Tax Monitor

By: Valerie F. Gainer

The Internal Revenue Service (“IRS”) recently updated its frequently asked questions (“FAQs”) regarding the Employee Retention Credit (“ERC”) under the CARES Act. Here are some important highlights.

What is a government order that completely or partially suspends an employer’s operations?

Recall that the ERC allows an Eligible Employer to receive a tax credit in the amount of 50% of the qualified wages it pays to employees. An “Eligible Employer” is an employer carrying on a trade or business in 2020 that (1) completely or partially suspends operation during a 2020 calendar quarter because of certain government orders relating to COVID-19; or (2) suffers a significant decline in gross receipts during a 2020 calendar quarter. 

The new FAQs explain that government orders are directives issued by federal, state, or local governments that restrict “commerce, travel, or group meetings” in response to COVID-19.ⁱ  These orders must be issued by a government authority that has jurisdiction over the employer and must impact the “employer’s operation of its trade or business.”ⁱⁱ Examples of government orders include orders closing non-essential businesses, orders to shelter-in-place, and curfews limiting business hours.ⁱⁱⁱ 

What does it mean to completely or partially suspend operations?

When the IRS previously issued guidance regarding the ERC, it explained that a business may be partially suspended if the business continues to operate at less than its normal capacity, like a restaurant that provides carry-out orders but cannot offer its usual dining room service due to governmental orders. 

The new FAQs clarify that essential businesses that have been permitted to remain open will not be treated as fully or partially suspending operations.^iv  This remains true even if the essential business’s operations have been impacted by the closure of non-essential businesses pursuant to a government order.^v An exception exists, however, for certain essential businesses having trouble with their supply chain. If a non-essential business which provided an essential business with “critical goods or materials” is no longer operating because of a government order, and the essential business must fully or partially suspend operations because it lacks those “critical goods or materials,” the essential business is considered to have completely or partially suspended operations for purposes of the ERC analysis.^vi

The FAQs also address businesses with employees working from home. “If an employer’s workplace is closed by a governmental order, but the employer is able to continue operations comparable to its operations prior to the closure by requiring its employees to telework, the employer’s operations are not considered to have been fully or partially suspended as a consequence of a governmental order.”^vii We have minimal direction regarding how to evaluate whether a business is operating comparably to its pre-closure status. In the example offered in the FAQs, a non-essential business is forced to close pursuant to a government order. Before the closure, all the business’s employees teleworked a couple times each week. After closure, the business mandated that all employees telework and that any client meetings be conducted through remote audio and/or video methods. “[B]ecause its employees may continue to conduct its business operations by teleworking,” the business has not suspended operations.^viii This example does not reflect the reality of many businesses that have newly instituted work from home policies and have reduced productivity or performance as employees must adapt to working away from the office.

How do I evaluate a significant decline in gross receipts if my business started in 2019?

This depends on which quarter in 2019 your business started. A business begins to experience a significant decline in gross receipts when its gross receipts for a 2020 quarter are less than 50% of its gross receipts for the corresponding 2019 quarter. A business will continue to be treated as suffering from a significant decline in gross receipts throughout the 2020 calendar year until the quarter following the first quarter in which the business’s gross receipts increase to an amount greater than 80% of the business’s gross receipts in the corresponding 2019 quarter.

If the business started in the first quarter of 2019, the employer simply compares corresponding quarters between 2019 and 2020 (i.e., the first quarter of 2019 to the first quarter of 2020, the second quarter of 2019 to the second quarter of 2020, etc.) to determine if it has experienced a significant decline in gross receipts.^ix If the business started in any other quarter of 2019, the IRS has provided the following guidelines: 

