How to Qualify for the Employee Retention Tax Credit
Source: Clarus R+D | April 21, 2021
There are three ways to qualify for the ERTC:
- Significant decline in quarterly gross receipts — 20% or more decline in 2021; 50% or more decline in 2020
- Full or partial government shutdown — hindering more than a nominal portion of operations; also consider key vendors
- Recovery startup — start a new trade or business after February 15, 2020 with average annual revenue < $1 million
Since the government expanded this program, it’s important to realize that businesses may now retroactively claim the ERTC in addition to the Paycheck Protection Program loan. If a business was affected by a government-ordered shutdown or had at least a 50% decline in quarterly gross receipts, this creates a compelling look back opportunity for 2020.
The 2021 threshold for ERTC is even more accessible. A business can now qualify if they had a 20% decline in gross receipts in 2021 compared to the same quarter in 2019.
Particularly impactful for some small businesses is the recovery startup opportunity, where the ERTC can be claimed if they:
- Began a new trade or business after February 15, 2020, and
- Have average annual gross receipts of no more than $1 million for 2018-2020.
Value of the Employee Retention Tax Credit
- For 2020: up to $5,000 per employee, per year
- For 2021: up to $7,000 per employee, per quarter
- For recovery startup: capped at $100,000 claimed in Q3/Q4 2021
Key Considerations and Complexities
- Double dipping: Cannot claim multiple tax credits (e.g., PPP, WOTC, R&D, etc.) with the same wages
- Recovery startup: Begin your new trade or business before June 30, 2021 in order to optimize value in Q3 and Q4 of 2021
- Substantiation requirements: Extended audit window for ERTC claims
- Period eligibility: Differences in eligibility and calculation from 2020 to 2021
- How to count employees: Full-time employees, not full-time equivalents
The Employee Retention Tax Credit (ERTC) under the CARES Act is a fully refundable payroll tax credit. Significant updates to the ERTC were finalized by the Consolidated Appropriations Act in December 2020, the American Rescue Plan Act in March 2021, as well as the Infrastructure Investment and Jobs Act in November 2021.
Companies that received PPP loans may now also claim the ERTC. Additionally, nearly every aspect of the credit was liberalized and extended into 2021.
Who is eligible?
Companies qualify for the ERTC if they (1) had a decline in quarterly revenue, or (2) were fully or partially shut down due to governmental orders, or (3) began a new trade or business with less than $1 million in average annual revenue.
What is it worth?
For 2020, the ERTC is worth up to $5,000 per employee per year. In 2021, it’s worth up to $7,000 per employee per quarter.
When does it end?
The eligibility period for many companies ended on September 30, 2021. However, recovery startup businesses are eligible through the end of 2021. Employers can retroactively claim the credit against past quarters.
(Source: Clarus R+D | April 21, 2021)