One of the most beneficial (and more complicated) business tax provisions in the CARES Act is the Employee Retention Credit for Employers Subject to Closure Due to COVID-19 ("Retention Credit").1 The Retention Credit is expected to provide employers with a meaningful financial incentive to keep employees on the payroll during the pandemic crisis.
An employer is eligible for the Retention Credit if the employer satisfies one of two tests:
- Operational disruption: The business's operations are fully or partially disrupted because of a government order limiting commerce and travel as a result of COVID-19.
- Gross receipts: Gross receipts for a quarter in year 2020 are less than 50% of gross receipts for the same quarter in 2019, with eligibility ceasing following a quarter in which the employer's gross receipts are greater than 80% of the previous year's quarterly gross receipts.
The gross receipts test is not available to tax-exempt organizations, however. These organizations must satisfy the operational disruption test to qualify.
Any business (regardless of size) may qualify for the Retention Credit, but the statute imposes special limitations on larger businesses. For businesses with over 100 full-time employees, the credit can be taken only with respect to wages paid to employees who (i) are furloughed or (ii) face reduced hours as a direct result of COVID-19. For businesses with 100 or fewer full-time employees, all paid wages are eligible for the credit. (For this purpose, a full-time employee is an employee who works on average at least 30 hours per week.)
The Retention Credit is determined by taking 50 percent of the "qualified wages" from each employee during the eligible period (March 12, 2020 to January 1, 2021). The maximum amount of qualified wages that can be used for the credit is $10,000 – meaning the credit cannot exceed $5,000 per employee. Moreover, the credit cannot exceed the employer's share of payroll taxes (i.e., the 6.2% Old Age, Survivors and Disability tax (OASDI) paid by the employer). To the extent the credit for the quarter exceeds the employer's total OASDI tax, the excess amount is treated as a tax overpayment and refunded to the employer.
In addition to the wage limitations previously discussed for large employers, the Retention Credit is subject to several requirements and limitations:
- Qualified wages for the credit cannot exceed the amount of wages an employee would have received for the same amount of work during the prior 30-day period.
- Qualified wages do not include wages covered by the paid sick and paid family and medical leave credits enacted as part of the Families First Coronavirus Response Act. Similarly, an employer's share of payroll taxes does not include any employment taxes paid with respect to any such wages.
- Amounts paid to maintain a group health plan are included as qualified wages as long as they are allocated on a pro rata basis (or as the Treasury Secretary prescribes).
- An employer is not eligible for the Retention Credit if the employer receives an SBA loan under the Paycheck Protection Program enacted in the CARES Act.
Treasury Guidance Outlook
There is little in the way of guidance or precedent regarding the application of the Retention Credit. Not surprisingly, the statute confers broad authority on the Treasury Department to issue guidance regarding (i) the advance payment of the credit, (ii) the recapture of the credit if the employer receives an SBA loan, (iii) the application to third-party payors, and (iv) the application of the 50% gross receipts test when the employer was not carrying on a trade or business for all or part of the same calendar quarter in the prior year.
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1 Interestingly, the Retention Credit was not codified in the Internal Revenue Code; rather, it is an "off-code" provision of limited duration (Act section 2301 applies only to wages paid after March 12, 2020 and before January 1, 2021).