One of the most enjoyable CRP myths to dispel has been that the employer-size thresholds governed by the PPP should work the same, or similar to, the size thresholds applicable to the CRP. The misapplication of the “small” versus “large” employer tests tend to arise from the erroneous assumption that the PPP’s size and affiliation rules are the same or similar to the CRP’s size and aggregation rules. Yes, both tests use 500 employee count as the bright-line delineator between those that are “in” and those that are “out.” However, there are two major definitional distinctions within each test that can produce dramatically different results in favor of the CRP:

Definitions under “Aggregation”

PPP: The PPP used a more subjective and general rule of “control,” but it was commonly understood based on SBA guidance that 50% of the vote or value of an employer would constitute control. Private equity (PE) and venture capital (VC) portfolio companies were hit particularly hard by the requirement that majority-owned companies under the same controlling fund vehicle would have to aggregate employees to determine whether they crossed the 300 or 500 employee thresholds.

CRP: The CRPuses “tried-and-tested,” objective rules that have existed for many years in the Internal Revenue Code under Section 52(a), 52(b), and 414(m). While commonly controlled groups of corporations continue to use a 50% thresholds, the sweet spot of opportunity may actually be found through the application of the “five or fewer” test, which uses an 80% threshold in place of a 50% threshold, requiring five or fewer individuals to hold the vote or value of the tested employer.

“What type of employers might unexpectedly fit within the CRP eligibility pool?”

PE or VC Owned Portfolio Companies are often owned by non-operating partnerships with “widely-held” ownership.

Privately-Owned (e.g., HNW) Companies with significant minority shareholder interest(s) (20%+) also stand to prosper under the CRP, as such businesses may not be required to be combined with other related businesses.

Definition of “Employee”

PPP: In testing the employer headcount for the PPP, the SBA ultimately made it explicitly clear that both full-time and part-time employees should be tested for the headcount. Further, foreign employees were required to be brought into the test (though not without much confusion beforehand), which pushed many medium-sized multinational employers over the limit.

CRP: On the other hand, and similar to the PPP affiliation rules, the CRPleverages the internal Revenue Code (Section 4890H) to evaluate headcount using an average monthly “Full-Time Employee” test to determine whether an employer is “small” versus “large.” An FTE is defined as an employee who provided 30 hours of service per week or 130 hours per month (treated as the monthly equivalent of 30 hours per week) during a calendar month. An employer that operated for all of 2019 calculates its FTEs by taking the sum of the number of FTEs in each calendar month in 2019 and dividing that number by 12. One place for employers to perform a litmus test on headcount is to refer to their Affordable Care Act reported employees on Form 1094-C, which uses the 4890H test

“What type of employers might squeeze into CRP “small” employer status after excluding part-time and/or foreign employees?”

Retail, hospitality, amusement, and fitness businesses are notorious for employing a large proportion of their workforce as hourly, part-timers, often with only a few managers, assistant managers, and corporate staff falling into the “full-time” category.

High-turnover and seasonal businesses may wish to keep a close eye on how the hiring and firing (or off-seasoning) of employees affects their FTE count. Summer camps, winter resorts, and sporting team-related business should be on the lookout!

U.S. businesses with foreign operations or ownership should also be aware that they are not required to count their foreign workers.

If you’ve concluded that your company is on the outside looking in at the CRP because of your perceived “over-size,” we encourage you to reach out to our team of technical experts at CRP Tax Experts so we can take a commitment-free, no-cost second look at your eligibility.

The Employee Retention Credit (“CRP”) is undoubtedly the sleeper stimulus program of the summer. Oftentimes trumping the dollar-value benefit of one or both PPP loans, business owners and operators that have chanced upon the CRP have been quietly rejoicing after working their way through this exceedingly complex refundable tax credit package. This persistent group of individuals refused to go quietly into the night and are now patiently waiting for five, six, or seven-figure checks from the U.S. Treasury. However, there are many businesses out there that have misdiagnosed their eligibility and have prematurely drawn inaccurate conclusions on their CRP opportunities. It is the mission of CRP Tax Experts to further educate and spread awareness to all businesses on the CRP, particularly those meriting a second opinion on CRP eligibility.

