One crucial provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act is the new Employee Retention Credit (ERC). The ERC provides an incentive for businesses, including certain tax-exempt organizations, affected by COVID-19 and its associated economic impacts to retain and pay their employees.
In brief, the ERC is a fully refundable tax credit equal to 50% of up to $10,000 per employee for qualified wages paid to certain employees retained during COVID-19. A business may be eligible if it 1) is required to fully or partially suspend operations due to a government order, or 2) experiences a greater-than-50% reduction in gross receipts in a 2020 quarter compared to the same quarter in 2019.
In a recently published FAQ
, the IRS addresses nearly all aspects of the ERC and clarifies several issues regarding eligibility for the credit and the wages and health plan expenses that can be taken into account, but unanswered questions remain. Grant Thornton highlights below 10 key guidance items in the IRS FAQ.
- My business is part of a group of related businesses – so how do I determine if my business is an eligible employer for purposes of the ERC? There are specific employer aggregation rules that apply, and all aggregated entities are treated as a single employer for purposes of applying the ERC. As a first step, businesses should consider whether they are part of an aggregated group.
- I applied for a Paycheck Protection Program loan. Can I still qualify for an ERC? If your business receives a Paycheck Protection Program (PPP) loan, it is not eligible for an ERC, regardless of whether any portion of the PPP loan is forgiven. The ERC is also unavailable for wage payments required by the Families First Coronavirus Response Act, which generally requires employers with fewer than 500 employees to provide paid sick and expanded FMLA leave to employees who are unable to work (or telework) for certain COVID-19-related reasons.
- My business is allowed to remain open, but most of my customers are required to stay home under a government order. Can I qualify for an ERC under the government order test? Generally - no. A business is not considered fully or partially suspended for purposes of the ERC solely because its customers must stay home due to a government order. However, your business could possibly qualify as an eligible employer under the gross receipts test if the reduction in 2020 is greater than 50% from the same quarter in 2019.
- If my business is an open “essential business,” but my suppliers are closed due to a government order, do I qualify for the ERC under the government order test? Operators of essential businesses generally cannot qualify for the ERC under the government order test. However, an essential business that fully or partially suspends operations because a supplier is required to close due to a government order can be eligible for the ERC if an alternate supplier cannot be found.
- Is the credit available to businesses of all sizes? Employers of any size may be an eligible employer. However, the definition of qualified wages depends, in part, on the average number of full-time employees employed by an eligible employer during 2019. For an eligible employer that averaged 100 or fewer full-time employees in 2019, qualified wages include all wages paid to any employee during any period the employer is otherwise eligible for the credit. But in the case of an eligible employer that averaged more than 100 full-time employees in 2019, qualified wages are limited to the wages paid to an employee for time the employee is not providing services due to either a full or partial suspension of operations by government order or a significant decline in gross receipts.
- How do sick, vacation, holiday and PTO days count when determining ERC-eligible “qualified wages?” For employers that averaged more than 100 full-time employees in 2019, paid time off for vacations, sick days, holidays and other days off are not treated as qualified wages for purposes of the credit. In contrast, for employers that averaged 100 or fewer full-time employees in 2019, those types of paid time off generally are consider qualified wages.
- One business in my aggregated group is in a state that has not closed any businesses under a government order, but another in the group is in a state where it must suspend its operations due to a government order. Is our business group eligible for an ERC? Yes. Because all members in an aggregated group are considered a single employer for purposes of the ERC, that single employer generally would be considered to have experienced a partial suspension of business operations and would be an eligible employer. However, for purposes of determining the qualified wages that would be eligible for the ERC, generally only those wages paid as a result of the partial suspension of business operations due to the government order would be considered qualified wages.
- I am an employer that averaged more than 100 full-time employees in 2019. For purposes of the ERC, how do I determine the extent to which I paid wages to exempt salaried employees for time they did not work when they performed at least some services? The IRS indicates that an employer can use any “reasonable method” to determine hours a salaried employee was paid for time she or he did not work. The FAQ specifically states that hours lost due to “loss of productivity” (inefficiencies of working at home, for example) is an “unreasonable” method.
- How are severance and other post-termination payments treated for purposes of the ERC? Payments are considered qualified wages only if the payments are made to an employee who continues to be employed by the eligible employer. Thus, severance and other post-termination payments made in connection with a former employee’s termination of employment are not qualified wages because they are payments for the past employment relationship and are not attributable to the time during which the ERC may be claimed.
- How do employer healthcare expenses figure in all this? Qualified wages generally include the eligible employer’s qualified health plan expenses that are properly allocable to the wages. For this purpose, qualified health plan expenses are amounts paid or incurred by an eligible employer to provide and maintain a group health plan, but only to the extent the amounts are excluded from the employees’ gross income. The FAQ clarifies that qualified health plan expenses generally can be counted even if the eligible employer does not pay any other qualified wages – for example, an eligible employer that furloughs its employees without pay but continues to provide the employees with health care coverage. However, qualified wages for eligible employers with more than 100 full-time employees do not include health care expenses allocable to the time the employees provide services.
The ERC is a powerful tax incentive for businesses impacted by COVID-19, and all businesses should consider the extent to which the credit may be available. For a more detailed discussion of the ERC and the IRS guidance that has been issued to date, please read our article, “New guidance clarifies employee retention credit
” on the recently issued IRS FAQ.