Of all the businesses in the US economy, the manufacturing sector felt the effects of the COVID-19 pandemic more than most. The reaction by all levels of government created ever more challenging restrictions on businesses by forcing downtime and social distancing mandates. Those mandates affected the supply chain of more than 90% of Fortune 1000 companies, and the US Census Bureau Supply Chain Disruption Survey noted that the manufacturing industry suffered the most during this chaotic period.
The Internal Revenue Service (under direction from the federal government) has updated the Employee Retention Credit for manufacturing businesses like yours. As part of continued economic recovery initiatives, you can still use Employee Retention Credit refunds to alleviate the burden placed on your business by the pandemic and governmental responses.
Legislative extensions allow qualifying companies to still apply for the Employee Retention Credit (ERC) refund in 2023, 2024, and 2025. Your manufacturing business will need to meet criteria relating to the fiscal quarters in 2020 and 2021. Manufacturers can receive a percentage of employee payroll back from that period.
Your business may still qualify for the refund even if it did not experience a complete government-mandated shutdown. Partial shutdowns and delays due to supply chain issues can also make you eligible for an ERC refund if it negatively impacted your gross income during the 2020 and 2021 fiscal years. You may yet qualify, even if previously told that you did not.
The most recently updated ERC regulations and rules from the IRS help clarify this. The extent of the government-mandated restrictions generated by local and state entities is a factor in qualifying for Employee Retention Tax Credit refunds. Government restrictions resulting in restrictions on manufacturing capabilities may help a business meet the criteria for ERC refunds between the start of enforcement to the complete lifting of those mandates.
We have created this detailed Employee Retention Credit (ERC) Quick Start Guide to help all manufacturing business owners understand this tax refund more completely. The information that follows covers eligibility criteria, what is involved in the application process, and additional resources you may find helpful. When you finish, we hope you will know how you qualify for ERC and what to do to get the maximum refund for your company.
Key Points of This ERC Quick Start Guide:
- Come away with a better grasp of how the ERC applies to businesses involved in manufacturing.
- Become better acquainted with various ERC qualifying criteria your manufacturing business needs to meet to receive this refund.
- Familiarize yourself with the calculation and claiming processes required to file an accurate claim for your Employee Retention Credit refund.
- Discover various ways a manufacturer like yourself can use the Employee Retention Credit refund to benefit your company.
- Learn about some of the more common mistakes regarding filing a claim for an ERC refund, and read answers to frequently asked questions that manufacturers may have about the ERC.
WHAT IS ERC FOR MANUFACTURING COMPANIES?
As a manufacturing business, you could be eligible to apply for an Employee Retention Credit (ERC) refund covering the fiscal periods between March 12, 2020, and December 31, 2020. The ERC allows manufacturers to claim tax credits equaling 50% of the gross wage salaries paid during that time.
The percentage increases to 70% of qualified wages for the tax year 2021, covering wages a business paid out from January 1, 2021, to September 30, 2021. Qualifying wages for the specific quarter in question and the amount of gross payroll get used to calculate Employee Retention Credit refund totals that a manufacturer may be entitled to claim.
If you took over an existing company or started operations after February 15, 2020, the IRS considers your business a Recovery Start-Up regarding ERC qualifications. That allows you to claim wages paid through December 31, 2021.
The Employee Retention Credit Tax Refund was part of the CARES Act, a piece of legislation the US government enacted as a response to the COVID-19 pandemic. Designed to aid businesses of all sizes, it incentivized employers to keep workers on the payroll through reductions in operations and gross income. It has gone through several changes since.
Under the Infrastructure Investment and Jobs Act of 2021, ERC applies only to wages before October 1, 2021. Recovery Start-Up companies can claim on gross payroll through January 1, 2022.
HOW DOES THE ERTC CREDIT WORK?
The Employee Retention Tax Credit (ERTC) Refund program has changed several times since its launch in 2020. While these changes offer additional opportunities for manufacturing businesses like yours, they can also make it challenging when determining which qualifying criteria to use.
The IRS has provided the exact steps you, as an employer, must take to file a valid ERC claim. It begins with checking if your manufacturing business meets the Employee Retention Credit eligibility criteria. Once verified, the next step is to calculate the tax credit totals for each period your business is eligible for. The next step involves filing a revised version of the Employer Quarterly Federal Tax Return Form 941 (labeled as Form 941-X).
IRS changes modified the process that used Form 7200 for claims. If the Employee Retention Credit was more than the tax deposit, manufacturers could apply Form 7200 when seeking advance payment. A business would receive the remaining refund total later.
If your business applied for and received a PPP loan, you can still apply for ERC for up to three years after the Paycheck Protection Program loan program concluded in May 2021.
