ERC for Law Firms and Lawyers
It is still possible for law firms to qualify for tax credits despite partial closures or drops in gross receipts in 2020 and 2021. Legal practices may be eligible for the credit if they are or were subject to government mandates as a result of certain courts closing in 2020 and perhaps into 2021. Law companies can submit updated payroll tax returns to receive ERC benefits.
Even though a law firm never saw a revenue decline attributable to the pandemic, they may be qualified for relief from the ERC if their business operations were temporarily interrupted as a result of court closures (civil, criminal, immigration, etc.), moratoriums on collections/foreclosures, and other considerations. Government orders during the pandemic that caused qualifying partial shutdowns were more frequent than many companies may believe, notably for legal firms with practices depending on:
- open, staffed, and fully operational courthouses
- a large range of in-person interactions, especially the ability for in-person jury trials, for which there are no equal virtual alternatives
ERC Qualifications for Law Firms
A law firm’s revenue for a quarter in 2020 must have declined by 50% from the same quarter in 2019. The law firm will continue to be eligible until its gross revenue for the same quarter in 2020 exceeds 80% of its gross revenue for the same quarter in 2019. When compared to the same quarter in 2019, you must show a 20% drop in the 2021 quarter. A look-back quarter can also provide more eligibility.
Legal practices that began operations after February 15, 2020, automatically qualify for a cash return of up to $100,000 for the third and fourth quarters of 2021. It is not essential to meet any financial or governmental requirements to qualify. For a law firm to qualify, its annual revenue must be under $1 million.
Numerous complex calculations are used to calculate the ERC. The IRS guideline is continually changing, therefore specific understanding is needed. Naturally, law firms seek to maximize their use of all government benefits, including the ERC, PPP loan forgiveness, COVID sick pay, COVID family leave pay, and personal and professional relationships. Since legal practices cannot apply for two programs at once, they must submit the appropriate paperwork.
Please be aware that many businesses that help a company file the paperwork charge 20% to 30% of the ERC refund.
One of the biggest opportunities for relief is the ERC, which was launched in March 2020 and allows impacted law firms by the COVID-19 pandemic up to $26,000 per employee in 2020 and 2021. Even for those legal practices that are already beginning to recover, employers can retrospectively register for the ERC based on hardships experienced throughout 2020 and the first three quarters of 2021. A few examples of difficulty are:
- shuttered courts
- limitations on jury trials
- prohibited in-person depositions
- prohibited in-person meetings with incarcerated clients
- reduction in services offered to your clients
Legal firms should take into account court restrictions, delays connected with trials where in-person juries were not allowed, as well as limitations and/or disruptions that changed how law firms could operate due to governmental mandates. Keep in mind the way that the courts were allowing firms to address matters before the court.