The COVID-19 pandemic resulted in executive orders and supply chain issues, which forced many businesses to either partially or fully cease operations. The government afforded financial assistance to employers impacted by the pandemic through the CARES Act, under which the Employee Retention Credit (ERC) was introduced in 2020. The ERC can benefit healthcare organizations—even if they didn’t experience a decline in revenue and didn’t have to close their doors due to the COVID-19 pandemic.
Out of all sectors, the healthcare industry saw some of the most notable staffing and operational impacts during the COVID-19 pandemic, but many are unaware of how to reap the full benefit of the ERC. Some organizations took advantage of the PPP (paycheck protection program), but many have continued to overlook or believe they do not qualify for the ERC.
How COVID-19 Impacted the Healthcare Industry
Hospitals, clinics, and other healthcare organizations were critical in response to COVID-19. Even though most healthcare organizations were deemed essential and allowed to operate, some were still subject to new regulations and restrictions. Hospitals and clinics had to implement new safety protocols, expand telemedicine efforts, and impose staffing restrictions to mitigate the spread of COVID-19. Non-emergency medical facilities and services were also impacted, mostly by capacity limitations and sanitization requirements.
Healthcare institutions that qualify for some CARES Act benefits—including the employee retention credit—are nonprofit and for-profit hospitals, instrumentalities including district or county-owned hospitals or medical centers, and independent medical practices.
Healthcare facilities that faced more than a 10% restriction on business operations due to COVID-19 executive orders—or a 20% or more decline in gross receipts are—eligible for ERC funds under the CARES Act. Some specific factors that may lead to qualification for healthcare organizations include:
- Increased time between patients.
- Social distancing regulations.
- Capacity restrictions.
- Increased sanitization standards.
ERC Misconceptions in Healthcare
A lack of regulatory guidance and common misconceptions surrounding the CARES Act and the Employee Retention Credit led to many healthcare organizations not participating in the program, regardless of eligibility. The Internal Revenue Service (IRS) issued guidance related to eligibility in 2021, eliminating some confusion related to the ERC. However, misconceptions about the ERC remain and have made the filing process challenging to navigate without qualified assistance.
Here are some common areas of confusion that bar healthcare organizations from applying for the ERC:
Number of employees. For full-time employees, the original 2020 version of the ERC only allowed businesses with 100 or fewer full-time employees in 2019 to claim the credit. However, this was later expanded to include employers with 500 or fewer full-time employees in 2019 for 2021. So, employers with up to 100 full-time employees can claim the ERC for 2020 and 2021 qualified wages, and employers with up to 500 full-time employees can claim the ERC for 2021 qualified wages. These eligibility requirements are subject to change, and employers should consult with an ERC expert to determine their eligibility for the ERC.
The Paycheck Protection Program. Like the ERC, the CARES Act also established the Paycheck Protection Program (PPP) to prevent economic downfall during the pandemic and provide small businesses with funds to pay up to eight weeks of payroll costs. The most significant difference between the ERC and PPP is that PPP loans must be repaid with interest—unless the borrower eventually qualifies for forgiveness—while ERC does not have to be repaid. Luckily, healthcare organizations don’t have to choose between the PPP and the ERC. The Consolidated Appropriations Act of 2021 allows employers to claim ERC funds for any wages that were not added to the payroll costs reported for PPP loan forgiveness
However, businesses must avoid “double-dipping” when applying for CARES Act benefits. When designating wages as ERC wages after an employer has had a PPP loan forgiven, a qualified ERC advisor must take a thoughtful approach to ensure the client is not engaging in “double-dipping,” while concurrently deploying a strategy to optimize the ERC-qualified wages.
Additional grant funding. If an employer received grant funding from HRSA or another organization, the employer could still claim the ERC with respect to Qualified Wages in that quarter. Unlike the PPP, there is no crossover or anti-double-dipping rule associated with grant funding.