You may notice program changes for claiming tax credits since September 30, 2021. A manufacturing company applying for ERC needs to verify which requirements apply to their fiscal situation.
Proof needs to include documented evidence that shows how the pandemic negatively affected the business. Qualifying proof should highlight governmental restrictions on production capacity or revenue. You must also provide detailed records showing the pay payroll records and appropriate wages paid during the fiscal quarters your company is applying for.
DOES YOUR MANUFACTURING BUSINESS QUALIFY FOR ERC?
We can confirm that manufacturing businesses can apply for Employee Retention Credit returns. Your company may be eligible to receive an ERC refund if it meets these eligibility requirements:
1. Partial or Full Suspension of Operations, Production, or Trade
For any financial quarter you plan to claim for, you must provide evidence that a form of government mandate suspended operations partially or fully. The suspension must relate to COVID-19 restrictions during the tax years of 2020 and 2021.
Some tests can demonstrate partial suspension. These show that the work you were required to cease doing makes up more than the ‘nominal' part of your manufacturing business.
The Internal Revenue Service covers this in Question 11 and Question 19 of the IRS Notice 2021-20. Here, the criteria nominal means less than 10% of your total gross receipts or the total service hours all employees worked. That definition applies to Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES).
2. Experiencing a Significant Decline in Gross Receipts
Here, your manufacturing business must have experienced a notable reduction in gross receipts when comparing qualifying quarters from 2019, 2020, or 2021. To meet the threshold established by the IRS for 2020, the decrease in gross receipts must exceed 50% for the comparable 2019 quarter. For 2021, the qualifying number drops to a 20% decrease compared to the same quarter in 2019.
For example, you may qualify if your business experienced a gross receipt decline from $500,000 in the second quarter of 2019 to $250,000 in the second quarter of 2020. Should your second quarter in 2021 improve to $400,000, you can still qualify because it represents a 20% decrease from quarter two 2019 totals.
3. The Number of People You Employed
The number of people you employed during the quarters in question also matters. If you paid out wages to fewer than 100 employees in fiscal quarters in 2020 or 500 people or less in quarters of 2021, you include the gross wages and salaries in your ERC calculations. That applies to part or full-time workers.
The IRS has provided additional condition clarifications to help manufacturers like yours qualify for Employee Retention Credit refunds during the COVID-19 pandemic quarters. The scenarios outlined by the IRS for partially or fully shutdown businesses include:
4. Declines in Production or Service Output Due to the Pandemic
The manufacturing sector got hit extremely hard as the COVID-19 pandemic and subsequent government-mandated restrictions significantly reduced business output. Fewer sales and lost revenue resulted.
Output production was not the only thing affecting business output at the time. Many employees came down with the virus, adding to the effects of government mandates. Most companies had to adopt operating guidelines, and new social distancing protocols negatively impacted manufacturing efficiency on the floor, the shop, and the office.
5. Pandemic-Related Manufacturing Disruptions and Process Alterations
In many cases, pre-pandemic operations were interrupted, creating a need for organizational retoolings to match the new mandated operations reality. These include adopting virtual meetings, remote work environments, and upgraded communication technology to facilitate business. For manufacturers, however, this often reduced production capacity as communication tech did not have the same impact on the factory floor, workshop, or warehouse.
6. Delays and Disruptions in the Supply Chain Due to COVID-19
COVID-19 created delays and full-blown disruptions due to the local, state, federal, and international pandemic-related restrictions on everything ranging from travel to imports. Workforces ravaged by the virus also impacted the supply chain. It was especially difficult for manufacturers needing raw materials or partially assembled components as integral elements of their manufacturing.
7. Pandemic-Related Social Distancing Logistics
Mandatory guidelines and strict regulations forced manufacturers to reduce the available workers in facilities to maintain social distancing. Not only did this directly impact the ability to produce goods and services, but it also required expenditures to implement specific safety precautions to limit employee contact on the floor or in the office.
8. Pandemic-Related Logistical Problems Between Manufacturers and Vendors
Upstream supply chain issues weren't the only problem; the pandemic affected downstream collaboration with vendors acquiring goods and services from manufacturers like you. Sick workers, contamination fears, and stringent regulations slowed shipments and reduced purchases. That negatively impacted production levels.
9. COVID-19 and Government Restrictions Forced a Complete Shutdown
Some manufacturers, perhaps yourself included, could qualify for ERC because the pandemic forced them to shut down production during the specific fiscal quarters you are filing for.
HOW TO CALCULATE ERTC CREDIT FOR MANUFACTURING PLANTS?
The process starts with you determining the gross wages your manufacturing business paid out to employees for a given quarter. Accuracy is crucial and can affect the claim's validity and the total you could receive.
