Tax Law Insights

On March 27, 2020 the the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act or Act), H.R. 748, became law.  The Act provides eligible employers a tax credit against employment taxes equal to 50% of qualified wages.  The credit is determined quarterly and effectively capped at $5,000 per eligible employee.

Eligible employers include any employer that was carrying on a trade or business in 2020 whose operations were impacted by the Coronavirus crisis.  Two tests are used to determine whether a business was impacted by the Coronavirus.  The tests are applied quarterly.  The first test is based on impacts caused by a governmental order related to Coronavirus.  The second test is based on a decline in a business’ gross income, irrespective of whether a governmental order caused the decline.

An employer meets the first test if the operation of its business is fully or partially suspended during a calendar quarter due to order from a governmental authority due to Coronavirus (the Shutdown Test).  For example, a restaurant that was forced to cease allow dine-in dining should qualify under this test.

An employer meets the second test during calendar quarters included in a measuring period (the Impact Test).  The period begins with the first quarter in 2020 where the business’ gross receipts are less than 50% of its gross receipts for the same calendar quarter in the prior year.  The period ends with the first calendar quarter following the calendar in which gross receipts of the business are greater than 80% of the gross receipts for the same calendar quarter in the prior year.  For example, if a business had gross income of $100,000 per quarter in 2019, gross income of $80,000 in the first quarter of 2020, $40,000 of gross income in the second quarter of 2020, $60,000 of gross income in the third quarter of 2020, and $81,000 of gross income, the business would meet the second test for the second quarter of 2020 through the fourth quarter of 2020.

Qualified wages are defined differently for employers based on headcount.  If an employer employed more than 100 employees on average during 2019 (determined under the same rules used for Affordable Care Act purposes), qualified wages include wages paid to an employee who is not providing services in a period where the employer eligibility tests described above are met.  The credit is therefore not available for employees who continue to perform their regular duties.  If an employer employed 100 or fewer employees during 2019, all wages paid with respect to an employee during a quarter where the employer eligibility test described above were met are qualified wages (irrespective of whether the employee continued to perform services).

Qualified wages taken into account for an employee cannot exceed $10,000 in the aggregate for all quarters, irrespective of employer size.  Qualified wages for employer who employed more than 100 employees are further limited to the amount an employee would have been paid for working an equivalent duration during the 30 days immediately preceding the quarter in which the employer eligibility tests were met.  In other words, larger employers cannot raise wages to receive an increased credit.

Qualified wages also include qualified health plan expenses properly allocable to such wages.  Qualified health plan expenses include amounts paid by an employer to provide and maintain a group health plan.  Expense allocations can be made on pro rata, per diem basis.  Other permissible methods may be used if additional guidance allows such a method.

Aggregation rules apply for purposes of the credit.  Affiliated employers are treated as one employer for purposes of the credit.  Affiliated employers for this purpose generally include subsidiaries where the parent owns more than 50% of the subsidiary, brother/sister groups where 5 or fewer individuals own overlapping interests with more than 50% of each business, and other entities with similar ownership.

The Act contains provisions to coordinate the retention credit with the credits provided under the Families First Coronavirus Response Act (FFCRA).  The FFCRA provides credits against employment taxes for paid leave required to be provided under the FFCRA.  An employer cannot receive the FFRCA credits and retention credits for the same payments made to an employee.

The credit doesn’t apply to governmental employers.  In addition, if an employer receives a loan under the Paycheck Protection Program (potentially forgivable SBA loans added by the Act) the employer will not be eligible for credit.

Employers can elect not to have the credit apply.  If an employer anticipates receiving a Paycheck Protection Program loan it may make sense to elect not to have the credit apply.

The IRS is authorized to issue additional guidance, including the allowance of the credit on an advance basis.  The IRS has issued guidance under the FFCRA which allows employers to retain those credits from employment tax deposits and it seems likely the same procedure will be allowed with the retention credit (as opposed to waiting until a quarterly return is filed to receive the credit).