Employee Retention Credit FAQ UpdateJuly 21, 2020
Have you claimed or are you planning to claim the employee retention credit under the CARES Act? Make note of some updates to the IRS FAQ page on the credit.
Did you read our blog, What is the Employee Retention Credit under the CARES Act? The employee retention credit is useful for those who did not apply for an economic injury disaster loan or the paycheck protection program. If a loan is taken under either the EIDL or PPP, the business would not be eligible for the credit. The IRS recently updated their FAQs on the employee retention credit—here’s what you should be aware of.
What is the employee retention credit?
Read our blog for the details, but essentially this is a fully refundable tax credit for employers that applies to qualified wages paid after March 12, 2020 and before January 1, 2021. The maximum amount of qualified wages taken into account is $10,000 with a maximum credit of $5,000 per employee.
The IRS recently updated their FAQ page on the employee retention credit. Here are the updates that will be most useful to employers.
If a governmental order requires non-essential businesses to suspend operations but allows essential businesses to continue operations, is the essential business considered to have a full or partial suspension of operations?
The IRS clarifies that an employer who maintains both essential and non-essential operations is considered to have a partial suspension provided its non-essential operations are suspended as a result of a governmental order. Note that the non-essential operations must be more than a nominal portion of the business.
If a governmental order requires an employer to close its workplace, but the employer is able to continue operations comparable to its operations prior to the closure by requiring employees to telework, is the employer considered to have a suspension of operations?
Question 33 will be of interest for many employers. It provides two additional examples regarding the effect that the employees’ ability to telework may have on an employer’s eligibility for the credit.
- The first new example (Example 2), provides that the employer is eligible for the credit if access to its workplace and the equipment in it are essential to its operations and the employer is unable to serve all of its clients remotely.
- In the second new example (Example 3), the employer is also eligible for the credit when a significant part of its operations cannot be conducted by telework and a governmental order required it to close its workplace. This applies even if another significant part of its business can continue its operations by telework.
If a governmental order requires an employer to close its workplace for certain purposes, but the workplace may remain operational for limited purposes, is the employer considered to have a suspension of operations?
To determine eligibility, an exacting examination of the facts and circumstances of each employer’s operations may be necessary. This will likely result in arbitrary credit eligibility distinctions among employers. As one example, the FAQs suggest that an employer whose occupancy limits are reduced by governmental order may be ineligible for the credit if the order does not result in more than a “nominal effect” on its business operations. If the business suffers a 50% decline in gross receipts, they may be eligible however.
Are an employer’s operations considered to be partially suspended for purposes of the Employee Retention Credit if the employer is required to reduce its operating hours by a governmental order?
The IRS makes clear that a business that is required to reduce its operating hours to comply with a governmental order is an eligible employer. The updated Q&A seems to assume a business is eligible for the credit even if it served the same number of customers in the reduced operating hours that it served pre-pandemic
It’s important that employers that have claimed or intend to claim the employee retention credit consider how the updated FAQs may impact their eligibility for the credit, and determination of the credit as well. We can help. Contact us.