How Can Cyclical Businesses Benefit from the ERTC?

December 8, 2023
Dayes Law Firm

Cyclical businesses are those that typically experience poor performance during periods of economic downturn and stable performance during times of economic growth. While many cyclical businesses are prepared to experience seasonal business cycles, even these flexible companies faced significant hardships during the COVID-19 pandemic. 

If you run a cyclical business, the Employee Retention Tax Credit (ERTC) could provide significant benefits for your company. Below are a few benefits of the ERTC for cyclical businesses. 

Do Cyclical Businesses Qualify for the ERTC? 

The Employee Retention Tax Credit has several eligibility requirements. One requirement is that businesses must have experienced a significant decline in gross receipts in 2020 and/or 2021 to qualify. 

For cyclical businesses, experiencing a significant decline in gross receipts is part of the cash conversion cycle. Many cyclical businesses qualify for the ERTC because their performance waned during COVID-19, a significant economic downturn. 

However, you’ll need to compare your gross receipts for each quarter in 2020 and 2021 (minus 2021 Q4) to the same quarter in 2019 to determine eligibility. So, if your business was also in economic distress in 2019, your eligibility may not be as clear. 

Working with a qualified CPA or tax attorney can help determine your business’s eligibility for the ERTC. 

How the ERTC Benefits Cyclical Businesses

If you qualify for the ERTC, think carefully about how you can use the funds from this credit to support your cyclical business. Here are a few benefits and uses of the ERTC for cyclical businesses: 

Build Up Cash Reserves

Cyclical businesses rely heavily on cash reserves for sufficient cash flow management during low periods. If your business is like many, the COVID-19 pandemic sucked your cash reserves dry. But the refund or credit the IRS gives you can help you rebuild these reserves. 

The ERTC provides up to $26,000 in credits per employee. It’s also a refundable tax credit, which means you’ll see the full amount you’re eligible for regardless of whether it surpasses your tax liability. 

Eliminate Debt 

Some cyclical businesses went into debt during the pandemic just to stay afloat. The cyclical nature of their cash flow meant they just didn’t have enough reserves to lean on during the economic hardships of COVID-19. As a result, many are still trying to pay off that debt while pouring capital into inventory and employees. 

Your business can consider using your tax credits to pay down or eliminate your debt. Lowering your debt-to-equity ratio even a little bit can help prepare you for the next stage in your business cycle. You may want to start by paying down debts with the highest interest rates. 

Put Your Cash to Work

If nothing else, don’t just deposit your credits in your bank account and call it a day. Make that cash work for you, whether by depositing it in a money market or high-yield savings account or investing it. 

Your business might even consider investing in a new business, product line, or service opportunity. All of these measures can set you up for greater economic stability during your next period of low performance. 

Seek ERTC Assistance From Dayes Law Firm 

Before you can start using the ERTC to benefit your cyclical business, you must secure these credits. Our tax attorneys at Dayes Law Firm can help you understand your eligibility for the ERTC, guide you through the application process, and prevent errors and tax penalties. Give us a call at (800) 503-2000 or fill out our online form to schedule your free consultation.