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Expanded Guidance on the Employee Retention Credit Arrives

Below you will find summaries of the opportunities provided by the ERC and the Payroll Tax Deferral as well as highlights of some of the previously unanswered questions that were addressed by the newly expanded FAQ.

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Insights  <  Expanded Guidance on the Employee Retention Credit Arrives Amid COVID-19

Below you will find summaries of the opportunities provided by the ERC and the Payroll Tax Deferral as well as highlights of some of the previously unanswered questions that were addressed by the newly expanded FAQ.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides several forms of relief to employers in an effort to encourage employers to keep employees on their payroll during the economic crisis: the Paycheck Protection Program (PPP), the Employee Retention Credit (ERC), and the provision for the temporary deferral of certain payroll taxes (Payroll Tax Deferral).

Unfortunately, an employer will not be able to take advantage of ALL these provisions together. The law provides that if an employer receives a PPP loan, the employer is not eligible for the ERC. In addition, once an employer is notified that a PPP loan has been forgiven, they can no longer take advantage of the payroll tax deferral.

For a more in-depth analysis of the benefits of the PPP vs. ERC, click here.

The Paycheck Protection Program (PPP) has received the most attention to date because it provides employers with an opportunity to receive a forgivable, tax-free loan. However, for employers who do not receive a PPP loan for any reason, either because they are not eligible, the funding is exhausted, or because they opt not to apply for the PPP loan, they may still be able to take advantage of the ERC and the payroll tax deferral. Fortunately, on April 29, the IRS drastically expanded their FAQs related to the ERC, providing the guidance employers and tax professionals were waiting for. The FAQs were expanded to 94 questions addressing all areas surrounding the ERC. The link to the complete FAQ is here.

Below you will find summaries of the opportunities provided by the ERC and the Payroll Tax Deferral as well as highlights of some of the previously unanswered questions that were addressed by the newly expanded FAQ.

Employee Retention Credit (ERC)

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. Eligible employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

  1. Fully or partially suspend 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
  2. Experience a significant decline in gross receipts during the calendar quarter.

If the eligible employer 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 due to an economic hardship—specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship described in (1) or (2) above.

If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.

If an employer receives a PPP loan, the employer is not eligible for the ETC.

Temporary Deferral of Certain Payroll Taxes (Payroll Tax Deferral)

In order to free up employers’ cash flow and retain employees during times of quarantine or shutdown, the CARES Act allows employers to defer the deposit and payment of the employer’s share of Social Security taxes. The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020 and ending December 31, 2020. The deferred deposits must be deposited by the following dates (to be treated as timely)

  1. 50% on December 31, 2021, and
  2. On December 31, 2022, the remaining amount.

While employers may not defer the deposits and payments once the employer receives notification from its lender that the PPP loan has been forgiven, the IRS has clarified that the amount that has been deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the dates provided in (1) and (2) above.

Self-employed individuals may also defer payment of certain self-employment taxes.

Highlights of the Newly Expanded Guidance

Ability to Defer Payroll Taxes BEFORE Claiming the Employee Retention Credits

The IRS provided that an employer can defer deposit and payment of the employer’s share of Social Security tax prior to determining whether the employer is entitled to employee retention credits (ERC) or the paid leave credits of the FFCRA, and prior to determining the amount of employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits.

Example: Employer E paid $10,000 in qualified wages (including qualified health plan expenses) and, after deferral of the employer’s share of social security tax, is otherwise required to deposit $8,000 in federal employment taxes for all of its employees for wage payments made during the same quarter as the $10,000 in qualified wages. Employer E has no paid sick or family leave credits under the FFCRA. Employer E may keep up to $5,000 of the $8,000 of taxes Employer E was going to deposit, and it will not owe a penalty for keeping the $5,000. Employer E will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

Partial Services for Employers With More Than 100 Employees

Eligible employers are entitled to an Employee Retention Credit based on the “qualified wages” paid to their employees. 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 due to either (1) a full or partial suspension of the employer’s business operations by a governmental order, or (2) the business experiencing a significant decline in gross receipts. Based on the statute, it was unclear whether wages paid to an employee who was providing less than 100% of their typical services (partial services) could be treated as qualified wages. In the updated FAQ, the IRS clarifies that even if employees are continuing to provide partial services, the wages paid to the employees for the time they are not providing services can be treated as qualified wages. The guidance provides several examples and provides additional information as to how qualified wages would be determined under various circumstances.

For more information, see Determining Qualified Wages.

Clarifications for “Essential Businesses”

An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer to remain open, even though the governmental order requiring non-essential businesses to close may have an effect on the employer’s operations. However, an employer with an essential business may be considered to have a full or partial suspension of operations if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations or if the employer is required to reduce its operating hours by a governmental order.