• For a 2019 second quarter start-up, the second quarter of 2019 should be compared to the first quarter in 2020, the second quarter of 2019 should be compared to the second quarter in 2020, the third quarter of 2019 should be compared to the third quarter of 2020, and the fourth quarter of 2019 should be compared to the fourth quarter of 2020.^x
• For a 2019 third quarter start-up, the third quarter of 2019 should be compared to the first quarter in 2020, the third quarter of 2019 should be compared to the second quarter in 2020, the third quarter of 2019 should be compared to the third quarter of 2020, and the fourth quarter of 2019 should be compared to the fourth quarter of 2020.^xi
• For a 2019 fourth quarter start-up, the fourth quarter of 2019 should be compared to the first quarter in 2020, the fourth quarter of 2019 should be compared to the second quarter in 2020, the fourth quarter of 2019 should be compared to the third quarter of 2020, and the fourth quarter of 2019 should be compared to the fourth quarter of 2020.^xii

If a business started in the middle of a 2019 quarter, the employer should estimate what gross receipts for the entire quarter would have been based upon the gross receipts for period during the quarter it was operating.^xiii

How are related employers treated for purposes of the ERC?

Related employers that are regarded as one employer under retirement rules or under Section 52(a) or (b) of the Internal Revenue Code when evaluating certain tax credits (like certain parent-subsidiary controlled groups, brother-sister controlled groups, combined groups of corporations, partnerships, trusts, and estates) will receive the same treatment for purposes of the ERC.^xiv  If one employer of the aggregated group fully or partially suspends operations of its business, then all the employers of the group will be treated as fully or partially suspending operations.^xv

Similarly, all employers in an aggregated group will be considered when evaluating whether the group has experienced “a significant decline in gross receipts.”^xvi When conducting this assessment for an aggregated group, the gross receipts of each employer in the aggregated group must be added together, and, if the aggregated group as a whole has not experienced a significant decline in gross receipts, then no employer that is part of the aggregated group will be considered to have a significant decline in gross receipts.^xvii

If an aggregated group qualifies for the ERC, the ERC is allocated to each member of the group in proportion to each member’s “share of the qualified wages giving rise to the credit.”^xviii Each member’s proportionate share should be reported by that member on its employment tax return.^xix

Jackson Kelly is prepared to answer any questions you may have regarding the impact of Employee Retention Credit on your business.

ⁱ      See Internal Revenue Service, COVID-19-Related Employee Retention Credits: Determining What Types of Governmental Orders May be Taken into Account for Purposes of the Employee Retention Credit FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-what-types-of-governmental-orders-may-be-taken-into-account-for-purposes-of-the-employee-retention-credit-faqs).
ⁱⁱ      Id.
ⁱⁱⁱ      Id.
^iv      See Internal Revenue Service, COVID-19-Related Employee Retention Credits: Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employers-trade-or-business-operations-are-considered-to-be-fully-or-partially-suspended-due-to-a-governmental-order-faqs).
^v       Id.
^vi       Id.
^vii      Id.
^viii     Id.
^ix      See Internal Revenue Service, COVID-19-Related Employee Retention Credits: Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employer-is-considered-to-have-a-significant-decline-in-gross-receipts-and-maximum-amount-of-an-eligible-employers-employee-retention#gross_receipts).
^x       Id.
^xi      Id.
^xii      Id.
^xiii     Id.
^xiv     See Internal Revenue Service, COVID-19-Related Employee Retention Credits: Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-which-entities-are-considered-a-single-employer-under-the-aggregation-rules-faqs).
^xv      See Internal Revenue Service, COVID-19-Related Employee Retention Credits: Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employers-trade-or-business-operations-are-considered-to-be-fully-or-partially-suspended-due-to-a-governmental-order-faqs).
^xvi     See Internal Revenue Service, COVID-19-Related Employee Retention Credits: Determining When an Employer’s Trade or Business Operations are Considered to be Fully or Partially Suspended Due to a Governmental Order FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employer-is-considered-to-have-a-significant-decline-in-gross-receipts-and-maximum-amount-of-an-eligible-employers-employee-retention#gross_receipts).
^xvii      Id.
^xviii      See Internal Revenue Service, COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs (https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs).
^xix      Id.