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Employee Retention Tax Credit (ERTC) for Coronavirus

Congressional Leaders and the Administration are in intensive discussions over legislation to address the economic impacts of the coronavirus (COVID-19) and there is bipartisan support to act as quickly as possible to protect industry sectors that are in rapid decline, especially travel and tourism, and to protect employment.

An employee retention tax credit (ERTC) is under very serious consideration. Used to address the economic impact of weather disasters since Hurricane Katrina in 2005, the ERTC provides a tax credit equal to 40% of the first $6,000 in wages paid to any employee retained by an employer that has suffered a significant economic downturn as a result of an unforeseen and uncontrollable event, such as hurricanes, floods, and most recently, wildfires. Congressional tax staffs are working to make adjustments to extend the ERTC to employers that are retaining employees despite a loss in revenues as a result of COVID-19. In the case of a weather disaster, the trigger for the credit was “inoperability” defined as a reduction to below 80% of business just before the weather disaster occurred. In the case of COVID-19, the trigger is likely to be a reduction in revenues. In the past the ERTC expires at the earliest of the point at which the business is restored to its pre-disaster levels when the full amount of the credit is used up.

Congress is considering a great many COVID-19 relief proposals but few appear to have the proven track record and bipartisan support of the ERTC. Democrats tend to support it because even though it is a credit for the employer, the basis for it is retention of employees, and Republicans favor the ERTC because of its simplicity and because it essentially subsidizes wages at a time when employers may be having cash flow challenges.

The first set of relief provisions in the House of Representatives are likely to focus more on labor law issues (mandating paid leave for individuals in quarantine) with tax provisions to follow later in the month or early in April.

ERTC supporters will continue to advocate for its inclusion in the COVID-19 tax relief package and a growing number of business advocacy groups have, and will continue to weigh in with lawmakers for its inclusion.

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