The final version of the Coronavirus Aid, Relief and Economic Security (CARES) Act includes a new payroll related tax credit that was not incorporated into earlier versions of senate bills. The employee retention credit (ERC) is designed to help businesses, or eligible employers, who keep employees on the payroll when COVID-19 forces the business to suspend or close its operations. The benefits are not unlimited however, and the benefits are not the same for all employers. Additionally, the amount of the ERC benefit is dependent upon the size of the employer; the provision provides smaller employers a greater opportunity to obtain benefits.
Eligible employers include Section 501(c)(3) charitable organizations exempt from tax, but not governments or governmental agencies. An employer is not eligible if it received a Small Business Interruption Loan (a payroll protection loan).
There are two possible scenarios when a business can generate a credit:
The operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from the government limiting commerce, travel, or group meetings because of COVID-19.
The business was able to remain open but experiences a significant decline in gross receipts compared to the prior year. A significant decline is when gross receipts for a current quarter is less than 50% of gross receipts for the same quarter in the prior year. The employer continues to qualify for the credit until the quarter following the quarter when gross receipts exceed 80% of the prior year quarter.
The size of the employer determines which scenario under which the employer can qualify. When an employer has more than 100 employees (as defined under Section 4980H to include full-time equivalents) based upon 2019 employment data, the credit is based only on qualified wages paid to employees when an employee is not providing services under either of the scenarios above.
When an employer has 100 employees or less (as defined under Section 4980H) based upon 2019 employment data, the credit can be based on when the employer is paying wages whether the employee is performing services or not performing services under either of the scenarios above.
The credit is equal to 50% of “qualified wages,” which includes both actual wages paid plus qualified health plan expenses allocable to those wages. However, the credit ceases when qualified wages exceed $10,000 per employee. The maximum credit per employee then is $5,000.
The credit is allowed to offset the employer’s 6.2% share of social security taxes (or Railroad Retirement Tax Act taxes) and the excess is refundable. By refundable, this could mean that the employer can use the credit to reduce the amount of payroll taxes required to be deposited (similar to rules provided under the Families First Coronavirus Response Act for certain qualifying sick pay or family medical leave pay).
There are additional rules that come into play. For example, wages taken into consideration for determining the new payroll tax credit under the Sick Leave Act or the Emergency Family Medical Leave Act may not be taken into consideration for this credit. Additionally, credits on wages paid to certain business owners will not be allowed. Further, employer aggregation rules come into play in determining the number of employees. Employers will not be allowed a deduction for wages equal to the credit claimed.
The $10,000 limitation on eligible wages prevents an unlimited tap by small business for government support. Possibly, Congress believes the country will get back on its feet quickly. Let’s all hope.
Contact your Schneider Downs tax advisor if you have any questions or would like to discuss the provisions of the CARES Act.Please visit our Coronavirus Resource Center for related content.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.