The Employee Retention Tax Credit (ERTC) is a tax credit aimed to incentivize businesses to keep employees on their payroll despite revenue reductions during the COVID-19 pandemic.
Congress originally created the ERTC under the CARES Act of March 2020, but the tax credit has now been significantly enhanced and extended to aid struggling businesses, including hotels. With the latest stimulus package signed into law on December 27, 2020, there are several key changes to the ERTC that benefit hotels.
One major change is that PPP borrowers who also qualify for the ERTC can now claim the tax credit (such credit was previously barred under the CARES Act for businesses that obtained PPP loans). This is true both retroactively for 2020 and prospectively in 2021. Note: any wages upon which an ERTC is computed are not forgivable under the PPP. Thus, there is no “double-dipping” for PPP funds and ERTC being used to cover the same payroll costs.
Also, eligibility requirements have been expanded for hotels seeking to claim the ERTC in 2021. Whereas in 2020 a hotel needed to show a more than 50% decline in gross receipts comparing one quarter to the same quarter in 2019, that threshold has been lowered. For 2021, a business now only needs to show a 20% decline in gross receipts to qualify.
The original tax credit available under the CARES Act was capped at $5,000 for all qualified wages paid during 2020 (the credit amount of $10,000 in qualified wages X 50% tax credit rate). However, the maximum allowable credit for 2021 is now increased to $7,000 for each of the first two quarters of 2021 ($10,000 in qualified wages X 70% tax credit rate). Therefore, the maximum credit for 2021 is $14,000. This aggregate $14,000 per employee maximum credit for the first two quarters of 2021 is available even if the employer received the $5,000 maximum credit for wages paid to that same employee in 2020.
Period of Availability
The period of tax credit availability has been extended for qualified wages paid after March 12, 2020 and before July 1, 2021 (extended through the first two quarters of 2021). The ERTC was previously set to expire at the end of 2020.
The combined effect of the above changes is significant for lodging operators.
We encourage all hoteliers to coordinate with your tax preparers and payroll companies immediately to see if you can take advantage of 2020 and 2021 credits. You may also contact the IRS directly if you have questions.