What is the Alternative Quarter Election Rule for the ERTC?

August 3, 2023
Dayes Law Firm

During the height of the COVID-19 pandemic in 2020, the economy declined by more than 30% in a single quarter, and the U.S. GDP (Gross Domestic Product) experienced its biggest contraction in over 70 years. 

To help keep businesses afloat and encourage companies to retain their employees, the government instituted a series of stimulus packages and the 2020 CARES Act (Coronavirus Aid, Relief, and Economic Security), including the Employee Retention Tax Credit, or ERTC for short.

There are a couple of ways to qualify for ERTC funds, including a little-known rule that expands company eligibility. This rule is referred to as the Alternative Quarter Election Rule, and it can result in a business receiving tens or hundreds of thousands of dollars in additional refunds. Here is more on how to determine if you qualify for the Alternative Quarter Election Rule. 

Determining ERTC Eligibility 

Businesses that qualify for ERTC funds can receive up to $26,000 per employee based on qualified wages paid. There are two main ways to qualify for these refundable payroll tax credits: 

  1. Experience a 50% decline in revenue in 2020 or a 20% decline in revenue in 2021 compared to 2019 figures.
     
  2. Be subject to a full or partial suspension of operations due to a government mandate.

There’s also a qualification for startup businesses that commenced operations after February 15, 2020, but this eligibility doesn’t apply to the Alternative Quarter Election Rule since there are no 2019 figures to determine ERTC eligibility. 

The Alternative Quarter Election Rule Explained 

As businesses began claiming ERTC funds based on their tax returns, the understood rule was that you could only compare gross receipts based on the same quarter. For example, to qualify for ERTC for Q1 2021 revenue, a business must have experienced a 20% or greater decline compared to Q1 2019. 

However, the Alternative Quarter Election Rule turns this misconception on its head. Also referred to as the “Lookback Period” rule, the ERTC Alternative Quarter Election Rule allows businesses to claim ERTC funds for quarters in which they otherwise would not have been eligible. 

The Alternative Quarter Election Rule allows business owners to use the prior calendar quarter’s earnings to be eligible for an ERTC refund for a different quarter. In other words, this rule allows you to qualify for quarters that might not have otherwise qualified as long as you had been eligible in the immediately preceding quarter. 

For an example of how this works, refer to the chart below and the corresponding explanation:

Quarter2019 Revenue2021 Revenue
Q1$100,000$75,000
Q2$100,000$85,000
Q3$100,000$50,000
Q4$100,000N/A

Reviewing the chart above, one would think that the business wouldn’t qualify for ERTC for Q2 of 2021 because there was only a 15% decline in revenue. However, because the business qualified in Q1, the immediately preceding quarter, a lookback period allows the company to be eligible in Q2, too.

The rule has similar applications for 2020 as well. There is still an applicable lookback period, though the rules are slightly different than they are for 2021. 

Contact Dayes Law Firm for Help with ERTC Claims 

There’s no question that ERTC rules are complex and can get confusing, especially if you’re not already familiar with the program. By enlisting experienced help, you can be confident that you’re getting the maximum ERTC credit while still abiding by the rules. 

At Dayes Law Firm, we have helped hundreds of business owners claim millions of dollars in ERTC funds. To receive a no-cost, no-obligation evaluation, contact us at 800-503-2000.