In FAQs, the IRS has clarified that eligible employers that have not claimed employee-retention tax credits because they anticipated receiving a loan under the Payroll Protection Program (PPP) may claim the credit if they did not receive their PPP loan.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides that otherwise eligible employers that received a PPP loan are not eligible for the credit. The FAQs clarify that employers that have not received their PPP loans or that returned their PPP loan proceeds by May 7 may also claim the credit. The Small Business Administration has extended its May 7 safe harbor deadline to return PPP loan proceeds to May 14.
The employee-retention tax credit is a refundable payroll tax credit equal to 50 percent of up to $10,000 in qualified wages (including qualified health plan expenses) paid after March 12, 2020 and before January 1, 2021. The credit applies against the employer’s share of FICA (social security) tax reported on the employer’s federal quarterly employment tax return (IRS Form 941).
The FAQs clarify a number of issues relating to the credit:
Eligible Employer
Any employer that carries on a trade or business during calendar year 2020 is an “eligible employer” if the employer fully or partially suspends operation 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 experiences a significant decline in gross receipts during the year. The FAQs clarify that tax-exempt employers are eligible. Federal, state, and local government entities are not eligible, but tribes and tribal entities are eligible if they operate a trade or business.
Suspension of Operations Due to a Government Order
The FAQs provide the following examples of an order, proclamation, or decree that limits commerce, travel, or group meetings:
- An order of a city mayor stating that all non-essential businesses must close for a specified period
- A state’s emergency proclamation that residents other than residents employed by an essential business must shelter in place
- 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
A mere statement or comment of a government official during a press conference or interview does not constitute an order, proclamation, or decree.
An employer with business locations in multiple jurisdictions is considered to have a partial suspension of operations if it is subject to an government order limiting operations in one or more jurisdictions.
An essential business that is not required to close under an order, proclamation, or decree is generally not eligible for the credit by reason of a governmental order closing non-essential businesses. However, an essential business could qualify for the credit if the business’ operations are fully or partially suspended due to an inability to obtain critical goods or materials from its suppliers that were required to suspend their operations. An essential business may also qualify for the credit based on a significant decline in gross receipts.
Significant Decline in Gross Receipts
An employer may qualify for the credit if it has a significant decline in its gross receipts in a calendar quarter in 2020 in relation to the corresponding quarter in 2019. An employer may claim the credit due to a decline in gross receipts beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50 percent of its gross receipts from the same calendar quarter in 2019. In this case, the employer remains eligible until the earlier of January 1, 2021 or the first calendar quarter after the quarter for which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019. The FAQs provide the following example:
“Employer I’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, Employer I’s 2020 first, second, and third quarter gross receipts were approximately 48 percent, 83 percent, and 92 percent of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, Employer I had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50 percent of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80 percent of the same quarter in 2019). Thus, Employer I is entitled to a retention credit with respect to the first and second calendar quarters.”
The FAQs clarify that an employer is not required to prove its significant decline in gross receipts is related to COVID-19.
Determining Qualified Wages
For an eligible employer that averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services because business operations are fully or partially suspended due to a governmental order or in any calendar quarter that the business is experiencing a significant decline in gross receipts. For an eligible employer that averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any calendar quarter.
The FAQs state an employer determines the number of its full-time employees in accordance with the rules under the Affordable Care Act (Internal Revenue Code Section 4980H). An employer that began operating in 2019 calculates its number of full-time employees for 2019 by taking the sum of full-time employees in each full calendar month in 2019 in which the employer operated its business and dividing by that number of months. An employer that began operations in 2020 calculates its full-time employee count by taking the sum of its full-time employees in each full calendar month in 2020 in which the employer operated its business and dividing by that number of months.
The FAQs clarify that an employer may not treat amounts paid to a related individual such as a child, sibling, parent, niece, or nephew—or, in the case of a corporate employer, an related individual of a 50 percent or greater shareholder of the employer—as qualified wages. Nor may an employer treat amounts paid to former employees as qualified wages.
An employer with more than 100 full-time employees in 2019 cannot treat amounts paid under a pre-existing vacation, sick, or other personal leave policy as qualified wages.
Qualified Health Plan Expenses As Qualified Wages
Qualified wages include an allocable portion of the “qualified health plan expenses” paid or incurred by the eligible employer. Under the FAQs, both the employer’s share of health care premiums and the portion of employee’s share of premiums paid for with pre-tax dollars qualify for the credit. The employee’s share of premiums (if any) paid for with after-tax dollars do not qualify.
The FAQs state an employer may use any reasonable method to determine its qualified health plan expenses. or insured plans, acceptable methods include the COBRA applicable premium, the average premium rate for all employees, or any substantially similar method that differentiates between self-only and other than self-only coverage. For self-insured plans, employers may use any reasonable method, including the COBRA applicable premium or any reasonable actuarial method.
