Qualifying for ERC by Alternating Gross Receipt Methods

Technical topics regarding tax preparation.
#1
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Client has quarterly earnings as follows:
Q1 2019 - $100,000
Q2 2019 - $100,000
Q3 2019 - $100,000
Q4 2019 - $100,000

Q1 2021 - $46,000
Q2 2021 - $35,000
Q3 2021 - $81,000
Q4 2021 - $75,000 - (Estimated)

The client is qualified for the ERC in the 1st and 2nd quarters of 2021 using both the original and alternative gross receipts methods.
The client is qualified for the ERC in the 3rd Q of 2021 because of Q2's qualification.

MY QUESTION: Does the client qualify for the ERC in the 4th Q? As noted in section III.C. of Notice 2021-23, the determination of whether an employer is an eligible employer based on a decline in gross receipts is made separately for each calendar quarter. Because Q3 qualified under the alternative method, can Q4 qualify on its own gross receipts decline?
 

#2
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It could if there was an ERC for the fourth qtr., but, the ERC stopped with the third qtr.
 

#3
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Yes.
 

#4
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keninmichigan wrote:It could if there was an ERC for the fourth qtr., but, the ERC stopped with the third qtr.


Has this really been finalized or is it still in consideration?
 

#5
Coddington  
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Not finalized yet and everyone is watching the two moderate senators to see what actually gets through Congress.
-Brian

Director of Tax Accounting Methods & Credits
SourceAdvisors.com

Opinions my own.
 

#6
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I thought it was definitely taken away for the fourth quarter. This doesn't mean it cannot be reinstated by legislation.
 

#7
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I thought the removal was in the impasses infrastructure deal
 

#8
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Assuming 4th Q ERC is approved by congress, It seems the client may not qualify for Q4 because of the following in Section III.C of Notice 2021-23 on page 5:

"The period during which there is a significant decline in gross receipts ends with ... or the calendar quarter following the first calendar quarter in which an employer's 2020 (2021 as extended) quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019."

This client's Q3 2021 receipts were greater than 80% of the Q3 2019, therefore the client relied on the alternative method to qualify for the Q3. Now, is it over because Q4 is the first Q following the Q with gross receipts greater than 80%?

Section IV.E of Notice 2021-49 on page 32 indicates "Thus employers are NOT required to use the alternative quarter election consistently." The example on page 32 of Notice 2021-49 has my client's exact scenario but does not go far enough to explain what would happen if Q4 were to qualify on its own. As a matter of fact, because the example does not go into Q4, it does not even answer the question at hand which is "whether an eligible employer must consistently use the alternative election once it has made the election".

Please provide any guidance or opinions on this quandary. Thanks in advance.
Last edited by mammondee on 4-Oct-2021 12:22pm, edited 1 time in total.
 

#9
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The sad thing about discontinuing the ERC is the reasoning was that hardly anyone was using it. I guess it appears that no one is using it because hardly any 941X's have been processed. I'm still waiting for a refund for 4th qtr. 2020!
 

#10
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Seaside CPA wrote:The sad thing about discontinuing the ERC is the reasoning was that hardly anyone was using it. I guess it appears that no one is using it because hardly any 941X's have been processed. I'm still waiting for a refund for 4th qtr. 2020!


I agree it is sad. It is unbelievable to me that the ERC is so underutilized based on the liquidity factor. Most of my small business clients would not have been able to make it through without the ERC. I wish our profession would have been able to provide more clients with this ridiculously lucrative credit.
 

#11
BenCPA  
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When someone elects to use the alternate time period (4Q of 2020 v. 4Q of 2019) to qualify in Q1 of 2021, they don’t automatically qualify in Q2. However, when someone qualifies in Q1 based upon a 20% decline in gross receipts during Q1 2021 v Q1 2019 they essentially automatically qualify for Q2 2021 ERC. They automatically qualify for Q2 because of the ability to look back to the prior quarter (Q1) and qualify. This 2021 automatic qualification works differently than in 2020 where you automatically qualified for the following quarter because you did not get kicked out of the 2020 ERC until the calendar quarter following the quarter where gross receipts exceed 80%.

Certainly confusing when the keep adding/modifying the rules. Employers are NOT required to use the alternative quarter election consistently in 2021 so I suppose if the ERC is around in 4th quarter of 2021, an employer could qualify in 4Q by looking back to 3Q of 2021 to qualify if there was a 20% decline in receipts during 3Q of 2021 relative to 3Q of 2019.

I have not heard yet if congress has decided to end the ERC after 3Q 21. I have heard that it is likely to end after 3Q but I don't think we know for sure as of today.
 

#12
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I want to boost this post to the top again with a simpler question that is phrased as a statement!

For 2021, once an employer's quarterly gross receipts are greater than 80% of the same quarter in 2019, the employer no longer qualifies for any future quarterly ERC. Is this correct?
 

#13
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Ignore the reference to 2021-23 above. The language was lifted from the rules applicable to 2020. Notice 2021-49 clearly allows for your Q4 to qualify, assuming it survives the infrastructure bill which has NOT passed and therefore is not effective. With that in mind, if passed as currently drafted the change in law applies retroactive to October 1. Recovery startup credits will survive Q4 under the current draft.
 


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