If you’re considering the Employee Retention Tax Credits under the CARES Act, we recommend reviewing the newly released FAQS from the IRS, specifically regarding the Employee Retention Tax Credit. The IRS has released 94 FAQs with calculation examples. You can review the FAQs here. You can also find a high level overview here.
Below are some of the highlights from the newly released FAQs.
Eligible Employers for the Employee Retention Tax Credit
Eligible Employers that are entitled to claim the Employee Retention Credit are private-sector businesses and tax-exempt organizations that carry on a trade or business during calendar year 2020 and either:
- Have operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experienced a significant decline in gross receipts during the calendar quarter.
A “trade or business” is defined in section 162 of the Internal Revenue Code. An activity does not qualify as a trade or business unless its primary purpose is to make a profit and is carried on with regularity and continuity. For purposes of the Employee Retention Credit, a 501(c) tax-exempt organization that is exempt from tax under section 501(a) of the Code is deemed to be engaged in a “trade or business” with respect to all operations of the organization.
Aggregation Rules Related to the Employee Retention Tax Credit
FAQs 25 through 27 cover how aggregation rules are applied for related businesses entities. The aggregation rules are used to:
- Determine whether the employer has a trade or business operation that was fully or partially suspended due to orders related to COVID-19 from an appropriate governmental authority.
- Determine whether the employer has a significant decline in gross receipts.
- Determine whether the employer has more than 100 full-time employees in 2019.
- Preclude an employer from claiming the Employee Retention Credit if any member of the aggregated group received a Paycheck Protection Program (PPP) loan under the Small Business Act.
Operations Partially or Fully Suspended Due to Government Order
FAQs 28 and 29 clarify and provide examples of when a business is partially or fully suspended due to a government order limiting commerce, travel, or group meetings due to COVID-19. Statements from officials made during press conferences are not “government orders” nor is the declaration of a state of emergency.
Specific examples of government orders include:
- An order from the city’s mayor or state governor stating that all non-essential businesses must close for a specified period;
- A State’s emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and may travel to and work at the workplace location;
- An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period.
The IRS clarifies that an employer’s voluntary decision to close or limit hours due to COVID-19 does not qualify the employer for Retention Credits.
Significant Decline in Gross Receipts
An employer may also be eligible to claim Retention Credits if it experiences a significant decline in gross receipts when compared to the same calendar quarter in 2019. FAQs 39 through 46 cover how to calculate a significant decline in gross receipts. Notably, the FAQs state that the CARES Act does not require that the significant decline in gross receipts be related to COVID-19.
Average Number of Full-Time Employees Employed in 2019
Qualified wages for the retention credits are determined based on the average number of full-time employees employed in 2019. Employers with over 100 average full-time employees in 2019 may only claim credits for qualified wages paid to employees who were not providing services during a government shutdown or significant decline in gross receipts whereas employers with 100 or under average full-time employees in 2019 may also claim credits for employees who were working during the same periods.
A full-time employee is defined as an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. Aggregation rules will apply for related entities.
FAQ 54 also clarified that employers with more than 100 Full-time employees in 2019 may claim credits if an employee’s work schedule is reduced but the employer continues to pay the employee their full wage. For example, if an employee’s hours were reduced by 40% but the employer continues to pay the employee at 100%, the employer may claim credits for wages attributable to the 40% of time the employee was not working.
Clarifications Regarding Qualified Wages
An employer may not claim credits for wages that are exempt from Social Security and Medicare taxes. Wages paid to employees who are related individuals are not considered qualified wages. FAQ 59 defines “related individuals” but generally states wages paid to family members of an owner who owns more than 50% of the corporation are not qualified wages. Lastly, wages paid for FFCRA leave and employees included for Work Opportunity tax credits are not eligible wages.
Qualified Health Expenses
FAQs 62 through 72 provide detailed information regarding Qualified Health Expenses. Generally, the qualified health plan expense is the amount that is allocable to the hours for which the employees receive qualified wages. The amount of qualified health plan expenses taken into account generally includes both the employee and employer portion of pre-tax contributions but does not include after-tax health contributions. Qualified health plan expenses may include contributions to an HRA, or a health FSA, but does not include contributions to a QSEHRA. For employers with an average of over 100 full-time employees in 2019, the employer may not claim qualified health expenses that it paid for employees who were furloughed but the employer continued to pay health coverage. Wages must also be paid by the employer in order for the employer to claim the health expense. However, if an employer with over 100 full-time employees in 2019 is paying an employee a reduced amount of wages for hours that the employees are not providing services the health plan expense must be allocated to the time that the employees are being paid but are not providing services.
How to Claim the Employee Retention Tax Credit
Employers will report their total qualified wages for each calendar quarter on their Form 941. In anticipation of receiving credits, employers can fund qualified wages by: (1) accessing federal employment taxes, including withheld taxes that are required to be deposited with the IRS, and (2) requesting an advance of the credit from the IRS for the amount of the credit that is not funded by access. If an employer owes $8,000 in federal employment taxes and the employer has $10,000 in qualified wages, the employer may keep $5,000 of the $8,000 of the taxes the employer was going to deposit, and the employer will not owe a penalty. The credit is a per employee limit of 50% of qualified wages in a quarter up to a cap of $5,000 per employee for the calendar year. See FAQ 47.
If an employer is also deferring social security tax under Section 2302 of the Cares Act and taking advantage of the any credits for Families First Coronavirus leave, the federal tax deposits must first be reduced by (a) any amount of the employer’s share of social security tax deferred under section 2302 of the Cares Act and (b) any amount of federal employment tax not deposited in anticipation of credits claimed for the FFCRA leave before reducing the federal tax deposit by qualified wages. If an employer does not have sufficient federal employment taxes to cover the available credits, the employer may obtain advance credits by filing a Form 7200. However, an employer should not file a form 7200 if it has not paid qualified wages in excess of its federal employment taxes.
Income and Deduction
An employer receiving a tax credit for qualified wages does not include the credit in gross income for federal income tax purposes. However, the Employee Retention Credit does reduce the amount of expenses that an employer could otherwise deduct on its federal income tax return.
Stay Up-to-Date with the CTR COVID-19 Information Center for Businesses
The IRS is constantly updating guidelines and providing clarifications on the employee tax credit and other information. We’re remaining vigilant to ensure you and your organization have the most current information possible. Be sure to visit our FAQs page and bookmark our COVID-19 Information Center for constant updates.