Summary of Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (§ 2301)
Below is a summary of one of the provisions of Title II - Rebates and Other Individual Provisions and Business Provisions from the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
Summary
- Section 2301 of the CARES Act provides eligible employers with a refundable credit equal to 50% of qualified wages paid to employees.
- Employers must meet eligibility requirements by demonstrating full or partial business suspension due to a government order or a significant decline in gross receipts due to COVID-19.
- Employers who have taken out a small business interruption loan via the Small Business Administration's 7(a) Loan Guarantee Program will not be eligible.
Detailed Analysis
Qualified wages
For each eligible employee, a maximum of $10,000 in wages can be taken into account for the retention credits (a maximum of $5,000 in retention credits per employee) for wages paid between March 12, 2020 and January 1, 2021. The CARES Act specifically provides that in addition to traditional wages, an employee's qualified wages includes qualified health plan expenses.
Eligibility
To qualify for the refundable credit, an employer will be eligible if it was operating in 2020, and either:
- the trade or business is fully or partially suspended due to a government order (such as state or local social distancing or stay at home orders) due to COVID-19; or
- if the employer in a given quarter had gross receipts less than 50% compared to the same calendar quarter in the prior year. If this threshold is met, the employer remains eligible until its gross receipts exceed 80% from the same calendar quarter in the prior year.
For employers with more than 100 full-time employees (determined as the average number of full-time employees during 2019), the only wages that are eligible for the credit are for wages paid to employees who cannot provide services due to the COVID-19 circumstances outlined in subparagraphs (1) or (2) above. However, for employers with fewer than 100 full-time employees, retention credits may be earned irrespective of the employee providing services, so long as the employer satisfies the requirements in (1) or (2) above.
Tax-exempt organizations are eligible while federal, state, and local government employers are not eligible.
Employers who have taken out a small business interruption loan via the Small Business Administration's 7(a) Loan Guarantee Program will not be eligible for these retention credits.
Tax Treatment
If the retention credits exceed an employee's applicable taxes, such credits will be considered tax overpayments and refunded to the employer under sections 6402(a) and 6413(b) of the Internal Revenue Code.
Employers are prohibited from double-counting wages used to determine retention credits in the calculation of other credits, such as the Work Opportunity Tax Credit under Section 51 of the Internal Revenue Code or the Employer Credit for Paid Family and Medical Leave under Section 45S.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.