Your business may qualify for the Employee Retention Tax Credit (ERTC) if you experienced a “significant decline in gross receipts” in the 2020 and/or 2021 tax years. But what does a “significant decline” mean, and what is included in your gross receipts?
Accurately calculating your gross revenue for these tax years is essential to legally claim the ERTC. Learn how to calculate ERTC gross wages below.
What Are Gross Receipts for the ERTC?
The ERTC provides money back to eligible employers who experienced tangible losses from pandemic-related shutdowns. It defines these tangible losses as earning a certain percentage less in gross receipts compared to the same quarter in 2019.
The ERTC uses different calculations for the 2020 and 2021 tax years. You may qualify for the ERTC if you experienced:
- A 50% decline in gross receipts in a quarter during 2020 compared to the same quarter in 2019, OR
- A 20% decline in gross receipts in a quarter during 2021 compared to the same quarter in 2019
But what does the term “gross receipts” refer to? In a nutshell, gross receipts include all income your business received from virtually any source. These are considered receipts because you should have a record of them within your bookkeeping and accounting system in case the IRS requires an audit.
What Is Included in Gross Receipts?
Gross receipts may include any of the following activities that brought your business revenue:
- Sales of tangible property
- Services provided to customers
- Income from rental properties
- Employment tax returns
- Royalties from copyrights, logos, inventions, franchises, or licenses in your state
- Real estate transactions, including oil and gas holdings
If you are a tax-exempt organization, you can generally consider your gross receipts to be the total amount of money you received in a fiscal year before deducting expenditures.
Additionally, if you run multiple branches of a business categorized as a single company under aggregation rules, you would include the gross receipts from all participants in your aggregation group.
What Is Not Included in Gross Receipts?
Because “gross receipts” is an almost all-encompassing term, focusing on the few transactions that don’t count toward your gross receipts may be easier.
Certain loans or grants you received during the pandemic may not count toward ERTC gross wages, including:
- Restaurant Revitalization Fund (RRF) subsidies
- Shuttered Venue Operator Grants (SVOGs)
- PPP (Paycheck Protection Program) loans
While these funds are normally included in total receipts, they are not eligible for ERTC purposes.
Calculating Gross Receipts for the ERTC
Refer to your accounting system to review the gross receipts for a specific quarter and determine your eligibility for the ERTC. You can calculate your gross receipts with these steps:
- Start by determining the quarter in 2020 or 2021 that experienced the biggest loss from COVID shutdowns.
- Calculate the total revenue from all products and services within that quarter. Only include sales you delivered within that period or have received payment for, depending on your accounting system (cash-basis vs. accrual).
- Perform the same process for the comparable quarter in 2019. For example, if you calculated Q2 in 2021, compare it to Q2 in 2019.
- For 2020 quarters, determine whether your calculation is 50% lower than the 2019 quarter. For 2021, determine whether the quarter is 20% lower.
- Repeat these steps for a quarter in the opposing year (2020 or 2021) to determine whether you can apply for the employee retention credit for both years.
Need help calculating ERTC gross wages or determining your eligibility? Contact Dayes Law Firm today at 866-684-8114 or fill out the online form for assistance.