February 22, 2021
In response to the economic downturn at the start of the coronavirus pandemic, Congress passed an employee retention credit under Section 2301 of the CARES Act. The employee retention credit is a refundable tax credit for qualified wages paid from March 13, 2020, through June 30, 2021, by eligible employers. But, different rules apply to credits for qualified wages paid in 2020 and qualified wages paid in 2021.
The 2020 Employee Retention Credit
For wages paid in 2020, the credit amount is 50% of qualified wages, taking into account up to $10,000 of qualified wages, yielding a maximum credit of $5,000 per employee. The wages eligible for the credit depend on an employer’s average number of full-time employees in 2019. Under the credit, an eligible employer with more than 100 full-time employees can only take into account the wages paid to the employees who were not providing services during the period the employer is eligible for the credit. But, employers with 100 or fewer full-time employees can take all wages paid into account.
In this previous client alert, we discussed the definition of qualifying wages for the 2020 Employee Retention Credit and how the IRS guidance on the definition differs from the interpretation of the Joint Committee on Taxation. We also contacted an attorney at the Service Chief Counsel Office to discuss the employee retention credit. The Service had released the guidance before the Joint Committee on Taxation released its interpretation, and it recognized that the Service’s position in the guidance was more favorable to taxpayers.
Because the Joint Committee on Taxation and the Service have different interpretations of the 100-employee limit under the employee retention credit, there is a concern that the Service could change its mind to include full-time equivalents in the 100-employee limit. But, there is a reasonable argument that full-time employees do not include full-time equivalents for purposes of the employee retention credit’s 100 employee limit. And, an attorney in the Chief Counsel Office believes that the Service will follow the position the Service took in the FAQs.
Wages Paid in 2021
For wages paid in 2021, the credit amount is 70% of qualified wages, taking into account up to $10,000 of qualified wages per quarter, yielding a maximum credit of $14,000 per employee. And, an eligible employer with fewer than 500 full-time employees can take into account all wages paid during the period the employer is eligible for the credit. See here.
For an employer to be eligible for the employee retention credit, the employer must have been fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. If an employer’s workplace is closed by a governmental order for certain purposes—but the employer’s workplace may remain open for other purposes, or the employer is able to continue certain operations remotely—then the employer’s operations would be considered to be partially suspended. See here. But, if all of an employer’s business operations may continue—even if subject to a modification—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 the employee retention credit for 2021, an eligible employer with fewer than 500 full-time employees can take into account all wages paid during the partial suspension.
Mike Sorice is an associate in the Columbus, Ohio office of Walter Haverfield. He assists closely-held businesses with business succession planning, mergers and acquisitions, and tax planning. Mike can be reached at 614-246-2262 or firstname.lastname@example.org.
Vince Nardone is Partner-in-Charge of Walter Haverfield’s Columbus office. He serves as a business advisor to owners and executives of closely-held businesses, counseling them on business planning, tax planning and controversy, cash-flow analysis, succession planning, and legal issues that may arise in business operations. Vince can be reached at 614-246-2264 or email@example.com.