Eligibility For Employee Retention Credit
In order to claim the Employee Retention Tax Credit (ERTC), there are specific qualifications you need to meet. Eligibility requirements are outlined below.
To help trades or businesses retain employees and keep them employed during the COVID-19 crisis, Congress provided a refundable Employee Retention Credit in the CARES Act, later clarified, modified and extended by the TCDTRA and ARPA, that immediately compensates the employer by offsetting quarterly employment taxes.
The credit is available to all employers regardless of size, including tax-exempt organizations, tribal businesses, and businesses in U.S. Territories. There are only two exceptions: State and local governments and their instrumentalities.
PPP Loan
An employer who secures an SBA Paycheck Protection Program (PPP) loan is prevented from using the same wages for forgivable PPP loans and the employee retention credit. No double dipping. (Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA))
Eligible Employers
Must fall into one of two categories (but see “Recovery Start-up Businesses” for an exception):
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Business Operations Curtailed: Eligible employers are employers who were carrying on a trade or business during any quarter in 2020 or during the calendar quarter for which the credit is determined, for calendar quarters beginning after December 31, 2020, and for which the operation of that business is fully or partially suspended.
The operation may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can continue to operate but not at its normal capacity.
Example - A state governor issues an executive order closing all restaurants, bars, and similar establishments in the state in order to reduce the spread of COVID-19. However, the executive order allows those establishments to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. This results in a partial suspension of the operations of the trade or business due to an order of an appropriate governmental authority with respect to any restaurants, bars, and similar establishments in the state that provided full sit-down service, a dining room, or other on-site eating facilities for customers prior to the executive order
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Significant Decline in Gross Receipts: For 2020, employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in 2019 are also eligible. (CARES Act Sec. 2301(c)(2)(B)) The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019. (Act Sec. 2301(c)(2)) This cutoff of eligibility upon return to 80% of a comparable 2019 quarter’s gross receipts is removed for 2021.
For 2021, a significant decline is defined as gross receipts being 80% or less than the gross receipts for the same calendar quarter in 2019 (i.e., there’s a 20% decline in gross receipts). The employer has the option to elect to satisfy the gross receipts test by using the immediately preceding calendar quarter and comparing that quarter to the corresponding quarter in 2019. If an employer was not in existence as of the beginning of the same calendar quarter in calendar year 2019, substitute ‘2020’ for ‘2019’.
Gross Receipts Safe Harbor (Rev. Proc. 2021-33)
Employers may exclude certain amounts from gross receipts solely for determining eligibility for the ERC. These amounts are:
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The amount of the forgiveness of a Paycheck Protection Program (PPP) Loan,
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Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, and
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Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.
Election is made by excluding these amounts solely for determining whether it is an eligible employer for a calendar quarter for purposes of claiming the ERC on its employment tax return. The safe harbor must be applied consistently for determining eligibility for the ERC. An employer claiming the credit must also apply the safe harbor to all employers treated as a single employer under the aggregation rules.
* If an employer was not in existence as of the beginning of the same calendar quarter in calendar year 2019, substitute ‘2020’ for ‘2019’.