For more information, see Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order.

Clarifications to the Process of Claiming the ERC

In general, employers have the following options for claiming the ERC:

  1. The credits can be claimed on Form 941 for each calendar quarter.
  2. The credits may be able to be accessed via federal employment taxes that are set aside and required to be deposited with the IRS (including withheld taxes). If the employer paid qualified wages to its employees in the calendar quarter before the required deposit, the employer may reduce its federal employment tax deposit by the anticipated ERC for the qualified wages for the calendar quarter as of the time of the required deposit.
  3. If the remaining federal employment tax deposits set aside (after taking into account any Payroll Tax Deferral) are not enough to cover the credit, employers can file Form 7200 and request an advance of the credit for the amount that is not funded by accessing the federal employment tax deposits.

Example: Employer F is an eligible employer that does not receive a Paycheck Protection Program loan. In its first payroll period of the second quarter of 2020, Employer F pays $10,000 in qualified wages and $3,500 in qualified sick and family leave wages under the FFCRA, among other wages for the payroll period. Employer F has a federal employment tax deposit obligation of $9,000 for the first payroll period of the second quarter of 2020 (of which $1,500 relates to the employer’s share of social security tax) prior to (a) any deferral of the deposit of the employer’s share of social security tax under section 2302 of the CARES Act, and (b) any amount of federal employment taxes not deposited in anticipation of credits for qualified sick and family leave wages under the FFCRA. Employer F reasonably anticipates a $5,000 Employee Retention Credit (50 percent of qualified wages) and a $3,500 credit for paid sick and family leave (100 percent of qualified sick and family leave wages) thus far for the second quarter.

Employer F first defers deposit of the $1,500 employer’s share of social security tax under section 2302 of the CARES Act. This preliminarily results in a remaining federal employment tax deposit obligation of $7,500. Employer F then reduces this federal employment tax deposit obligation by the $3,500 anticipated credit for qualified sick and family leave wages, leaving a federal employment tax deposit obligation of $4,000. Finally, Employer F further reduces the deposit of all remaining federal employment taxes by $4,000 for the $5,000 anticipated Employee Retention Credit for qualified wages. Employer F will not incur a failure to deposit penalty under section 6656 of the Code for reducing its federal employment tax deposit for the first payroll period of the second quarter to $0.

The amount of the excess $1,000 in Employee Retention Credit available is refundable as an overpayment. Employer F may file a Form 7200 to request a credit or refund of this amount in advance of the close of the quarter (but not for any amount of the Employee Retention Credit that was already used to reduce the deposit obligation). If Employer F does not request an advance, it may request that the $1,000 overpayment be credited or refunded when it files its second quarter Form 941, Employer’s Quarterly Federal Tax Return.

Employer F may defer payment of the $1,500 employer’s share of social security tax (along with any other employer social security tax imposed under section 3111(a) for the quarter) on its Form 941 for the second quarter of 2020. Employer F will not be required to pay any portion of the deferred amount until December 31, 2021, at which time 50 percent is due ($750), with the remaining amount ($750) due December 31, 2022. If Employer F fails to pay the required amounts at those times, Employer F’s deferred deposits will lose their deferred status and may be subject to failure to deposit penalties from their original due dates. Employer F may also be subject to failure to pay penalties accruing from the deferred due date for payment.

For more information on the claiming the refundable Employee Retention Credit, see How to Claim the Employee Retention Credit.

Single Employer/Aggregations Rules and the ERC

Under the ERC rules, certain related employers may need to be aggregated and treated as a single employer for purposes of the ERC credit. The IRS FAQ provides additional guidance regarding the impact that the aggregation rules have on the following aspects of the ERC:

  • Determining 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
  • Determining whether the employer has a significant decline in gross receipts
  • Determining whether the employer has more than 100 full-time employees
  • The application of the rules that 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

As noted above, employers who receive a PPP loan are not eligible for the credit. However, the following issue that remained unclear was the following:

If multiple entities are treated as a single employer under the aggregation rules, and only one of these entities has received a Paycheck Protection Program (PPP) loan, does this mean that all of the other entities in the aggregated group are not eligible for the Employee Retention Credit?

Unfortunately for employers, the IRS clarified in the expanded guidance that an employer that is treated as a single employer under the aggregation rules may not receive the Employee Retention Credit if any member of the employer’s aggregated group receives a PPP loan.

We will continue to keep you apprised as additional information and guidance is provided. If you have specific questions, please contact your blum partner or contact us here.

 

COVID-19 Business Resources

 

Disclaimers: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation

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