IRS Provides More Guidance on Employee Retention Credit
Businesses that did not receive a forgivable loan under the Paycheck Protection Program (PPP), including business that repaid their PPP loan by May 18, 2020, may be able to find economic relief by claiming the employee retention credit. The employee retention credit is a payroll tax credit available to eligible employers in an amount equal to 50% of qualified wages paid after March 12, 2020. In addition to the previous guidance, the IRS has recently expanded the Employee Retention Credit FAQs to include 94 questions and answers, and they continue to update them on a regular basis. Although the expanded FAQs do not address every uncertainty, they do provide a significant amount of detail for businesses to determine their eligibility, calculate the credit, and understand how to claim the credit.
Eligible employers are employers engaged in a trade or business that either 1) fully or partially suspended operations due to orders from an appropriate governmental authority due to COVID-19 or 2) experienced a significant decline in gross receipts during a calendar quarter. The FAQs provide much-needed insight into the definition of eligible employer. The following are a few highlights from the FAQs:
- Tax-exempt organizations are eligible to claim the employee retention credit if they otherwise meet the requirements to be eligible for the credit. Furthermore, for purposes of the employee retention credit, tax-exempt organizations are deemed to be engaged in a “trade or business” with respect to all operations of the organization. (See FAQs 17 and 20.)
- An essential business that is allowed to remain open is not fully or partially suspended due to a government order even if such order has an indirect effect on operations, such as a reduction in customer traffic. However, if a government order causes suppliers of an essential business to suspend operations, the essential business may qualify as fully or partially suspended due to a government order. (See FAQs 30 through 32.)
- A nonessential business is not fully or partially suspended due to a government order if the employer is able to continue operations on a comparable scale by requiring its employees to telework. (See FAQ 33.)
- A “significant decline in gross receipts” is defined as gross receipts of less than 50% for the calendar quarter as compared to the gross receipts for the same calendar quarter in 2019. (See FAQ 39.)
The determination of qualified wages depends on whether the business employed an average of more than 100 full-time employees during 2019. (See FAQ 49 for how to calculate the average number of full-time employees.) Employers who averaged fewer than 100 full-time employees can treat all wages paid during the qualifying period as qualified wages. However, qualified wages for employers that averaged more than 100 full-time employees are only wages paid to employees for time they are not providing services, whether due to a shutdown or a decline in gross receipts. (See FAQs 51 and 52.)
This is just some of the guidance provided by the expanded FAQs. As circumstances change and additional details about the credit are released, employers may determine they were entitled to claim the Employee Retention Credit in a prior quarter but failed to claim it on their originally filed Form 941. If this happens, employers can file an amended payroll tax return using Form 941-X to claim a refund for such prior quarter. (See FAQ 94.)
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