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IRS updated FAQs on employee retention credit

IRS updated FAQs on employee retention credit

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.

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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.

Government order

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. 

Suspension due to government order

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 an essential business that is allowed to remain open under a governmental order is not considered to have a full or partial suspension, FAQ #30 clarifies that an essential business may have a partial suspension if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order. For example, an employer that maintains both essential and non-essential business operations, each of which are more than a nominal portion of the business operations, may have a partial suspension if a governmental order restricts the operations of the non-essential business, even if the essential business is unaffected. Additionally, an essential business that is permitted to continue its operations may, nonetheless, be considered to have a partial suspension of its operations if a governmental order requires the business to close for a period of time during normal working hours.

  • FAQ #33, addressing whether an employer whose business operations continue in a comparable manner because its employees telework, now indicates that if the workplace closure causes the employer to suspend business operations for certain purposes but not others, there may be a partial suspension.

    In new Example 2, Employer D, a physical therapy facility, is not an essential business under the relevant government order and closes its workplace. None of the employees provided services through telework prior to the closure; however, following the governmental order, Employer D moves to an online format. Although Employer D services some clients remotely, it cannot service all clients remotely and employees do not have access to certain equipment or tools. Employer D has a partial suspension because the workplace, including access to physical therapy equipment, is central to operations and cannot continue in a comparable manner.

    In new Example 3, Employer E, a scientific research company, is not an essential business under the relevant government order and closes its workplace. Prior to the closure, laboratory-based research operations could not be conducted remotely (other than certain administrative tasks) and were done on-site. However, employees who handled computer modeling often teleworked. Following the governmental order, all employees engaged in computer modeling research are directed to telework, with business operations continuing in a comparable manner. In contrast, the employees engaged in the laboratory-based research cannot perform their work while the facility is closed and are limited to performing administrative tasks during the closure. Employer E’s business operations are considered to be partially suspended by the governmental order because Employer E’s laboratory-based research business operations cannot continue in a comparable manner.

  • Under existing FAQ #34, if an employer is closed by a governmental order for only certain purposes, but remains open for other purposes or is operational for limited purposes, then there is a partial suspension. An update to FAQ #34 provides that if all of an employer’s business operations may continue, even if subject to modification (for example, to satisfy distancing requirements), such a modification of operations is not considered to be a partial suspension of business operations unless the modification has more than a nominal effect on the business operations under the facts and circumstances.

    Under new Example 2, Employer F, a restaurant business previously closed due to government order, is permitted to offer sit-down outdoor service (and continue carry out service) but the indoor dining room continues to be closed under a subsequent government order. During this period, Employer F’s business operations are considered to be partially suspended because, under the facts and circumstances, a more than nominal portion of its business operations—its indoor dining service—is closed due to a governmental order. A month later under a further government order, indoor dining service is permitted, subject to social distancing requirements, in addition to the existing services. Under the facts and circumstances, the governmental order restricting the spacing of tables limits Employer F’s indoor dining service capacity and has more than a nominal effect on its business operations. During this period, Employer F’s business operations continue to be partially suspended because the governmental order restricting its indoor dining service has more than a nominal effect on its operations.

    In new Example 4, Employer H, a hospital, operates an essential business under a governmental order with respect to its emergency department, intensive care, and other services for conditions requiring urgent medical care. Because the governmental order prevents Employer H from performing elective and non-urgent medical procedures as non-essential business operations, these services and procedures are suspended. Although Employer H is an essential business, Employer H is considered to have a partial suspension of operations due to the governmental order that prevents Employer H from performing elective and non-urgent medical procedures.

    A grocery store, Employer I, in new Example 5 is an essential business under the relevant governmental order. The governmental order requires grocery stores to discontinue their self-serve offerings (e.g., salad bars). Employer I modifies its operations to close its salad bar and other self-serve offerings and instead offers prepackaged salads and other items. Even though Employer I modified its business operations, the governmental order does not have more than a nominal effect on Employer I’s business operations under the facts and circumstances, and it is not considered to be partially suspended.

    In new Example 6, a larger retailer, Employer J, previously closed its storefront due to a government order and provided curbside service for online and phone order. Under a subsequent governmental order, Employer J is permitted to reopen its storefront location; however, social distancing guidelines require Employer J to only admit a specified number of customers into the store. Although customers may wait a short period to enter the store during busy times, the size of Employer J’s storefront location is large enough to accommodate all of its customers after these short waits. The governmental order requiring Employer J to enforce social distancing guidelines does not have more than a nominal effect on Employer J’s business operations under the facts and circumstances, even though Employer J is required to modify its business operations. During this period, Employer J’s business operations are not considered to be partially suspended because the governmental order requiring enforcement of social distancing guidelines does not have more than a nominal effect on its operations.

  • A new example in FAQ #35, which addresses whether a reduction in hours is a partial suspension, demonstrates that a partial suspension may occur if the employer must reduce its daily operating hours to comply with a governmental order to deep clean its workplace.

Significant decline in gross receipts

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.

Qualified wages

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.

Other issues

Clarifying changes were also made to a number of FAQs addressing special issues, including the following:

  • With respect to a payroll reporting agent (RA) signing and submitting a Form 7200 on behalf of a client, FAQ #88 was updated to provide additional explicit instructions for the signatory for the RA in signing and submitting the form.
  • With respect to reliance by third party payers, FAQ #90 clarifies that the client employer and the third party payer may each be liable for employment taxes due as a result of any improper ERC claim.
  • With respect to avoiding a double benefit under the ERC and the credit under section 45S, FAQ #92 specifically indicates that wages used to claim the ERC, and reported by the third-party payer on the client employer’s behalf, cannot be used to claim the section 45S credit on its income tax return and the client employer is responsible for avoiding this double benefit.

Contact us

For more information, contact a tax professional with KPMG's Washington National Tax:
 

Compensation and benefits

Robert Delgado | +1 (858) 750-7133 | rdelgado@kpmg.com

Gary Cvach | +1 (202) 533-3116 | gcvach@kpmg.com

Erinn Madden | +1 (202) 533-3757 | erinnmadden@kpmg.com

Terri Stecher | +1 (202) 533-4830 | tstecher@kpmg.com

 

Employment taxation

Scott Schapiro | +1 (703) 286-8267 | sschapiro@kpmg.com

John Montgomery | +1 (212) 872-2156 | jmontgomery@kpmg.com

Manan Shah | +1 (404) 739-5247 | mananshah@kpmg.com

 

Exempt organizations

Ruth Madrigal | +1 (202) 533-8817 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 (202) 533-3985 | pquesenberry@kpmg.com

 

Tax credits

Katherine Breaks | +1 (202) 533-4578 | kbreaks@kpmg.com

Susan Reaman | +1 (202) 533- 3541 | sreaman@kpmg.com

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