Recently expanded and extended, the Employee Retention Tax Credit (ERTC) is a refundable tax credit that encourages businesses to keep employees on their payroll. It’s worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. As well, under the recovery startup provision, small businesses can claim up to $100,000 in Q3/Q4 of 2021.

Find out if you qualify

How to Qualify for the Employee Retention Tax Credit

There are three ways to qualify for the ERTC:

1. Significant decline in quarterly gross receipts — 20% or more decline in 2021; 50% or more decline in 2020
2. Full or partial government shutdown — hindering more than a nominal portion of operations; also consider key vendors
3. 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 lookback 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

Examples of Qualified Companies

It is important to safeguard access to these tax credits. Our team at Clarus R+D can verify your eligibility, optimize your credit, and deliver documentation to support your claim.

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On March 12, 2021, President Biden signed into law the American Rescue Plan Act, which provides approximately $1.9 trillion in spending to address the continued impact of COVID-19. The American Rescue Plan is a followup to the CARES Act, which became law in March 2020, as well as the Consolidated Appropriations Act, which was adopted in December 2020.

The Employee Retention Tax Credit (ERTC) was expanded significantly through the Consolidated Appropriations Act to allow PPP recipients to participate in the program. This creates a compelling lookback opportunity. Plus, the Act extended ERTC through June 30, 2021 and enhanced its benefits on a go-forward basis. Businesses should take the time to understand these changes. Many companies can now benefit more from ERTC than they did from the PPP program.

Find out if you qualify

The American Rescue Plan further extended the ERTC through December 31, 2021, and expanded eligibility through the recovery startup provisions. The following is an overview of the recovery startup opportunity signed into law under the American Rescue Plan.

Recovery startup opportunity

In an effort to encourage small businesses to invest in new business opportunities and create employment, Congress has provided for an Employee Retention Tax Credit for small businesses that have recently started a new trade or business and those who will do so before the end of 2021. A business must meet both of these criteria:

Eligibility

1. Began carrying on any new trade or business after February 15, 2020; and
2. Has an average annual gross receipts of no more than $1,000,000 for the three year period ending December 31, 2020

Credit amount

The credit amount is 70% of qualified wages paid from either the start of the new trade business or July 1, 2021, whichever is later. Qualified wages are capped at $10,000 per employee per quarter. Under the Recovery Startup criteria, the total credit cannot exceed $50,000 per quarter, with the potential for a maximum of $100,000. A business can begin taking the credit in the 3rd quarter of 2021.

What constitutes starting a new trade or business?

This concept is not well defined in the tax code. At a minimum, a business must meet the following two criteria:

1. Enter into and carry on a new activity with a good-faith intention to earn a profit; and
2. Engage in the new activity on a regular and continuous basis

Other factors the IRS will consider in determining if an activity represents a new trade or business:

• Are there separate books and records, facilities, locations, employees, and bank accounts?
• Are you operating separate types of businesses or activities?
• Is the new trade or business seen as separate to the public from your business?
• Are the customers of the two divisions the same or mutually exclusive?
• Does each business have requisite assets and employees for the production of income?

No single factor is definitive as to whether an activity will establish a new trade or business. However, the following example can be helpful.

Example

A licensed plumbing contractor currently selling and installing plumbing supplies hires an employee to begin a sewer and drain cleaning offering. This new business requires additional training and specialty equipment. Although a new bank account is not established and separate facilities are not required, this new activity should represent a new trade or business.

Find out if you qualify

In December 2020, Congress passed the Consolidated Appropriations Act (CAA) of 2021. Originally, the CARES Act provided an employee retention tax credit (ERTC) to eligible employers for qualified wages paid after March 12, 2020, and before January 1, 2021. The ERTC was designed to reimburse businesses with lost economics due to the impact of COVID.

To be eligible for the credit, an employer must have experienced a full or partial shut down of operations due to a COVID-19 related government order, or a significant decline in gross receipts (as defined under the CARES Act).

The CAA arrived as many measures were set to expire at the end of 2020. Though the CAA is an extension of the CARES in some ways, there are some key differences. The most significant are changes to the Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC).

ERTC for 2020

• Credit of 50% of qualified wages
• Qualified wages limited to $10,000 per year per employee
• Small employer capped at 100 FTEs in 2019
• Decline in gross receipts threshold at 50% compared to 2019
• Originally under the CARES Act if an employer took a PPP loan they could not take advantage of the ERTC. However, with the passage of the CAA those employers can now participate which creates a lookback opportunity.

ERTC for 2021

• Credit of 70% of qualified wages
• Qualified wages limited to $10,000 per quarter per employee
• Small employer capped at 500 FTEs in 2019
• Decline in gross receipts threshold at 20% compared to 2019
• If had a PPP loan, can claim the ERTC (excluding wages required to obtain forgiveness of a PPP loan).

Learn more about your ERTC eligibility

The COVID-19 pandemic has created a challenging economic environment for businesses of all shapes and sizes. Now more than ever, these businesses are seeking out resources and advice as to how to move forward and put themselves in the best position for the future. One way companies can put money back into their pockets is through federal and state tax credits, including the Employee Retention Tax Credit (ERTC).

The House and Senate are considering new legislation that would remove certain restrictions to claiming the ERTC, maximizing the benefits of the program for small businesses. If approved, employers could claim the ERTC in addition to the R&D tax credit.

What is the ERTC?

In March of 2020, Congress passed the CARES Act as a response to the COVID-19 pandemic. One part of the CARES Act was the Employee Retention Tax Credit (ERTC), a payroll credit of up to $5,000 per employee, aiming to relieve some of the financial stress that many businesses are facing due to the coronavirus. The main purpose of the ETRC is to incentivize businesses to maintain their payroll, even if they have been negatively affected by COVID-19.

Possible Changes

Initially, there were limitations that prevented employers from claiming the ERTC if they received a PPP loan, which is also part of the CARES Act. Currently, the House and Senate are considering new legislation that would remove certain restrictions to claiming the ERTC, maximizing the benefits of the program for small businesses. If approved, employers could claim the ERTC in addition to the R&D tax credit.

The details and structure of the legislation are still being decided by the House and Senate. However, the government is attempting to use these tax incentives to pump money into the US economy, which could have a significant financial impact on small businesses.

• In addition to claiming the R&D tax credit, businesses can take advantage of the ERTC program — essentially stacking the credits on top of each other.
• The House and Senate are considering the expansion of eligibility to qualify a greater number of businesses.
• Congress has proposed increasing the size of ERTC credits for eligible businesses.

Since the ERTC is fully refundable, you can use the R&D tax credit against your FICA tax obligation first, then claim the ERTC, maximizing your tax benefits.

It’s important to note that the R&D tax credit and ERTC are both credits against your payroll tax. And since the ERTC is fully refundable, you can use the R&D tax credit against your FICA tax obligation first, then claim the ERTC, maximizing your tax benefits.

To maximize cash savings, companies should consider combining R&D tax credits and ERTC as a part of their payroll relief options with COVID-19 aid packages. Clarus R+D can help you navigate recent legislation to ensure you capture all available cash savings opportunities.

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