The Consolidated Appropriations Act of 2021, signed into law on December 27, 2020, significantly enhances a refundable employee retention tax credit (ERTC). The enhancements to the ERTC can provide important benefits to independent schools.

Overview of ERTC

The ERTC was enacted as part of the CARES Act. It provided tax credits to eligible employers whose business operations were suspended as a result of a COVID-19-related government order, or that had certain reductions in gross receipts compared to 2019. The credit offsets the school's portion of payroll taxes. The credit is refundable, so any amounts that exceed the school's share of payroll taxes in a calendar quarter can be refunded to the school or used to offset future payroll taxes.

Changes to ERTC

Schools That Received PPP Loans May Be Eligible. Under the CARES Act, a school that received a Paycheck Protection Program (PPP) loan was not eligible for the ERTC. The new legislation retroactively eliminates this rule; however, the ERTC cannot be claimed for wages funded by a PPP loan (i.e., no "double dipping"). Schools that received PPP loans in 2020 may be able to claim the ERTC for wages that were not funded by the PPP loan. Schools that did not claim the ERTC because of a PPP loan should review the 2020 eligibility requirements to determine whether they can claim the ERTC for wages paid after March 12, 2020.

Extension of ERTC to June 30, 2021. Under the CARES Act, the ERTC was set to expire on December 31, 2020. The new legislation extends the ERTC from December 31, 2020 to June 30, 2021.

Increased Credit Amount for 2021. Under the CARES Act, the ERTC was capped at $5,000 for all eligible wages paid in 2021 (a maximum of $10,000 in qualified wages times the 50% tax credit rate). For the first and second quarters of 2021, the maximum per-employee credit amount is equal to $7,000 per quarter ($10,000 in qualified wages times the 70% credit rate). Thus, the maximum credit for 2021 is $14,000 per employee.

Eligibility Requirements for Employers. For both 2020 and 2021, an employer is eligible for the credit if its operations were either fully or partially suspended by a COVID-19 government order. Many schools will meet this requirement for 2020 and at least part of the first quarter of 2021, as government orders have caused many schools to suspend or modify in-person learning. In addition, for the first and second quarters of 2021, an employer is eligible if it experiences a 20% quarter-over-quarter decline in revenue compared to the same quarter in 2019.

Credit Eligibility for Working Employees. In 2020, an employer with more than 100 full-time equivalent employees could claim the ERTC only for wages paid to employees that were not working or were working a reduced scheduled without a corresponding reduction in wages. For 2021, this threshold is raised to 500 employees. Thus, for the first two quarters in 2021, a school with no more than 500 employees can claim the credit for wages paid to employees who are working.

Wages Eligible for the ERTC. Wages eligible for the ERTC include an employee's regular salary, as well as the employee's share of health benefits paid by the employer.

Claiming the ERTC. The ERTC is claimed on the employer's quarterly payroll tax filings. For schools that did not claim the ERTC in 2020 that are now eligible (for example, schools that were previously ineligible because of a PPP loan), credit-eligible wages paid between March 13 and December 31, 2020 can be claimed on the fourth-quarter payroll tax filing. Alternatively, an employer seeking to claim the ERTC for prior quarters in 2020 could file amended payroll tax returns.

The enhancements to the ERTC will provide significant benefits to many independent schools.