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FAQs About The California Employee Retention Credit

California employers are encouraged to take advantage of the California Employee Retention Credit before it expires. But what is this tax credit? Who qualifies? Is ERC taxable in California? In this article, Dominion Enterprise Services’ CPA Skyler Kressin breaks down the ERC and how it can benefit your business.

 

 Like many business owners, California employers were subjected to extreme challenges during 2020 and 2021 and even extending into 2022. Business operations often were fully or partially suspended due to state or local health orders, revenue swings occurred unexpectedly, labor shortages abounded, and the unknowns related to global economic conditions created a difficult environment for businesses of all stripes due to COVID-19.

 

In the midst of these difficult times, various federal programs were created to mitigate these challenges, including the CARES Act and the American Rescue Plan Act. Each of these had provisions for relief, such as advance payment programs or forgivable business loans such as the Payment Protection Program (PPP loan).

 

While many businesses took advantage of these relief provisions, the sheer volume of legislation signed into law in the last several years has resulted in some of the key relief provisions for employers to be overlooked in the effort to keep the lights on and business flowing.

 

One such relief provision that consistently has been overlooked was created specifically for employers who continued to pay wages and federal employment taxes throughout the official “pandemic period” (March 12, 2020, through the third quarter of 2021) in the form of an employer tax credit, officially called the Employee Retention Credit (ERC).

 

The good news is, for California employers specifically, this federal tax credit may be much easier to obtain than for those who own and operate businesses in other states, due to how eligibility works. 

 

High-level Features of the ERC for California Employers:

• The credit is up to $26,000 per employee for a fully eligible employer. 

• The credit is a federal refundable tax credit, meaning you can claim a refund directly in the form of a check from the IRS, and the ERC is NOT a loan or grant through a bank like the PPP.

• That said, the other relief programs, (such as the PPP) do interact with the ERC but importantly, do NOT make you ineligible for the ERC as was previously widely believed – even those who received both rounds of PPP funding are still potentially eligible for the ERC.

• The claim is made through federal payroll tax filings and entails tax calculations customarily performed by tax professionals.

• The eligible filing period for the ERC begins to expire in April 2023 as the statute of limitations for refunds begins to sunset. 

 

Who is Eligible for the ERC? 

Eligibility for the ERC is determined on a calendar quarter basis (corresponding to each federal filing period) and can be achieved in one of two ways:
 
1. Gross Receipts Test
Employers must show a specified percentage decline in gross receipts, quarter-over-quarter when comparing a given quarter in 2019 to the same quarter in 2020 or 2021. For example, the quarter ending December 31, 2019, compared to the quarter ending December 31, 2020, must show a specific percentage decline. Specifically, 2020 needs to show a decline of 50% in at least one quarter, and 2021 needs to show a decline of 20% in at least one quarter – BOTH compared to the equivalent quarters in 2019. 
 
2. Trade or Business Operations Disruption Test
This test is where there may be advantages for the California Employee Retention Credit as opposed to the relative eligibility in other states. Eligibility under this test all hinges on whether direct state or local government orders restricted business operations for employers during the pandemic period. California was one of the more restrictive jurisdictions as compared to other U.S. states and localities, so ERC eligibility is more likely to be achieved for California employers than in other jurisdictions.
 
As with all federal legislation and tax law, there are nuances and fine print to the above eligibility tests that go beyond the scope of this article and edge cases that require parsing through grey areas. This is where working with a qualified and licensed tax professional who specializes in tax credits comes into play. Many who are otherwise eligible for the ERC may be leaving money on the table, or otherwise working off an incomplete assessment of the full scope of their eligibility. 
 

Is ERC Taxable in California?

Another benefit of the ERC is that, in general, it is not taxable on your California income tax return, as per FTB Publication 1001. That said, given it is a federal credit, it does directly impact your federal income tax filing and may result in the need to modify your federal income tax filing.
 

Dominion Can Help 

Dominion Enterprise Services, PLLC is a full-service licensed CPA firm, with broad experience in helping California employers with various tax credits and consulting and has broad familiarity with the Employee Retention Credit specifically for the state and local legislative and regulatory environment in California during the pandemic period. 
 
Our model is based on a transparent assessment of the facts and circumstances of each business we work with and working with existing tax preparers and payroll providers in ensuring the maximum claim for the ERC in California is pursued under the law. 
 
Given the unique regulatory landscape of California, don’t miss out on this opportunity to claim the California Employee Retention Tax Credit before the eligible filing period ends in April 2023. If you would like us to help with this process, please click on the button below and fill out our quick, one-minute questionnaire.

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