The IRS has posted FAQs for the Employee Retention Credit (ERC) included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020. FAQ topics provide the latest perspective of the Treasury Department regarding eligibility requirements, applicable types of governmental orders, whether operations are fully or partially suspended, credit maximum, and how to determine a significant decline in receipts, among other considerations. Though FAQs may not be relied upon as legal authority and are therefore non-binding, they do provide some clarification for how employers may likely use ERCs to help offset the impact of keeping employees on their payroll. The following is a brief overview of key issues addressed by the FAQs.
What Is Covered?
The employee retention credit applies to qualified wages paid from March 13, 2020 through December 31, 2020 by employers experiencing economic hardship or closure due to COVID-19. The credit equals 50% of qualified wages and qualified health plan expenses paid in a calendar quarter up to a maximum of $10,000 per employee. Accordingly, the maximum credit per employee is $5,000, whether the credit is taken for one quarter or aggregated across multiple quarters. FAQ 47 provides the following examples:
Example 1: Employer M pays $10,000 in qualified wages to Employee A in the second quarter of 2020. The Employee Retention Credit available to Employer M for the qualified wages paid to Employee A is $5,000.
Example 2: Employer N pays $8,000 in qualified wages to Employee B in the second quarter 2020 and $8,000 in qualified wages in the third quarter 2020. The credit available to Employer N for the qualified wages paid to Employee B is equal to $4,000 in the second quarter and $1,000 in the third quarter due to the overall limit of 50 percent of $10,000 of qualified wages per employee for all calendar quarters.
For large eligible employers (more than 100 employees), qualified wages are wages paid to an employee for “not providing services” due to a full or partial shutdown or a significant decline in gross receipts. To claim the credit, large employers may not pay an employee more than he or she would have been paid for working the equivalent time during the 30 days immediately preceding the eligible period. For small eligible employers (100 or fewer employees), qualified wages are wages paid to “any employee” during a calendar quarter due to a full or partial shutdown or a significant decline in gross receipts.
Full or Partial Shutdown?
An employer may be eligible for the ERC if its business is fully or partially suspended during a calendar quarter due to a governmental order or if it experiences a significant decline in gross receipts. Generally, “[t]he operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings . . . due to COVID-19 such that the employer can still continue some, but not all of its typical operations.” An “essential business” is not considered to be partially (or fully) suspended even if a governmental order requiring non-essential businesses to close affects its operations. However, where a governmental order affects suppliers of critical goods or materials to the essential business it may qualify as partially or fully suspended and an essential business may also qualify due to a significant decline in receipts, as discussed below. Non-essential employers may qualify as fully or partially suspended where a governmental order requires a reduction in operating hours, but conversely would not qualify where it is ordered to close its workplace and is able to continue operations. As should be clear with these limited examples, whether and how your business might qualify as fully or partially suspended depends on your specific situation.
Significant Decline in Receipts
Where an employer does not qualify for the ERC due to its business being fully or partially suspended, it may qualify if it experiences a significant decline in gross receipts. Notably, an employer does not have to show that the significant decline in gross receipts is related to COVID-19, just that it experienced the requisite decline. A significant decline is determined by comparing 2019 calendar quarters with the corresponding calendar quarter in 2020. A significant decline occurs when the 2020 calendar quarter receipts are less than 50% of the same 2019 calendar quarter and continues until 2020 calendar quarter receipts are greater than 80% of the same 2019 calendar quarter, or, if necessary, with the first calendar quarter of 2021. Employers can take the ERC for each qualifying quarter, subject to the maximum per-employee credit discussed above.
For purposes of determining a significant decline, “gross receipts” means gross receipts for the taxable year, including total sales, amounts received for services, income from investments, and income from incidental or outside sources. FAQ 40 provides that “gross receipts include interest (including original issue discount and tax-exempt interest [. . .]), dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer’s trade or business. Gross receipts are generally not reduced by cost of goods sold, but are generally reduced by the taxpayer’s adjusted basis in capital assets sold.” Gross receipts cannot include loan repayment or sales taxes collected.
What About Tax Exempt Organizations?
While tax exempt organizations are eligible for the ERC, the current FAQs do not apply. The IRS plans to issue additional guidance for tax-exempt organizations at a later date.
If your business has been affected and you would like to determine if and how you can qualify to use the ERC to help mitigate the impact, contact Tax Law attorney Robert Trott to discuss your situation in more detail.