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Overview of the ERC for Law Firms

May 24, 2023 by Jamon McBride

employees discuss automated I-9 management

Assisting employers with Employee Retention Credit (ERC) claims has provided insight into the numerous challenges businesses faced during the pandemic. Law firms are among those employers with operations that may have been fully or partially suspended due to government orders. Orders implemented to mitigate the spread of the virus may have significantly impacted law firms’ operations. Despite these challenges, there are several misconceptions making it difficult for law firms to understand if they’re eligible for the ERC. In this overview, I aim to explore these misconceptions and provide some examples of eligibility to explain how some law firms may be able to claim the ERC. It is critical for employers to have this clear understanding of whether they qualify for the ERC or not, and avoid filing a claim until they can be sure of their qualifications.

ERC Provides Relief for All Types of Eligible Employers

The ERC is a refundable tax credit introduced by the CARES Act in 2020 to help employers retain employees during the pandemic. It can provide eligible employers with a credit to apply to their payroll taxes during certain quarters of 2020 and 2021. Depending on individual facts and circumstances, the ERC is an opportunity for an eligible employer from any industry to financially recover if they maintained employees on their payroll. Yet, there is still confusion regarding the ERC for law firms.

Common Misconceptions for Law Firms

One of the most common misconceptions is that the ERC is only available to businesses that experienced a decline in gross receipts. However, employers that were required to fully or partially suspend their operations due to government orders are also eligible for the ERC if they meet a certain more than nominal threshold.

Another misconception we often see is that law firms believe they cannot qualify for the ERC due to being classified as an essential business. Many firms were allowed to maintain operations, often with some in-office restrictions or working from home. While they were allowed to operate, many firms nevertheless faced modifications that could contribute to eligibility based on the partial suspension test.

Finally, many firms believe that if their annual revenue did not drop by the amounts required for qualification, they cannot claim ERC. However, eligibility due to gross receipts declines is based on a comparison of quarterly gross receipts and not annualized. Many firms do not have flatline revenue so it is possible to see a reduction of gross receipts that leads to qualification in some quarters while not seeing a drop in annual gross receipts.

ERC for Law Firms Eligibility

While many firms were able to stay open, the services they performed and offered to their clients were often impacted due to government orders relating to COVID-19. For example, in many jurisdictions, there were restrictions on access to the courts, jury trials, or moratoriums on practices such as foreclosures and evictions. In many areas across the country, law firms were prevented from meeting with incarcerated clients or conducting in-person depositions.

Claiming the ERC

Law firms negatively impacted by government orders during the COVID-19 pandemic should seriously investigate the Employee Retention Credit (ERC). Despite misconceptions, law firms may be eligible for the ERC and should explore their qualifications. It can be beneficial for law firms to work with a trusted third-party provider to help them determine eligibility and file an accurate claim.

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