When you mention the CARES Act, most people will think of two things; the $1,200 individual stimulus check or the Small Business Administration’s Paycheck Protection Program. They may even mention the SBA’s Emergency Injury Disaster Loan and the Treasury’s Main Street Lending Program, however, many have overlooked the Employee Retention Credit (ERC).
The ERC was implemented within the CARES Act and is a 50% refundable tax credit of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. Wages paid after March 12, 2020, and before January 1, 2021, are eligible. The ERC is available to every business, regardless of size, and includes tax-exempt organizations. However, there are two exceptions:
- State and local governments and their instrumentalities; and
- small businesses that take small business loans.
To qualify, the business must fall into a category:
- The business is fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
- The business’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
The wages that qualify are based on the average number of the business’s employees in 2019:
- If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.
- If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Under the CARES Act, “qualified wages” included:
- Cash compensation paid March 13, 2020, and December 31, 2020, and
- “qualified health plan expenses[i].”
On April 29, 2020, the IRS issued what has become the guiding hand in the age of COVID-19, a plethora of FAQs on the ERC. Within the FAQs, the IRS stated that an employer could not claim the ERC unless some amount of cash compensation subject to Social Security and Medicare tax was also paid[ii]. Thus, an employer who furloughed employees paid no cash wages, yet continued to pay health plan premiums, would not be eligible for the ERC.
The FAQs also noted that mere statements from a governmental official, including press conference or media interview statements, do not rise to the level of a governmental order. Further, the declaration of a state of emergency by a governmental authority is not sufficient, unless it limits commerce, travel, or group meetings. Additionally, if a declaration does not affect a business’s operations, then it does not pass muster for the purposes of the ERC.
You may recall that one of the criteria for claiming the ERC is that the business cannot receive small business loans. Yet, the IRS has stated that a business who has applied for a PPP loan, received payment, and repays the loan by May 14, 2020, will be exempted from this exception if the business otherwise meets the criteria.
On May 7, 2020, in response to many senators questioning the IRS’s position, the Treasury stated that they have taken the senators’ views into consideration and will be revising the applicable guidance. It will be interesting to see just how the IRS will be revising the guidance.
Here at Wladis, we are closely monitoring all CARES Act situations and will continue to update you. If you have questions about the CARES Act’s, one of our attorneys can assist you. Please do not hesitate to contact the Wladis Law Firm. We will do our best to provide you with updates and will be available to answer questions as circumstances change. We may be reached at (315) 445-1700 or by e-mailing Attorney Jennifer Huse Granzow at email@example.com or by reaching out to your everyday firm contacts.
[i] The CARES Act defines qualified health plan expenses as amounts paid or incurred by the employer to provide and maintain a group health plan, but only to the extent that those amounts are excluded from the gross income of employees.
[ii] FAQ 58, 64 and 65.