On March 18, 2020 the CARES Act became law and established the Employee Retention Tax Credit ("ERTC") which provided up to $5,000 in tax credits to employers that had experienced a 50% decline in revenues. Frankly, this didn't receive much attention for two main reasons: (1) A business could not get the ERTC if they participated in the Payroll Protection Program Loan regime ("PPP"), and (2) most businesses did not experience a 50% decline in revenues. These issues have been resolved for the first two quarters of 2021 and the plan has become considerably more lucrative. Read on - - -

Consolidated Appropriation Act, 2021 ("CAA")
(Passed into law December 27, 2020)

The CAA is a massive piece of legislation including 5,593 pages covering a wide variety of topics. According to the Senate Historical Office it is the longest bill ever passed by Congress. Of particular importance to many employers will be the revisions to the ERTC.

PPP Loan Participation
The CARES Act prohibited an employer from participating in the ERTC if the business availed itself to the PPP Loan. That prohibition has been removed such that a company can participate in BOTH programs.

This creates a planning opportunity because if your business qualified for the ERTC in 2020 you may be able to still claim that credit in 2020 for pay periods that were not used to support PPP Loan Forgiveness. (Note: All other rules for the 2020 ERTC remain the same including the requirement for at least a 50% reduction in revenue.)

Revenue Reduction Criteria
The CARES Act prescribed that a business needed to experience a 50% decline in revenues to qualify for the ERTC. For the period of January 1, 2021 through June 30, 2021 that reduction has been revised to just a 20% reduction, a hurdle we believe many more businesses will meet in the next two quarters.

  • Revenue in the First Quarter of 2021 is compared to the First Quarter of 2019
  • Revenue in the Second Quarter of 2021 is compared to the Second Quarter of 2019
  • There is a technical provision that allows a business to look back at the Fourth Quarter of 2020 compared with the Fourth Quarter of 2019 in order to qualify in the First Quarter of 2021.

These comparisons are designed to to allow more businesses to qualify for the ERTC and also to not require a 20% reduction in revenue to be compared to a quarter in 2020 that was already adversely effected by the pandemic.

Amount of the Credit
Under the CARES Act the credit was 50% of wages up to $10,000 during all of 2020, so an employer was capped at a potential ERTC of $5,000 per employee. While this is an attractive sum, most employers took the PPP Loan instead as that was the most beneficial option available.

The CAA revised the credit for the first six months in 2021, after which the ERTC is set to expire and no longer be available. The new ERTC is 70% of wages up to $10,000 for each of the first two quarters of 2021. That makes the potential ERTC a possible $14,000 per employee in the first six months of 2021! And remember - this is a TAX CREDIT. It is deducted directly from the Federal Tax Deposit the employer might otherwise remit for payroll taxes. It is also a refundable credit, meaning if the available credit exceeds the tax liability the employer will receive the "excess" credit as a refund.

Eligible Business Size Limitations
Under the CARES Act the ERTC was only available to employers with less than 100 employees. The CAA has revised that limitation to 300 employees.

Don't let this opportunity pass
Please let us know if compared to the prior year-

  • You had a 50% revenue reduction in any quarter of 2020

  • You had a 20% revenue reduction in Fourth Quarter 2020

  • You anticipate a 20% reduction in the coming two quarters compared with the same period in 2019

Don't let this opportunity pass - it is not likely to be repeated.

If you have any questions about these rules please contact our office.