Many home-based care providers are still feeling the financial fallout from the COVID-19 pandemic, and misconceptions around eligibility status have led to many agencies not engaging with a potentially key resource.
Specifically, they may be leaving money on the table by not taking full advantage — or completely opting out — of the employee retention tax credit (ERC), an unrestricted cash refund from the IRS.
That’s the main takeaway from a National Association for Home Care & Hospice (NAHC) webinar that took place on Thursday.
Broadly, the employee retention credit was one of the main components of the CARES Act, which came to be due to the anticipated financial fallout of the COVID-19 pandemic.
“When the CARES Act was released, the PPP and ERC were actually the two biggest sources of relief for taxpayers,” Maxwell Burns, managing director of EZ-ERC, a boutique tax advisory firm, said during the webinar. “It was so big in the beginning that you could only take one or the other. Most folks took the PPP because it was quicker money, forgivable and easier to get, whereas the ERC is something you applied for and was realized through a payroll tax return.”
Burns noted that the rule preventing taxpayers from benefiting from both the PPP loan and the ERC would eventually be lifted in December of that year.
There are two ways for an agency to become eligible for the ERC. The first is an accounting test to see if the agency had a substantial decline in gross receipts, in any quarter of 2020, or from Q1 to Q3 of 2021.
“[It’s] an objective accounting test, it cares about those 50% or 20% drops in gross receipts and nothing else,” Kyle Morabito, chief legal officer and managing director of EZ-ERC, said during the webinar.
The second test is more subjective. It’s a legal facts and circumstances analysis.
“[The test] says you can disregard revenue margins, profitability or any other financial metric,” Morabito said. “They just want to understand what’s the key performance indicator that most accurately measures your company’s productivity.”
For home health agencies, this is usually either patient encounters or hours of service, Morabito noted.
“The question here becomes, did COVID executive orders cause you to be 10% less productive than you would have otherwise been from a KPI perspective,” he said.
Most businesses get somewhere between $10,000 and $18,000 per employee, according to Burns.
One of the biggest misconceptions about the ERC is that providers that didn’t face revenue dips aren’t eligible for the cash refund.
“Revenue doesn’t always paint the full picture of a company’s hardship during COVID, and even if the company as a whole was profitable, or revenue stayed stagnant or increased, it didn’t mean that the company didn’t have to make very difficult decisions with certain sections or portions of the business itself,” Burns said. “That’s why the IRS came out with these two different tests.”
Another misconception that prevents providers from going after the ERC is the belief that they are ineligible because their business never fully shut down.
Many providers also believe that their agency is too big to qualify for the ERC.
“On its face, you hear the ERC qualifies if you have 100 employees or less for 2020 and 500 employees or less for 2021,” Burns said. “This calculation is a little more difficult on its surface. The way you test the full-time employee count for both 2020 and 2021 is based on your full-time employee count in 2019. Because the IRS wanted to see what your employee count was before you had to start making any decisions related to COVID. You look at your W-2 count for 2019 and you have to exclude any contractors. You also actually exclude any part-time employees.”
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