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IRS Issues Guidance for CARES Act Employee Retention Credit

On March 31, the IRS issued guidance related to the employee retention credit enacted in the CARES Act. The employee retention credit was discussed in our previous alert entitled The CARES Act: A Summary Overview of Federal Tax Changes Affecting Businesses. In general, the credit enables employers subject to closure, partial suspension, or significant decline in gross receipts due to the COVID-19 pandemic to claim a credit against the Social Security portion of the employer’s share of quarterly FICA taxes for half of the qualified wages paid to each employee in a calendar quarter of 2020, subject to certain adjustments.

This alert covers portions of the new guidance and expands upon certain aspects of the initial legislation.

The recently released IRS guidance comprises a Treasury Department press release and three publications:

Form 7200 is used by employers who file Form 941, Employer’s Quarterly Federal Tax Return, (or who file certain other forms) to request an advance payment of the employee retention credit (enacted by the CARES Act) and the tax credit for qualified sick and family leave wages (enacted by the Families First Coronavirus Response Act). This alert focuses on the employee retention credit.

Any time at which an employer’s tax credit exceeds the taxes due, the taxpayer may request a payment from the IRS. Form 7200 may thus be filed multiple times in any calendar quarter—any time at which the cumulative credit since the beginning of the quarter exceeds the sum of (a) the amount by which the employer has reduced employment tax deposits since the beginning of the quarter, and (b) the cumulative amount of advances (i.e., IRS “refunds” of tax) applied for on previous filings of Form 7200 during the quarter. One approach would be for an employer to seek a payment from the IRS (assuming the employer is eligible for a payment) as often as every time the employer has paid wages. Another approach is to file Form 7200 each time payroll taxes would otherwise be due. The required schedule for depositing payroll tax depends, in general, on the size of the current payroll and the size of the employer’s payroll during a lookback period (the details of which are beyond the scope of this alert). Regardless of the approach taken, care should be exercised to avoid claiming a refund in excess of the amount to which the employer is entitled.

For taxes imposed in a quarter, Form 7200 may not be filed after the end of the month following the close of the calendar quarter.

The instructions for Form 7200 direct the employer to claim the credit arising from wages paid for the period from March 13, 2020 to March 31, 2020 on a Form 7200 filed for the second calendar quarter of 2020.

In its discussion of “Who is an Eligible Employer?” the FAQs remind employers that an Eligible Employer—an employer eligible for the CARES employee retention credit—must “carry on a business during the calendar year 2020.” The requirement that the operation of a “trade or business” be either fully or partially suspended during any calendar quarter in 2020 due to certain governmental orders limiting commerce, travel, or group meetings due to COVID-19, or that such trade or business experiences a significant decline in gross receipts during the calendar quarter is in addition to the requirement that there was, in fact, a pre-existing “trade or business.” The CARES Act does not prescribe rules for determining whether an employer is carrying on a business at any time during the calendar year 2020, nor does the recent guidance elucidate the answer to this question. The phrase “carrying on a trade or business” has been the subject of a great deal of interpretation and litigation over the years, and a full explanation is beyond the scope of this alert. However, at one extreme, a start-up operation or a company that is a research-stage enterprise that has not yet generated any operating revenue, nor engaged in activities directly for the production of such revenue, stands a reasonable chance of not constituting a trade or business for this purpose. To avoid inadvertently claiming a credit without justification for such a business, employers should carefully address the question of whether a trade or business (as defined in court cases and other IRS guidance) existed prior to the time at which business was suspended.

In contrast to the question of whether an employer is engaged in a trade or business in the first place, the FAQs provide limited guidance regarding when a business is treated as “partially suspended” for purposes of the employee retention credit. One example is a restaurant that normally serves food in a dining room on the restaurant premises that is required to restrict its operations to carry-out, drive-through, and delivery service only. This limitation on its business results in a partial suspension, according to the FAQs.

Another example in the FAQs illustrates a situation in which an employer has a significant decline in gross receipts. A significant decline first exists for a 2020 calendar quarter for which the employer’s gross receipts are less than 50 percent of the gross receipts for the same quarter in 2019. The “significant decline” ends with the quarter after a 2020 quarter for which the gross receipts exceed 80% of the gross receipts for the corresponding quarter in 2019. In the example, the gross receipts for each of the first three quarters of 2020 were respectively, 48%, 83%, and 92% of the gross receipts for the corresponding quarter in 2019. Accordingly, the employer had a significant decline in gross receipts beginning on the first day of the first quarter and ending on the first day of the third quarter. Although the significant decline exists for the entire first quarter, only wages from March 13 are eligible for the employee retention credit.

The IRS guidance includes other general information regarding the employee retention credit, most of which confirms or is consistent with prior guidance. The guidance is available for further review at the links shown above.

 

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Roy W. Gillig focuses on federal, state, and international tax planning as well as on tax controversy and litigation and other tax-related legal services for Mintz clients. Roy counsels individuals, corporations, partnerships, nonprofits, and other entities on tax issues.

Judy Kwok

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Judy Kwok is a lawyer in the Mintz Tax Practice who focuses on transactions in the energy and sustainability industry, including tax-sensitive structures for renewable energy investments in the project finance space. In addition to advising on tax issues relating to partnerships, depreciation, and energy credit qualification, she has broad experience in mergers and acquisitions, cross-border transactions, and other commercial deals.