Generally, the qualified health plan expense for any employee is the amount allocable to the hours for which the employee receives qualified wages. However, the FAQs also allow calculating qualified health plan expenses on a daily basis. For example, an employer may calculate its qualified health care costs by first dividing the employer’s overall annual qualifying health plan costs by the number of covered employees then dividing the average annual cost per employee by the number of work days during the year (treating days of paid leave as a work day) to determine a daily rate. The FAQs advise that employers should adjust the calculations for part-time and seasonal employees using any reasonable method.
The FAQs clarify that an employer that does not pay wages to an employee may not treat any portion of its health plan expenses as qualified wages because no portion of the health plan expenses would be allocable to wages.
Aggregation of Employers
Aggregation of related employers may have a significant impact on an employer’s eligibility for and the calculation of the credit:
- An aggregated group of employers with operations in multiple jurisdictions is considered to have a partial suspension of operations if any member of the group is subject to a government order limiting operations in one or more jurisdictions.
- The determination whether an employer has a significant decline in its gross receipts in a calendar quarter in 2020 in relation to the corresponding quarter in 2019 is determined by reference to the gross receipts of all members of the aggregated group.
- The determination whether an eligible employer’s qualified wages is determined under rules for employers with not more than 100 full-time employees in 2019 or the rules for employers with more than 100 employees in 2019 is determined by reference to the number of full-time employees of all members of the aggregated group.
Whether employers are treated as a single employer is determined under rules used to determine whether related entities are treated as a single employer for purposes of the application of tax credits available to an employer (Internal Revenue Code Sections 52(a) and (b)). Employers are also treated as a single employer under rules that determine whether related entities, including affiliated service groups, are treated as a single employer for purposes of retirement and other employee benefits (Internal Revenue code Sections 414(m) and (o)).
How to Claim the Credit
The FAQs state that, in anticipation of receiving a credit, an eligible employer may access withheld taxes that would otherwise be deposited with the IRS. No failure to deposit penalty will apply to the missed deposits in the amount of the missed deposits, reduced by:
a) Any amount of the employer's share of social security tax deferred under section 2302 of the CARES Act (i.e., the employer’s share of FICA tax for the period from March 27, 2020 to December 31, 2020)
b) Any amount of federal employment taxes not deposited in anticipation of credits for paid sick and/or family leave under the Families First Coronavirus Response Act (FFCRA) is less than or equal to the amount of the eligible employer’s anticipated employee retention credit for the calendar quarter
An eligible employer may also request an advance payment of the credit by filing IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19). An eligible employer may use both of these methods to claim the credit, as illustrated in the following example:
“Employer G paid $20,000 in qualified wages to two employees (each employee was paid $10,000 in qualified wages), and is therefore entitled to a credit of $10,000, and is otherwise required to deposit $8,000 in federal employment taxes on all wages paid, after deferring its employer's share of social security tax under section 2302 of the CARES Act. Employer G has no paid sick or family leave credits under the FFCRA. Employer G can keep the entire $8,000 of taxes that Employer G was otherwise required to deposit without penalty as a portion of the credits it is otherwise entitled to claim on the Form 941. Employer G may file a request for an advance credit for the remaining $2,000 by completing Form 7200.”
The FAQs clarify that an eligible employer that elected not to claim the employee-retention tax credit in any calendar quarter may begin doing so in any subsequent quarter for which the employer qualifies. An eligible employer may also file a claim for refund and make an interest-free adjustment for a prior quarter to claim the credit for that quarter, following the rules and procedures set forth in IRS Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund). The FAQs caution that qualified wages paid during the first quarter of 2020 should be reported on the employer’s second quarter Form 941, and employers should not file a Form 941-X to make that adjustment.
Income Tax Treatment
The FAQs state an employer that receives the tax credit does not include the credit in its gross income for federal income tax purposes. However, the employer’s deduction for wages paid must be reduced by the amount of the credit. Employees may not exclude qualified wages from their income. The wages do not constitute as qualified disaster relief payments.
If you have any questions regarding the content of this alert, please contact Ray McCabe, partner, at rmccabe@barclaydamon.com, or another member of the firm’s Tax Practice Area.
We also have a specific team of Barclay Damon attorneys who are actively working on assessing regulatory, legislative, and other governmental updates related to COVID-19 and who are prepared to assist clients. Please contact Yvonne Hennessey, COVID-19 Response Team leader, at yhennessey@barclaydamon.com or any member of the COVID-19 Response Team at COVID-19ResponseTeam@barclaydamon.com.