Tax Credits Available for Retaining Employees During COVID-19 Crisis
Many employers are scrambling to prepare their loan applications to participate in the Paycheck Protection Program (PPP), with lenders accepting and processing applications as of April 3, 2020. However, companies with more than 500 employees are generally not eligible for these low-interest and potentially forgivable loans. Additionally, it’s likely that small businesses across America will quickly gobble up the $349 billion Congress appropriated for these SBA loans.
In addition to the funds available through PPP loans, the Coronavirus Aid, Relief, and Economic Security (CARES) Act also established an Employee Retention Credit. Through this fully refundable tax credit, “eligible employers” can receive a credit against “applicable employment taxes” for each quarter equal to 50 percent of “qualified wages” paid to each employee. For purposes of the credit, “qualified wages” – which include allocable qualified health plan expenses – are capped at $10,000 per employee. Therefore, the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021.
Who Is Eligible to Receive the Employee Retention Credit?
All “eligible employers” that do not qualify for the Payroll Protection Program should consider availing themselves of the Employee Retention Credit. The credit is available to all employers regardless of size, including tax-exempt organizations. However, eligible employers must fall into one of two categories:
- The employer’s business or operations are fully or partially suspended by government order due to COVID-19 during the calendar quarter.
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify for the credit after the end of that quarter.
These measures are calculated each calendar quarter.
What Are Qualified Wages For Purposes of the Employee Retention Credit?
What constitutes “qualified wages” depends on the average number of full-time employees a company had in 2019. This count includes the aggregation rules of IRC Section 52 or 414 (for specific questions regarding these rules, please consult your Kreis Enderle counsel).
- Employers with 100 or fewer employees: For those employers with 100 or fewer employees on average in 2019, qualified wages are all wages paid to an employee during the periods the employer is an “eligible employer.”
- Employers with more than 100 employees: For companies with more than 100 employees, qualified wages are those paid to an employee during the periods the employer is an “eligible employer” with respect to which the employee is not providing services.
Limitations on the Employee Retention Credit
The ability to take the Employee Retention Credit is subject to several restrictions and limitations. Specifically:
- The credit only applies to qualified wages paid by a business whose operations have been fully or partially suspended pursuant to a governmental order related to COVID-19, or have experienced a significant decline (i.e., 50 percent) in gross receipts between March 13, 2020, and December 31, 2020.
- No credit is allowed for an employer that receives a PPP loan.
- Wages paid to an employee are not taken into account if the employer is allowed an IRC work opportunity credit for the employee for the period.
- A paid family and medical leave credit is not allowed for any wages used to calculate the employee retention credit.
- The credit is only allowed for wages paid between March 12, 2020, and January 1, 2021.
Call Us for Assistance With the Employee Retention Credit and Other Small Business Issues Related to COVID-19
We know this is an unprecedented time for business owners. Kreis Enderle remains steadfastly committed to providing guidance, counsel, and advocacy to help our clients weather the storm.
If you have questions regarding the Employee Retention Credit or have any other concerns or issues related to the COVID-19 pandemic, please contact the Business Law Practice Group at Kreis Enderle today.