How to Qualify for the California Employee Retention Credit

BusinessTaxesERTCClaim
4 min read

Many business owners in the state of California can qualify for the ERC based on a full or partial suspension of business operations or supply chain issues alone. Any governmental order that caused workflow disruptions can negate the need to pass the gross receipts test.

Eligible Employers

Thanks to the Disaster Tax relief Act, Consolidated Appropriations Act (2021, and the American Rescue Plan Act, a CA-eligible employer is now extended to include Recovery Startup Businesses and those who received paycheck protection program (PPP) loan forgiveness.

Government Orders

Any order, proclamation, or decree issued by the Federal government, State, or Local Government in California can be used when claiming shutdown orders had a direct impact on your business.

Verbal Statements

Unfortunately, verbal statements from governmental officials, including comments made during press conferences or media interviews are not considered government orders. The designation of essential or non-essential seemingly varied from jurisdiction to jurisdiction., so it pays to have a local tax attorney on hand when claiming the ERTC.

Example Orders

To justify your ERC claim, written orders from an appropriate governmental authority must have limited commerce, travel, or group meetings or required changes to your working hours due to COVID-19 Some examples include:

  • An order from a city’s mayor stating all non-essential businesses must close for a specified period
  • A State’s emergency proclamation that residents must shelter in place for a specified period
  • An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period
  • An order from a local health department mandating a workplace closure for cleaning and disinfecting.

Stay at Home Order

As stated in CA Executive Order N-33-20, California declared a state of emergency on March 4, 2020, and initiated a stay-at-home- order to curb the spread of covid-19 on March 19, 2020. At this time, California Governor, Gavin Newsom, ordered all CA residents to head the current state public health directives.

The government-mandated order insisted that residents remain within their homes or residences except to maintain the needs of 16 identified federal critical infrastructure sectors. Most non-essential businesses were forced into a complete shutdown during this time, which entitled many business owners to become eligible employers in regard to employee retention credit claims.

Even profitable businesses can be eligible for an ERC refund of qualified wages paid, which includes the employer portion of social security taxes and Medicare taxes.

Public Health Directive

The second decree of CA Executive Order N-60-20 was issued on May 4, 2020. This order included a State Public Health Directive that extended the stay-at-home directive in California with only limited openings for low-risk businesses. The purpose was to follow the American Rescue Plan for the third and fourth quarters of the pandemic years.

Several re-opening stages were set, with a color-coded blueprint and statewide restrictions for things such as indoor capacity limits. The executive orders described the risk categories using a color-coded chart that served as a visual language to help people understand the risk. It ordered risky activities in a scientific chart, using a traffic light’s green-yellow-red symbolism.

Lower-risk businesses and spaces were allowed to gradually open in Stage Two, while those with a higher risk had to wait until Stage Three. Local jurisdictions were then allowed to implement their own public health measures in Stage Four. This final caveat means that some businesses may be required to show proof of local or municipal government orders when claiming employee retention tax credits.

LA Port Congestion

All these public health restrictions above or port congestion issues below led to a large workforce reduction in numerous economic sectors. Many California employers were thusly able to claim a refundable tax credit to recoup employee wages and health insurance costs based on governmental orders alone.

Essential businesses in California, or those who turn a profit during the pandemic, can also claim the ERC by demonstrating how certain supply chain issues like the Los Angeles Port Congestion disrupted a nominal portion of normal business operations.

2020

Beginning in January 2020, there were more ships at anchor and longer wait times in Long Beach and Los Angeles ports. In addition to practical challenges like a lack of truckers and the difficulty of storing empty containers, these ports were also subject to regional regulations that placed restrictions on employee relationships and work hours.

The mayor of Los Angeles County issued several executive orders demanding various safety measures such as self-isolation and social distancing across all businesses, which included dock and warehouse workers.

2021

The COVID-19 outbreaks in Los Angeles and other ports, as well as the required self-quarantine periods, had a significant impact on many taxpayers’ supply chains. It affected roughly 700Los Angeles dockworkers in the first quarter of 2021. Los Angeles County mandated that infected staff remain at home and self-quarantine.

Despite loosening these limits, the Los Angeles County Mayor stated on June 15, 2021, that the county was entering the category-yellow stage.


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