, then it is eligible for the ERC. To prove a partial suspension, a company must show that its ability to service customers (operate) has been impaired by at least 10% due to a COVID-19 government order.

What does the IRS consider to be a partial suspension?

Partial suspension is based on the facts and circumstances of the business. The IRS released guidance on how they currently view partial suspension in Notice 2021-20.

Factors an IT company should consider in determining partial suspension, per Notice 2021-20: A managed service IT provider should consider the following factors from Notice 2021-20 in determining if an employer is able to continue comparable operations, although additional factors may be considered as well, if relevant:

1. Employers telework capabilities. Determine whether an employer has adequate support (IT and otherwise) such that operations can continue via work from another location.
2. Portability of employees’ work. Determine the amount of portable work or work otherwise adaptable to be performed from a remote location, within an employer’s trade or business operations.
3. Need for presence in employee’s physical workspace. Evaluate the role that the employer’s physical workspace plays in an employer’s trade or business (may be critical and necessary, beneficial but not necessary, or merely convenient). If the employer’s physical workspace is so critical to its trade or business operations that tasks central to the trade or business’s operations are unable to be performed remotely, then this factor alone indicates that the employer is not able to continue comparable operations. Examples of work space that is critical include laboratories or manufacturing involving special equipment or materials that cannot be accessed or operated remotely.
4. Transitioning to telework operations. If an employer can conduct comparable operations via telework, but the employer’s operations did not previously allow for telework, or allowed for only minimal telework, then some adjustment period is expected, and, generally, the employer’s operations are not considered partially suspended during that period. However, if an employer incurs a significant delay (for example, beyond 2 weeks) in moving operations to comparable telework (for example, implementing telework policies or providing employees with equipment to telework), then the employer’s trade or business operations may be deemed subject to a partial suspension during that transition period.

IRS examples from Notice 2021-20 that mananged service IT providers may want to consider:

Below are two examples from Notice 2021-20, showing how the IRS anticipates applying the law:

Example 2: Employer D operates a physicing al therapy facility in a city where the mayor has ordered that only essential businesses may operate. Employer D’s business is not considered essential under the mayor’s order, and therefore Employer D is required to close its workplace. Prior to the governmental order, none of Employer D’s employees provided services through telework and all appointments, administration, and other duties were carried out at Employer D’s workplace. Following the governmental order, Employer D moves to an online format and is able to serve some clients remotely, but employees cannot access specific equipment or tools that they typically use in therapy and not all clients can be served remotely. Employer D’s business operations are considered to be partially suspended due to the governmental order because Employer D’s workplace, including access to physical therapy equipment, is central to its operations, and the business operations cannot continue in a comparable manner.

Answer 19: An employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations since the employer’s operations have been limited by a governmental order. Example: Employer K operates a food processing facility that normally operates 24 hours a day. A governmental order issued by the local health department requires all food processing businesses to deep clean their workplaces once every 24 hours in order to reduce the risk of COVID-19 exposure. In order to comply with the governmental order, Employer K reduces its daily operating hours by five hours per day so that a deep cleaning may be conducted within its workplace once every 24 hours. Employer K is considered to have partially suspended its operations due to the governmental order requiring it to reduce its hours of operation

Conclusion:

To put the ERC in perspective, a company with 53 employees that qualifies for the maximum ERC credits will receive $1,000,000 from Q-4 2020, Q-1 2021, and Q-2 2021. That is more than the first and second rounds of the Payroll Protection Program (PPP) loans combined! If a company does not meet the gross receipts test, that company should look over its facts-and-circumstances, compare those to the IRS examples, and determine if the company can pass the partial suspension test.