2020 Year-End Tax Guide

27

www.marcumllp.com

COVID-19 Federal Wage-Related Tax Credits

EMPLOYEE RETENTION CREDIT Purpose The Paycheck Protection Program (PPP) received most of the attention in the Coronavirus Aid, Relief & Economic Security (CARES) Act, but another important provision was the employee retention credit. If your business missed out on taking the PPP loan and still suffered a full or partial shutdown, or a significant decline in gross receipts (defined later), the next best course of action is to take advantage of the employee retention credit. In some cases, the employee retention credit could be more beneficial than taking a PPP loan. Unlike the emergency sick leave or expanded FMLA, employers are not obligated to pay retention wages. This credit is available when an employer electively moves forward with paying its employees despite a full or partial shutdown, or a significant decline in gross receipts. (Please see discussion below regarding different specifications for employers with more or less than 100 employees.) How much is the credit? The credit is equal to 50% of wages paid, up to $10,000 per employee ($5,000 credit maximum). Who is eligible to claim the credit? The employee retention credit is open to employers of any size, in the private sector or nonprofit sector. The employer should experience one of the following conditions to be eligible for the credit: 1. The employer suspends operations either partially or fully during any quarter in 2020 due to government regulation or limitations, or 2. The employer has a significant decline in gross receipts. A “significant decline in gross receipts” is defined as gross receipts of less than 50% of the gross receipts in the same calendar quarter of the prior year. There are two significant dates: the quarter in which the >50% decline is met (beginning quarter), and the quarter following the quarter in which the employer achieves 80% of the gross receipts from the prior year calendar quarter (ending quarter). For the purposes of this credit, use gross receipts as defined in §448C.

A shelter-in-place or stay-at-home order is not considered a full or partial suspension of operations. However if a business is shut down for a reason such as a supplier being unable to deliver raw materials due to a shelter-in-place order, that could be reason for a partial suspension of operations. There are special provisions for businesses formed in 2019 or acquired in 2020; however, that discussion is beyond the scope of this article. If this is a circumstance that applies to your business, reach out to your Marcum advisor for additional information. What expenses are eligible for the credit? The most complicated part of the employee retention credit is the different specifications relative to one magic number: 100 employees (use §4980H rules for applicable large employers for the definition of “full time.” Full time is defined as an employee who averages at least 30 hours per week, and at least 130 hours per month). For employers with more than 100 employees The retention credit has greater restrictions for employers with more than 100 employees versus those with fewer. The basic difference is the employer may only take a tax credit for time paid to employees for hours not worked. In other words, the employer continues to pay wages to its employees despite not having work for them, as in the case of a shutdown. Wages paid for vacation, PTO, sick time, and holidays are not considered eligible wages. Severance wages and wages not subject to Medicare tax are also ineligible for the credit. The maximum credit the employer can claim is based on the wages the employee earned in the previous 30-day period, having worked the same number of hours, up to the maximum cap per day.