By James J. DeLuca, CPA, MST
Senior Tax Manager

Among the provisions of the Covid-19 relief legislation enacted in late December 2020 is a significant expansion of the Employee Retention Tax Credit (ERTC). The ERTC is a key tax incentive for businesses that retain workers as the Covid-19 crisis continues to wreak havoc on the economy.

The COVID-19 relief legislation enacted in late December significantly expanded a key tax credit that incentivizes employers to retain workers as the pandemic continues to hurt business.

The Employee Retention Tax Credit (ERTC), first created by the Coronavirus Aid Relief and Economic Security (CARES) Act enacted in March 2020, allows certain employers to take an immediate tax credit to help offset the costs of keeping workers on the payroll rather than laying them off. The credit can be used to offset both wages and the costs of health care benefits.

Under the new stimulus law, several changes expand the availability of the tax credit, including:

• The timeframe the tax credit covers is extended to July 1, 2021. Originally, it covered payroll and health care costs from March 12 through December 31, 2020.
• Employers who have received Payroll Protection Program (PPP) loans may now utilize the ERTC for any payroll costs not covered by their loans. This may impact your application for PPP loan forgiveness, so consult your G.T. Reilly advisor first.
• The amount of the credit is increased to 70% of the qualified wages and health care benefits paid to employees, up from 50% in the original legislation.
• For 2021, the maximum amount of the credit is $7,000 per quarter for each of the first two quarters, or an aggregate maximum of $14,000 for the year. The maximum credit for 2020 was $5,000.
• Employers will be able to realize the tax credit before paying the wages it will offset, under guidance that is yet to be drafted by the U.S. Treasury Department.
• As of January 1, 2021, the ERTC is available to certain government-run institutions, including state-run or community colleges, universities, and hospitals, as well as certain organizations chartered by Congress, such as Fannie Mae, the federal credit unions and Federal Home Loan Banks.
• Businesses with 500 or fewer employees will be allowed to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year.
• New employers who were not in existence for all or part of 2019 to be able to claim the credit.
• Reaffirms prior IRS guidance that group health plan expenses can be considered qualified wages even when no wages are paid to an employee for a certain period of time.

To help determine whether the expanded ERTC will benefit your business, consider the following questions:

• Was your business shut down partially or completely in 2020 due to a government shutdown order?
• Did you have any quarter in 2020 in which gross receipts were at least 20% less than the same quarter in 2019?
• Did you pay employees who were not working in 2020?
• Did your company have less than 500 employees for 2019?
• Have you filed, or are you planning to file, a PPP loan forgiveness application only using payroll figures?

The answers to these and other questions can help determine the ERTC’s value for you. Contact your G.T. Reilly tax advisor for further guidance.