The Internal Revenue Service (IRS) has clarified that the Employee Retention Credit (ERC) is not included in gross income for federal income tax purposes. However, the ERC does reduce the expenses that an eligible employer can deduct on their federal income tax return. If a qualifying employer's gross income has dropped significantly, they may be eligible for the Employee Retention Credit (ERTC).An employer that has experienced a substantial decrease in gross income is an eligible employer that may be entitled to the ERTC. This refundable credit can be requested on qualifying salaries, including certain health insurance costs, paid to employees.
For the purpose of determining eligibility for the ERTC, a tax-exempt employer's gross income includes all operations, not just activities that constitute unrelated trades or businesses. If the aggregated group does not experience a significant decrease in gross revenues, no member of the group can apply for the ERTC on that basis. The amount of the credit is calculated based on a percentage of “qualified wages”, including attributable qualifying health plan expenses paid to employees. Companies must understand what should and should not be included in the gross revenues of the ERTC. The IRS issued a safe haven that allows employers to exclude certain amounts received from other coronavirus financial aid programs when determining if they qualify for the ERTC based on a decrease in gross income. Gross income is used for the ERTC for the total amount of all cash and property receipts before any deductions for costs or other deductible items.
The ERTC is available to churches and other religious organizations that were affected by capacity restrictions imposed by the government for meetings or that experienced a significant decrease in their gross revenues. For the purposes of the ERTC, “the gross income of an employer that is not exempt from taxes” has the same definition as in section 448 (c) of the Internal Revenue Code. Gross income tests are the gross income requirements that must be met to obtain the ERTC. The suspension of operations or a significant decrease in gross revenues will determine eligibility, while the amounts paid to employees during specific calendar quarters will determine the amount of the credit.