EMPLOYEE RETENTION TAX CREDITS DURING COVID-19

On: September 16, 2020

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was approved by Congress and then signed into law on March 27, 2020 by President Trump.  The CARES Act offers various tax benefits to business taxpayers to help them better respond to the adverse economic impact caused by COVID-19.

Under Section 2301 of the CARES Act, one such tax benefit is an employee retention tax credit.  Tax credits are more valuable than tax deductions because they offer taxpayers a dollar-for-dollar reduction in tax liability.

What rules govern the employee retention tax credit?

Qualification for Employee Retention Tax Credits

To qualify for employee retention tax credits, you generally must be any employer (i) who carries on a trade or business during year 2020, and (ii) with respect to any calendar quarter, for which (A) the operation of the trade or business is fully or partially suspended during such calendar quarter 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 (B) such calendar quarter is within “the period described” for a “significant decline in gross receipts”.

“The period described” for “a significant decline in gross receipts” generally is the period (i) beginning with the first calendar quarter beginning after December 31, 2019, for which gross receipts (under Internal Revenue Code Section 448(c)) for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and (ii) ending with the calendar quarter for which gross receipts of such employer are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.

Tax-exempt organization employers may qualify for employee retention tax credits.  However, self-employed individuals (on their own self-employment earnings) and businesses who receive “Paycheck Protection Program” loans are ineligible to claim employee retention tax credits.

Amount of Employee Retention Tax Credits

The employee retention tax credit is generally equal to 50 percent of up to $10,000 in wages (including certain health plan expenses) paid to a full-time employee for all eligible calendar quarters beginning March 13, 2020 and ending December 31, 2020.  Thus, the maximum credit is $5,000 per full-time employee.

The same wages cannot be used to claim both the employee retention tax credit and the tax credit for qualified paid sick leave and family leave wages.

Utilization of Employee Retention Tax Credits

The employee retention tax credit can be used to offset, and thereby in effect pay, applicable employment taxes.  These applicable employment taxes generally are the employer’s share of social security taxes under Internal Revenue Code Section 3111(a) and similar taxes of railroad employers.

In addition, on Form 7200, “Advance Payment of Employer Credits Due to COVID-19”, because the employee retention tax credit is refundable, if the credit exceeds such applicable employment taxes, a business can receive a current advance payment of the excess amount of the credit.  This advance payment can be critical to provide a business with needed cash during COVID-19 negative economic conditions.

If you need tax help, always make sure to call Leading Tax Group and don’t attempt to do it yourself.