Happy Birthday, Employee Retention Tax Credit: Congress’s Gift to Cash-Strapped Employers Extended Through December 31

The Employee Retention Tax Credit (ERTC) has been expanded and extended further, providing relief to small and large employers affected by COVID-19 business disruptions. As we approach the one-year anniversary of its original enactment, employers should take a fresh look at their eligibility for the expanded ERTC in order to obtain the maximum tax benefits available.

On Wednesday, March 10, 2021, Congress passed the American Rescue Plan Act of 2021 (the Rescue Act). The Rescue Act further expanded and extended the ERTC through the end of 2021, following up on changes made in December 2020 as part of the “Taxpayer Certainty and Disaster Tax Relief Act of 2020” (the Relief Act). The Relief Act and the Rescue Act extended and substantially expanded the availability of the ERTC for both large and small employers, including recipients of Paycheck Protection Program (PPP) loans (who previously were ineligible to claim the ERTC).

The ERTC was created in March 2020 under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to assist employers experiencing economic hardship or closure due to COVID-19. It is a refundable tax credit available to “eligible employers” based on the amount of “qualified wages” paid to certain employees.

On March 1, 2021, the Internal Revenue Service (the IRS) released guidance (Notice 2021-20) (the Notice) addressing the ERTC as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021 (but not addressing the changes that are effective for 2021). The Notice indicates that the Department of the Treasury and the IRS will address the modifications made by the Relief Act applicable to calendar quarters in 2021 in future guidance.

This client alert provides a comprehensive explanation of the ERTC as it applies to calendar quarters in 2020 and in 2021, with discussion on developments from the newly issued Notice, the Relief Act, and the Rescue Act.

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