Special Tax Alert
Many companies and their advisors have spent the past weeks carefully analyzing the CARES Act and determining the best courses of action in response to the new legislation. One benefit for companies to consider is the Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (ERC). What makes the ERC both unique and powerful is how it is monetized – an “Eligible Employer” (defined below) can apply these credits against federal payroll taxes as opposed to income taxes. The ERC is not available to companies who participate in the SBA Payroll Protection Program (PPP). (For a more detailed description of PPP, see our past TAW.) However, unlike the PPP, the ERC does not inhibit a company’s ability to adjust employee headcount and compensation (although such an adjustment could impact the amount of the ERC). Additionally, eligibility for the ERC is not limited to “small business concerns” (i.e., companies of all sizes can generally benefit), so the ERC could provide a benefit for companies that maintain some level of payroll, even if they choose to implement wage reductions, layoffs, or furloughs.
However, late last night, the IRS released revised Frequently Asked Questions (FAQs), which although they are not binding authority, address many of the areas of uncertainty. Unfortunately, for the most part, the FAQs generally limit the scope of the extent a taxpayer can benefit from the ERC.
What is the ERC?
The ERC is a fully refundable payroll tax credit for an “Eligible Employer” equal to 50% of “Qualified Wages,” limited to $10,000 per employee per year. As a result, the ERC is effectively capped at $5,000 per employee and is only available for wages paid while the employer meets the Eligible Employer definition.
Who Is an Eligible Employer?
An “Eligible Employer” is an employer (including tax-exempt organizations) which was carrying on trade or business during the calendar year 2020 and incurred either (1) a full or partial suspension of operations with respect to a trade or business (FPSO) or (2) a significant decline in gross receipts.
An employer incurs a FPSO in any calendar quarter for which the operations are “fully or partially suspended … due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings” due to COVID-19. The FAQs clarify how to determine whether an employer satisfies this requirement. With respect to whether an employer has a FPSO, the FAQs clarifies that “governmental order” is an “[o]rder, proclamation, or degree from the Federal government or local government … if they limit commerce, travel or group meetings due to COVID-19.” The FAQs then exclude “[s]tatements from a governmental official, including comments made during press conferences or in interviews with the media ….”
Additionally, the FAQs clarify that an employer has a FPSO: