The Employee Retention Credit (ERC) for Manufacturers Unraveling the Misconceptions to Qualification

By Peter Harrington, Black Line Group

The Employee Retention Credit (ERC) may be one of the most misunderstood tax credits of all time. As a result, for many manufacturers across the country, ERC money remains unclaimed despite so many manufacturers qualifying for it.

The ERC is a refundable tax credit against certain employment taxes equal to 50% of qualified wages an employer pays to employees after March 12, 2020, and before Jan. 1, 2021.

There are three misconceptions about the ERC that may lead manufacturers to believe they do not qualify but in fact do. 

Misconception No. 1: Manufacturers were deemed an essential business and remained open or were never fully or partially closed in 2020 due to the COVID-19 pandemic, so manufacturers do not qualify. 

This is a misunderstanding of the IRS’ definition fully or partially suspended. Misconception No. 3, below, includes information on qualifying examples of a partial suspension.

Misconception No. 2: Manufacturers received a Paycheck Protection Program (PPP) loan in 2020 and/or 2021, so they can’t double-dip with the PPP and ERC, and therefore don’t qualify.

That’s a misconception. In fact, PPP wages are calculated on 10 weeks of payroll and the eligibility period to use the funds is up to 24 weeks. This leaves plenty of eligible wages to qualify for the ERC. And typically, the impact of PPP on the eligible ERC amount is relatively minor.

Misconception No. 3: Manufacturers have been told they don’t qualify because their revenue did not drop enough.

For companies with 100 or fewer employees in 2019, just because revenue didn’t drop by more than 50% in second quarter, third quarter or fourth quarter of 2020 compared to the same quarter in 2019 doesn’t mean the company doesn’t qualify.

For companies with 500 or fewer employees in 2019, just because revenue didn’t drop by more than 20% in first quarter, second quarter or third quarter of 2021 compared to the same quarter in 2019 doesn’t mean the company doesn’t qualify.

Most manufacturers do qualify based on a qualitative argument showing how their business was partially suspended due to COVID-19 government restrictions at the national, state or local level. This is where government restrictions have had at least a nominal (10% or more) impact on business operations. 

These government restrictions usually come in one of three forms, and only one is required for qualification. Examples include:

• Productivity impact. Due to governmental orders related to social distancing, cleaning, or 10-day quarantine restrictions, the productivity of a given department was impacted by more than a nominal amount compared to the same quarter in 2019.
• Supply chain impact. A company’s key suppliers have been impacted by governmental orders causing significant delays in receipt of parts and supplies. This is proven out by comparing order to delivery times of suppliers compared to the same quarter in 2019.
• Market segment impact. The automotive, aerospace, medical, commercial, etc. customers a manufacturer serves have been nominally impacted by governmental orders. This is analyzed by comparing revenue by market segment to the same quarter in 2019.

Simply put, if a company has experienced even a slight reduction in gross revenue in any calendar quarter from the second quarter of 2020 through the third quarter of 2021, it stands a good chance of qualifying.

Black Line Group is part of Think LLP and is focused ERC and R&D tax credit studies, providing manufacturing customers with specialty tax credit services for the last 20 years. It has a team of more than 50 professionals focused on performing ERC studies for clients. As a conservative tax firm, Black Line Group paint between the lines and backs its work with an audit guarantee if there is an IRS inquiry.