There are three elements that you can use when calculating an Employee Retention Credit refund claim, including:
- The wages you paid out
- FICA tax compensation
- Expenses from health insurance premiums
There is a caveat regarding paid wages worth noting here. To be eligible for ERC, the wages you use for calculations must have gone to individuals employed continuously between March 12, 2020, and September 30, 2021. For Employee Retention Credit purposes, payroll expense for an employee will max out at $26,000 for 2020 and 2021.
HOW TO CLAIM ERC
Thanks to several updates, your manufacturing business can still retroactively apply for Employee Retention Credit refunds. You are running out of time, however, and it does not appear that the government will make further extensions to the program. Depending on the 2020 and 2021 fiscal quarters you are looking to qualify for, deadlines loom in 2023, 2024, and 2025.
The ERC refund program is available to any business that meets the eligibility requirements, so there is no need to worry about funds being unavailable. Your only issue will be filing your claim, as funds set aside for ERC will no longer be available once the deadlines pass.
The IRS has approved limited methods that qualified manufacturing companies can use regarding ERC refunds. You can fill out and mail a paper version of the IRS Form 941-X for the fiscal quarters you are claiming. The Internal Revenue Service does not accept electronic submissions of this document, so mailing is the only option available to your business.
HOW A MANUFACTURER CAN USE THE ERC CREDIT TO THEIR ADVANTAGE?
Filing an ERC claim is something that manufacturers should do if they are looking to help manage payroll costs. You will receive your credit refund once you meet the qualifying criteria and file the IRS Form 941-X. There are several ways a manufacturing business like yours could use the tax credit, including:
1. Re-Establishing Your Supply Chain
Since the start of the COVID-19 pandemic, supply chains at all levels have experienced disruptions or worse. The lack of raw materials, components, and transportation issues are just a few ways the supply chain created delays and created a loss of income for manufacturers.
Improving or rebuilding this sector of your business provides short and long-term benefits. You can use your ERC to develop other raw material options, re-establish supplier relations, and improve tracking, purchasing, and other supply chain technology.
2. Develop and Train Your Workforce
Your Employee Retention Credit refund could help develop better floor, shop, office, and management employees. Learning new production methods, cross-training positions, and developing new skill sets can increase production output. These developmental steps can give you a competitive edge, and this training improves your current workers and future employees you have yet to hire.
3. Rebuild and Establish Vendor Relationships
A manufacturing company will not make money unless vendors buy goods from them. The COVID-19 pandemic affected vendors buying your products as much as it did those supplying you with materials for production.
Your ERC could help re-establish business ties with those selling the goods and services you create. It can also put you in a position to negotiate better contracts or find new vendors.
4. Retool or Upgrade Your Current Operations
As a business owner, your goal should be to grow beyond your pre-pandemic levels of operation. Luckily, the ERC refund is usable for things beyond payroll expenses.
You can profit short and long-term with upgrades to equipment in the factory, the shop, and the office. Refunds can also help finance an upgrade to your online social presence, website, or advertisements. Another upgrade might be to pay for third-party accounting or legal services.
5. Expand Your Workforce
One way to stimulate an increase in manufacturing production is to hire more workers. Adding to your 2019 employment numbers could help get more gross receipts for the current fiscal quarter and beyond.
6. Help Offset Current Expenses
You could use the Employee Retention Credit refund more straightforwardly by covering current payroll costs. The capital infusion could offset employee wage expenses or cover premiums for healthcare coverage. Leftover ERC refunds can go towards the future, saving it for upcoming expenses or a cushion for future unforeseen events.
7. Hand Out Bonuses or Incentive Payments
Nothing improves production capacity like a loyal and motivated workforce. The ERC refund gives you the capital you did not have, and it might help the company's morale by sharing it with your employees.
Pay a bonus to workers who remained with you throughout the pandemic, even when mandates made working conditions challenging. Use it to finance functions like picnics or sick days. It can also act as a reward to employees for meeting operating and safety goals.
8. Freedom and Flexibility
Manufacturers can use the Employee Retention Credit refund to lower operating costs, revitalize business, and expand beyond current operating levels. Fortunately, the ERC program and IRS do not limit what you, as an owner, can use your refund for. You control how the credit refund gets allocated, allowing you to use it how and when it will benefit your business the most.
COMMON MISTAKES YOU SHOULD AVOID
With the potential to receive $26,000 to $33,000 for each employee covered by the criteria, you might be in a rush to file for an Employee Retention Credit refund. Errors happen, especially with several program changes and fiscal quarters (2020 and 2021) to calculate for. Let's look at common misconceptions and filing mistakes you want to avoid.
1. I Had X Number of Employees and Paid None for Not Working
You will have to employ specific numbers of people if you wish to meet the ERC requirements laid out by the IRS. Those employees must also work more than 30 hours per week if you want to include them in your calculations.