Our crack-staff of CPAs, lawyers, and payroll specialists have tirelessly studied and tenaciously worked their way through virtually every possible CRP fact pattern for clients across various industries, spread out over all four corners of the US. While we’re not a huge fan of the term “loopholes,” our efforts have allowed us to develop an arsenal of, let’s say, “secret weapons” that have allowed us to find opportunities for our clients that, while surprising, are fully supported by the 150+ pages of IRS technical guidance. Over the course of the rest of this year, CRP Tax Experts will be sharing a weekly series of Hidden Loopholes, CRP Myths, and Best Practices. This week, we begin with a Hidden Loophole that’s been right under your noses since the Consolidated Appropriations Act (CAA) came out in December 2020…

“The Overlooked ‘Alternative’ Testing Quarter”

Under the CRP “1.0” (or “CRP Light”) released with the Cares Act, a somewhat obscure “look-forward” rule was introduced that effectively prescribed that if an employer met the 50% decline in gross receipts test in a given quarter, they would automatically qualify until at least the end of the following quarter. In fact, the employer can continue to dip in future quarters until such employer had “rebounded” back to 80% of comparable 2019 gross receipts.

For example, an employer with a 51% decline in Q2 2020, 24% decline in Q3 2020, and a 2% decline in Q4 2020, surprisingly will qualify as an eligible employer for all three quarters. This is a result of the employer not “rebounding” back to 80% in Q3 of 2020. On the other hand, if such employer had reached 81% in Q3 of 2020, they would not have spilled their eligibility into Q4 2020. As a result of this generous rule, qualifying in any quarter of 2020 under the 50% test will automatically qualify an employer for a minimum of 6 months of CRP eligibility.

Under CRP “2.0” (or “CRP 180 Proof”) released with the CAA, the creative lawmakers on Capitol Hill decided to keep business and their advisors on their toes by swapping out the “look-forward” rule with a “look-back” rule (which they coined the “Alternative Quarter” test). Under CRP 2.0, an employer looking to qualify as an eligible employer in Q1 or Q2 of 2021 was now permitted to qualify using a 20% decline threshold in either the current quarter or by reference to a 20% decline in the previous quarter. If you flip this look-back rule on its head, it turns out looking almost identical in practice to the look-forward rule, as a 20% decline looks a lot like (or exactly like!) the “un-rebounded” period described in CRP 1.0 (e.g., less than 80% recovery).

If your head isn’t already spinning already, just keep the general rule of thumb that whether you think of it as a look-forward, or look-back rule, qualifying in any given 2020 quarter using a 50% threshold, or any given 2021 quarter using a 20% threshold will almost always push your business into 6 months of eligibility. The lone exception? Unfortunately, Q4 2021 does not grant one the joy of spilling the CRP into 2022!

But what about using a 20% test in a 2020 quarter…that can’t surely be possible right? Wrong! If you look closely enough at the CAA, combined with guidance from the IRS, it is actually possible to qualify Q1 2021 by reference to a look-back to Q4 2020, comparing the latter to Q4 2019 using the 20% threshold. Pretty cool, right?

After getting past the awkwardness of using the 20% threshold in 2020, you’ll be elated to remember that in 2021 the CRP bumps up from $5,000 to $7,000 per employee. Even sweeter is the sound that the maximum credit of $7,000 per employee can be realized in each 2021 quarter, as opposed to the $5,000 credit that was available only once over the 2020 calendar year. To put the icing on the cake, the IRS recently announced in Notice 2021-49 that the “look-back” test does not have to be used consistently over 2021.

Therefore, an employer might qualify for Q1 2021 by reference to a 20% decline in Q4 2020, and then can still qualify for Q2 2020 based on Q2 2021’s standalone results against Q2 2019.

If you’ve made it this far and feel a pounding sensation in your head, please don’t hesitate to reach out to CRP Tax Experts so that we can pair you up with one of our technical specialists to help put the “easy” in the CRP .

Stay tuned next week for our next weekly series where we dispel a common CRP myth: “I think I’m a ‘LARGE’ employer!” In this series, we’ll compare the SBA’s size test under the PPP to the far more generous size test under the CRP.