Two Quarters May Equal Four Quarters

Before reading this post please note that there is a CAUTION at the end of the post that needs to be considered.

The Employee Retention Credit (ERC) for 2021 has been expanded and extended compared to the 2020 ERC rules.  The credit is now available through December 31, 2021.

Most farmers need at least a 20% reduction in gross receipts compared to the same quarter in 2019 to qualify for the credit.  However, there is provision that allows the taxpayer to elect to use the prior quarter instead of the current quarter in determining the decrease.

This could allow the farmer to qualify in quarters 1 and 3 and then automatically allow them to qualify in quarters 2 and 4.  Here is an example:

ABC Farm Inc. had the following reduction in gross receipts for each quarter in 2021 versus 2019:

1. 31% decrease
2. 15% increase
3. 23% decrease
4. 4% decrease

Quarters 1 and 3 will qualify for the ERC since gross receipts declined by more than 20% compared to 2019.  Quarter 2 had a 15% increase, but the taxpayer can elect to use quarter 1 and since that quarter had more than a 20% decrease, quarter 2 will qualify.  Quarter 4 had a small decrease but just like quarter 2 it can elect to use quarter 3’s numbers and qualify.

Therefore, the bottom line is that you may only need to have gross receipts decline by more than 20% in quarter 1 and 3 of 2021 to have all quarters qualify for the ERC.

CAUTION – This is our reading of the law.  The law gives the IRS the ability to decide when and how the election is made, so it is possible the IRS may disagree with our interpretation and may issue rules that would not allow the credit for all four quarters in the scenario described above.