Nonprofit organizations. One common misconception is that healthcare organizations that are also NPOs do not qualify for the Employee Retention Credit. Nonprofit leaders may be hesitant to apply for the ERC due to the risk of an IRS audit or the potential adverse public reaction to filing despite an increase in charitable giving. However, NPO leaders will be pleased to know that their organization may still qualify for the tax credit—even absent a loss in revenue for 2020 and 2021—and can still safely apply for the benefit by consulting ERC experts. There is still time to claim the ERC—a nonprofit-eligible employer can claim the ERC for seven quarters, beginning March 13, 2020, and ending on September 30, 2021, depending on each organization’s circumstances. Because the Employee Retention Credit is complex and requires in-depth knowledge to determine eligibility, NPO leaders should consult with experienced tax and legal professionals to avoid potential audits or ERC scams, which were added to the IRS Dirty Dozen list.
Revenue requirements. In 2023, the financial qualifications for ERC fund eligibility were lowered. The threshold for gross receipts dropped from 50% to 20% for 2021. Qualifying businesses that faced a 20% decline in revenue during the pandemic are eligible for the ERC funds. Even without revenue decline, employers showing substantial proof of how their business was impacted by the COVID-19 pandemic and satisfying a gross receipts test mandatory for obtaining ERC funds may still qualify. If your organization suffered a full or partial suspension of business operations due to COVID-19 government executive orders, you may still qualify for ERC funds due to a business interruption, even if revenue went up during the periods for which you’re claiming. The full or partial suspension of operations is not a financial statement test, and therefore, a business is not required to have a revenue decline in gross receipts to prove the existence of a partial suspension of operations. For instance, many hospitals didn’t lose revenue but were forced to increase staffing due to the operational impact of the pandemic, despite adverse working conditions.
Evaluating the Suspension Test and Productivity
Increased staffing, patients, and revenue make it seem like healthcare organizations were not impacted in terms of ERC metrics. If anything, those factors make it seems like healthcare experienced high levels of productivity as a result of the pandemic.
Many healthcare organizations may perceive growth during the pandemic as evidence of productivity. However, evaluating productivity under the ERC is multi-faceted. It is important to compare 2019 to 2020 productivity by individual employees. For example, imagine a facility had ten physicians in 2019 but twenty physicians in 2020 and 2021. That might appear to indicate an increase in productivity, but comparing those ten physicians in 2019 to those same ten physicians in 2020-2021 tells a different story. In that case, individual productivity might look completely different. Factors like moratoriums on elective procedures and other healthcare services also contribute to a partial suspension of operations.
There are two avenues of eligibility for ERC—and only one needs to be met.
The first test focuses on whether or not the employer or organization experienced revenue loss. However, there is a second route to ERC eligibility under the partial suspension of operations test, which reviews how COVID-19-related state and local orders impacted the organization’s operational output and does not consider revenue in the analysis. The full or partial suspension of operations test (FPSO) is not a financial statement test—so an employer is not required to have any decline in gross receipts to prove the existence of an FPSO.
Finding a Qualified ERC Expert
Here are some key considerations to remember when searching for the right firm for your healthcare organization.
- Start-to-finish assistance. The right ERC firm will offer assistance throughout the entire process of revisiting your filings, including calculating, documenting, claiming your ERC, and audit support.
- Tax insurance experience. Find a firm that has established strong, long-standing relationships with insurance brokerages with the resources to identify tax insurance policies.
- IRS experience. The right ERC firm for your organization will have experience dealing with—and proactively preparing for—audits.
- Paid preparer signature. Look for firms that take ownership of and coordinate the submission of forms to the IRS.
- Law firm relationships. Seek firms that employ both tax and legal professionals. Attorneys are crucial to ensuring full compliance with the ERC eligibility requirements.
- Accountability. Avoid firms that include ultra-broad cautionary disclaimers related to liability for providing tax or accounting advisement. The right firm for your organization will take ownership of what service they are providing.
- Reasonable fees. The sweet spot for not overpaying—but still employing qualified ERC experts—is in the 10-20% range, depending on the size and complexity of your business.
To ensure accuracy and adherence to the complex ERC tax code, it’s best to work with a firm of tax and legal experts specializing in the ERC. An experienced ERC firm can guide you through the process and ensure your filing is accurate and presents the lowest risk of an audit. Expert ERC firms are led by certified public accountants and tax attorneys with extensive experience in the legal test related to the ERC as well as navigating IRS audits.
You can set your healthcare organization up for ERC success by employing the help of a qualified advisor, like EZ-ERC. They are an advisory group led by former big firm CPAs and attorneys that exclusively focus on the ERC and have a proven track record of working with small and medium-sized businesses and nonprofit organizations.