ERTC for small business expanded to include all of 2021

The American Rescue Plan Act extends the Employee Retention Tax Credit to Dec. 31.

While there hasn’t been a lot of good news for restaurants during the pandemic, the American Rescue Plan Act (ARPA) contains several helpful measures, especially for smaller businesses. One bright spot is the extension of the Employee Retention Tax Credit (ERTC) from June 30 of this year to December 31, 2021.

Now, if you’re eligible, you can access ERTC for up to $7,000 per eligible employee per quarter for all of 2021, for a potential total credit of $28,000 per employee.

Download Understanding the ERTC Fact Sheet

The ARPA also includes $28.6 billion for Restaurant Revitalization Fund Grants that are administered by the SBA. If you receive a grant, you can use it for payroll expenses in 2021. If you choose to meet payroll expenses with grant funds in any quarter, you can’t receive an ERTC for that period. The SBA and IRS plan to release more details on this coordination.

Here’s a reminder of how the ERTC works.

Eligible restaurants. Restaurants with 100 or fewer full-time employees can access the ERTC for employees working in 2020. Companies with 500 or fewer full-time equivalent employees (FTEs) can access the ERTC for those employees working in 2021. The tax credits are only available for payroll wages and/or group benefits you didn’t pay directly with PPP loan funds. Your employer status (small or large) is based on the aggregate number of FTEs you employed in 2019.

Eligible employees. FTEs are those who work at least 30 hours per week or 130 hours a month.

If you first opened in 2019, calculate the number by taking the sum of the number of FTEs in each full calendar month your restaurant was open in 2019 and divide by that number of months.

If you first opened in 2020, use the same approach to calculate your FTEs.

Eligible circumstances. Since lawmakers intended this as pandemic relief, you can only get the ERTC if 1) your operation was partially or fully suspended by governmental authority due to COVID-19 (including capacity restrictions due to social distancing, full or partial closure of indoor dining, or closure of all on-site dining); or 2) your business experienced a significant decline in sales when comparing a calendar quarter (or prior quarter) to its matching quarter in 2019.

Eligible wages. Qualified wages are defined by IRS Code in section 3121(a) and section 3231(e). You can include group health plan expenses, such as monthly insurance premiums, which will come as a relief to many restaurants who continue to support their staff.

Ineligible wages. Wages are qualified for an ERTC only if the wages are made to an employee who continues to be employed in the calendar quarter for which the credit is being claimed. Any payments correlated with a former employee’s termination of employment are not qualified wages because they are payments for the past employment relationship and not attributable for employee retention credits.

Advance payments. For 2020, the IRS allowed employers to reduce deposits of employment taxes when anticipating ERTC for qualified wages by filing IRS Form 7200. For 2021, advance payments of the ERTC are permitted only for small employers (500 or fewer employees during 2019) and only up to 70% of the average quarterly wages employers paid in calendar year 2019.

Tax treatment. If you receive an ERTC for qualified wages you paid in 2020 or 2021, you can’t also deduct those wages as a business expense from your federal taxable income.

Always consult your accountant or tax advisor on these and other matters. For more information on the ERTC, click on the following links:

• “IRS provides guidance for employers claiming the Employee Retention Credit for first two quarters of 2021,” IRS, April 2, 2021
• “Notice 2021-23 and Employee Retention Credit for First Two Calendar Quarters of 2021,” KPMG, April 6, 2021
• “IRS provides guidance for employers claiming the Employee Retention Credit for 2020, including eligibility rules for PPP borrowers,” IRS, March 1, 2021
• “2020 Guidance for Employee Retention Tax Credit, Notice 2021-20,” IRS, March 1, 2021
• “Notice 2021-20 provides much anticipated guidance regarding the employee retention credit for KPMG, March 5, 2021