The employee retention credit enacted by the CARES Act is a fully refundable tax credit equal to 50% of up to $10,000 in wages an employer pays to each employee (i.e., $5,000 per employee). Employers can immediately access this benefit by reducing the payroll taxes that they deposit on a monthly or semi-weekly basis by the credit amount.
However, like many provisions of the CARES Act, questions remain, and some of the most important ones concern overall eligibility for the credit, and the employer deduction associated with it. The Joint Committee on Taxation in its description of the CARES Act offered some insight into the credit provision, such as affirming that the IRS can allow employers to count certain healthcare expenses toward the credit even if they are not paying any other wages. However, that guidance is not binding in the way that IRS guidance would be.
Businesses are eligible under the law to take the employee retention credit if they had to partially or fully suspend their operations in 2020 because of government directives stemming from COVID-19. Otherwise, they would have had to see a significant drop in gross receipts to qualify. However, it remains uncertain whether, for example, wholesalers that supply food to restaurants or trucking companies that deliver the food are eligible for the credit. The IRS, in responses to frequently asked questions on its website, specifically says that bars and restaurants that are ordered to close by state governors but continue to serve customers with carry-out, drive-through, or delivery orders qualify for the tax credit, as they are operating at “less than normal capacity,” and thus have had a partial suspension of operations. But, have the businesses that serve those restaurants also experienced such partial suspension, pursuant to existing IRS guidance? They may be able to stay open as essential businesses, but they have still had to reduce their operations because there is less demand for their services. These business should qualify for the credit, but the official answer remains unclear.
It is also unclear if an employer utilizing the credit is allowed to take a deduction for the total amount of payroll taxes incurred or the total amount of payroll taxes paid after application of the credit. It seems that the answer should be the former, based on Section 41(h) of the Internal Revenue Code (IRC), which allows some employers to take a credit against FICA taxes instead of income taxes for certain research expenses, and IRC Section 3111(f), which concomitantly reduces the employer’s payroll tax deduction by the amount of that credit. No provision akin to IRC Section 3111(f) was enacted under the CARES Act, but again, there is no authoritative guidance.
Notably, small businesses that are unsure of their eligibility for the credit can instead try to obtain a forgivable loan under the Paycheck Protection Program, though in that case they are restricted from taking advantage of of the employee retention credit.
Please contact your MSPC advisor to determine which of these new benefits makes the most effective and immediate sense for you.