Largely Ignored Tax Credit for Small Businesses

Employee Retention Credit

Since the federal government passed the CARES Act, most media coverage has focused on the individual stimulus payments, grants to large corporations, or loans and grants administered by the SBA. However, many business owners have wondered what federal assistance they can receive without having to apply for a loan.

A significant but largely ignored portion of the CARES Act provides for payroll tax credits for businesses. This is a significant tax incentive for employers to keep their employees on payroll even though their operations have been reduced or suspended. To claim the credit, businesses must meet the following criteria.


To claim the tax credit, an employing business or non-profit entity must carry on a trade or business in 2020 and either:

  • Fully or partially suspended operations due to a governmental authority’s orders due to COVID-19, or;
  • Experience a significant decline in gross revenue during the calendar quarter.

What Constitutes a Significant Decline

Each quarter’s revenue is measured against the prior year’s calendar quarter. If the current quarter’s gross revenue is less than 50% of same quarter in 2019, that constitutes a significant decline and the business may claim the credit. The significant decline ends when quarterly receipts exceed 80% of the same quarter in 2019, or the first calendar quarter of 2021.

Maximum Credit

The credit is equal to 50% of qualified wages paid, limited to $5,000 per quarter.

PPP Loan Recipients Not Eligible

If a business receives a Paycheck Protection Program (PPP) loan it may not claim the Employee Retention Credit. The tax credit may be useful for any businesses who are not approved or do not receive a PPP loan.

FFCRA Credit Recipients May Qualify

A business receiving a tax credit for wages paid under the Families First Coronavirus Response Act (FFCRA) because an employee takes sick or family leave is not disqualified from claiming the Employee Retention Credit. However, the employer may not count any wages paid under the FFCRA when applying for the Employee Retention Credit.

How to Claim Credit

Qualifying businesses may file Form 7200 to claim a credit advance on their quarterly employer taxes. The credit will be applied to the company’s tax due and reported on Form 941.  However, the credit only applies to wages paid after March 12, 2020 and before January 1, 2021.

The Tax Credit is Fully Refundable

The Employee Retention Credit could result in refunds to qualifying employers. If a business is entitled to a tax credit which exceeds the employer’s taxes on all employees’ wages, the excess is treated as an overpayment. This overpayment is then credited to any other tax liability, with the balance returned to the employer.

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