The IRS on June 19, 2020, released another set of updated “frequently asked questions” (FAQs) for the employee retention credit (ERC) provided by the “Coronavirus Aid, Relief, and Economic Security Act” (CARES Act), Pub. L. No. 116-136.
The ERC is a refundable payroll tax credit of 50% of qualified wages paid by an eligible employer whose business has been affected by COVID-19. Qualified wages are limited to $10,000 of compensation, including health benefits, paid to each employee. Thus, the maximum credit is $5,000 (50% x $10,000) per employee.
Read the FAQs as posted on a dedicated IRS webpage.
The updated FAQs include, but are not limited to, a number of helpful clarifications and expanded examples as explained in more detail below.
In providing examples of government orders, the IRS updated FAQ #28 to include an order from a local health department mandating a workplace closure for cleaning and disinfecting. Additionally, FAQ #28 clarifies that whether the operations of a trade or business are considered essential or non-essential may vary based on the jurisdiction and is determined by reference to the governmental order affecting the employer’s operation of its trade or business.
Although the FAQs continue to rely on a distinction between essential and non-essential businesses, several FAQs have been updated to refine when an essential business may be considered to experience a partial suspension, as well as include additional examples:
Although the prior version of the FAQs indicated that the IRS planned to issue future guidance addressing how a tax-exempt organization determines its gross receipts. This guidance has arrived in the form of updated FAQ #46, which now provides that, solely for purposes of the ERC, gross receipts for a tax-exempt employer include gross receipts from all operations, not only from activities that constitute unrelated trades or businesses. Gross receipts, for example, include amounts received by the organization from total sales (net of returns and allowances) and all amounts received for services, regardless of whether those sales or services are substantially related to the organization’s exercise or performance of the exempt purpose or function constituting the basis for its exemption. Gross receipts also include the organization’s investment income, including from dividends, rents, and royalties, as well as the gross amount received as contributions, gifts, grants, and similar amounts, and the gross amount received as dues or assessments from members or affiliated organizations.
To determine whether there has been a significant decline in gross receipts, a tax-exempt employer computes its gross receipts received from all of its operations during the calendar quarter and compares those gross receipts to the same gross receipts received for the same calendar quarter in 2019.
For an amount to be qualified wages, it must be wages within the meaning of section 3121(a) of the Internal Revenue Code. Under FAQ #58, a new Example 3 illustrates that an employer may treat amounts an employee contributes as pre-tax salary reduction contributions to a qualified 401(k) plan as qualified wages, as well as amounts paid to maintain the group health plan (including any employee pre-tax salary reduction contribution) that may be allocated to wages. However, an employer may not treat employer matching (or non-elective contributions) to the qualified 401(k) plan or any employee pre-tax salary reduction contributions toward the dependent care assistance program or qualified transportation benefits as qualified wages.
Clarifying changes were also made to a number of FAQs addressing special issues, including the following:
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