CARES Act: Summary of the Employee Retention Credit Provision Section 2301
On March 25, 2020, the U.S. Senate voted to approve the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, an economic stimulus package addressing the impact of the COVID-19 pandemic (the “Act”). The U.S. House of Representatives is expected to approve the Act in its current form, with the President signing it into law shortly thereafter. It is estimated the Act will infuse the economy with over $2 trillion of relief through a wide variety of provisions for individuals and businesses impacted by the COVID-19 pandemic. A key tax-related provision of the Act is the Employee Retention Credit for Employers Subject to Closure Due to COVID-19.
The provision allows eligible employers carrying on a trade or business in 2020 a refundable tax credit against Social Security taxes imposed under section 3111(a) of the Internal Revenue Code (the “Code”) or Railroad Retirement Tax Act taxes imposed under section 3221(a) of the Code. Eligible employers include employers whose operations were fully or partially suspended due to a COVID-19 government-mandated shut-down order, or employers whose gross receipts declined by greater than 50 percent when compared to the corresponding calendar quarter of the prior year.
The refundable credit is applicable for all wages paid between March 12, 2020, and before January 1, 2021. The credit is computed on a calendar-quarter basis and equals 50 percent of qualified wages up to $10,000 paid to each employee or $5,000 in actual credit. Eligibility for the credit begins with the first 2020 calendar quarter in which the employer’s gross receipts declined by greater than 50 percent of the corresponding calendar quarter of the prior year, and ends with the calendar quarter following the calendar quarter in which the gross receipts exceed 80 percent of the corresponding calendar quarter of the prior year. For purposes of computing the credit, qualified wages paid to an employee during the relevant period may not exceed an amount that would have been paid to such an employee within the preceding 30 days.
The credit is reduced by any credit taken under subsections (e) and (f) of section 3111 of the Code (related to credit for employment of qualified veterans and credit for research expenditures of qualified small businesses) and by any credit taken under sections 7001 and 7003 of the Families First Coronavirus Response Act (related to credits available for certain employers that provide paid sick leave and paid family and medical leave).
The qualified wages must also factor in expenses related to an employee’s health plan which would be allocable to the qualified wages under an employer-sponsored health plan. Further, any wages taken into account under the Employee Retention Credit for Employers Subject to Closure Due to COVID-19 cannot be taken into account for the employer credit for paid family and medical leave under section 45S of the Code.
The credit can be claimed by employers with an average of more than 100 employees for all employees who are retained but not currently working as a result of COVID-19. For employers with an average of fewer than 100 employees, all wages paid qualify for the credit so long as they meet other requirements related to suspension of business or reduction in gross receipts. All employers treated as a single employer under section 52(a) or (b) or Section 414(m) or (o) of the Code will be treated as a single employer under this provision.
Any eligible employer may elect out of the credit. This credit is not available to Federal or state employers but is available to organizations exempt under section 501(c) of the Code. In addition, this credit will not be available to any eligible employer that receives a loan under the Small Business Administration program pursuant to section 7(a) of the Small Business Act. Any employer that fails to pay the relevant payroll taxes based on reasonable anticipation of the credit may be relieved of penalties under Section 6656 of the Code.
If you have any questions about the information in this alert, please contact Michael Cumming (248-203-0740 or MCumming@dykema.com), Asel Lindsey (210-554-5298 or ALindsey@dykema.com), Nardeen Dalli (248-203-0793 or NDalli@dykema.com), or your Dykema relationship attorney.