Were part-time employee hours neglected during the quarters you are claiming? If so, it can seriously impact the ERC refund totals you file for.
2. Only Essential Businesses Are Eligible for Employee Retention Credit Refunds
One myth you see perpetuated online is that CARES Act programs like the Employee Retention Credit refunds are for essential businesses only, which would exclude many manufacturing companies. We can assure you that this is not the case.
Any business, essential or non-essential, can qualify for the ERC refund. Current rules and regulations encompass any company that experienced delays, disruptions, financial burdens, or shutdowns due to the COVID-19 pandemic and related government-mandated restrictions.
3. A Manufacturing Company That Received a First or Second Draw Paycheck Protection Program (PPP) Loan Is Automatically Disqualified for ERC
During the initial rollout, any business that received a PPP loan could not claim ERC refunds because of restrictions at the time. Subsequent modifications to Employee Retention Credit regulations have removed these criteria.
If your manufacturing business applied for and received a PPP loan on the first or second draw, you may still be eligible for an ERC refund. One stipulation to remember here, however, is that you can not use the same wages for calculating PPP loan forgiveness and an ERC claim.
4. Insufficient Revenue Drops Will Cause the IRS To Deny Etc Eligibility
Your manufacturing company may still qualify for an ERC refund even if it did not experience a 50% reduction in gross receipts in 2020 or a 20% in 2021. The percentage drops stipulated for qualifications for fiscal quarters in these years are not the only eligibility factors. Your business is not ineligible because it did not meet or exceed the percentages listed for 2020 or 2021; other criteria can help you qualify.
For example, you can demonstrate how local, state, federal, and international mandated restrictions forced a partial suspension of operations. The threshold here would be a negative impact of 10%, as explained in the eligibility sections you read above.
5. Trying To Guess Your Employee Retention Credit Totals Before Applying
The Internal Revenue Service does not accept rough estimates; you must provide exact data when processing your application. You can not simply multiply your qualified employee wages for a specific quarter by $26,000. More detailed calculations and information are necessary for a valid claim to be acceptable to the IRS.
That is why we highly recommend that manufacturing companies like yours use the services of an ERC specialist. They understand the 200-plus pages of tax code involved with Employee Retention Credit and keep you compliant while providing the maximum return possible. A business does not apply for ERC like it would a loan; a company instead qualifies if it meets the requirements.
6. Mistaking That Your Business Is Ineligible or Not Consulting To See if It Is
A quick consultation can verify if you qualify for an ERC refund based on the current regulations under the CARES Act. Having a specialist examine the figures and details of your application will prevent you from mistakingly disqualifying yourself and provide you with a valid filing the IRS will accept.
7. Providing Erroneous Data on Your ERC Application
Having accurate and detailed records to work from will make the application process easier to complete. You will need data on relevant costs, including employee wages and healthcare expenses. Make sure you save receipts, invoices, payroll, and other documents to provide detailed accounts of expenses.
8. Using Ineligible Fiscal Quarters for Your Calculations
The IRS lists specific financial quarters that qualify for the ERC refund. Any periods outside these are ineligible and should not count in your calculations. Double-check all quarters you plan to use to avoid any errors that will disqualify your filed claim. Again, the services of a specialist can help those confused or unsure about the allowable quarters.
9. Thinking You Are Not Eligible Because You Remained Open
While you may have stayed open during the pandemic, your business might have experienced a partial shutdown and a significant reduction in the gross receipts you brought in compared to similar quarters in 2019. You may still qualify for an ERC refund.
Remember, temporary closures, decreased operating hours, and lower output capacity due to mandated restrictions imposed by local, state, and federal agencies may qualify you.
10. Having a Claim Denied or Reduced Due to Inexperience and Scams
Several online companies and individuals have appeared recently touting expertise in ERC claims. A quick Google search pulls up pages of websites claiming to offer the best services.
Some of these are satellites for ERC Mills that could charge up to 30% or your refund. It may be hard to justify paying commissions and hidden charges when many of these programs have limited knowledge and experience.
You need to research a company's background and credentials offering ERC services. That can help you eliminate incompetent specialists costing you on your ERC claim or taking more than they should.
Accurate records, including pay stubs, W-2s, and healthcare premium billing, are crucial for any manufacturer applying for an Employee Retention Credit refund. You will need detailed records of eligible wages paid during the fiscal quarters you use in your ERC claim. In short, documentation is critical for calculating refund totals and filing an ERC claim the IRS will accept.
Your manufacturing business could receive a sizeable refund should your manufacturing company qualify. The IRS does not limit the ERC refund regarding how it gets used. You can apply this capital as you see fit, helping to improve your business and help it grow beyond its current operating capacity.
Even if you think you may not qualify, consult a reputable ERC specialist to receive the extra capital you could be eligible for.