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Employee Retention Credit Deadlines Looming

Posted on June 26, 2020

As the deadline nears for some employers struggling to determine their employee retention credits, recent guidance might be just what they’ve been waiting for.

“There’s a big date looming at the end of July for taxpayers to claim the employee retention credit” on Form 941, “Employer's Quarterly Federal Tax Return,” if they haven’t filed for the advance payment of the credit, Gary Hecimovich of Deloitte Tax LLP said June 25 during his firm’s virtual media event.

Employers eligible for the credit in the first and second quarters can apply for the credit via their second-quarter filing of Form 941, due July 31, and can amend that form later in the year, Hecimovich said.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) gave employers options for paying workers during the economic shutdown as the nation tries to halt the spread of COVID-19. The options include an employee retention credit that is fully refundable and applied against the employer’s portion of payroll taxes, but only $10,000 of wages per employee can be counted for all calendar quarters, and the credit is capped at $5,000 per employee.

Qualifying small businesses can forgo that credit and instead apply for a Paycheck Protection Program loan that is generally forgivable on a tax-free basis if a specified portion of the proceeds is spent on payroll costs over a covered period and employee levels are retained.

The employee retention credit came with complexities and challenges, but over time the IRS has released FAQs to help companies navigate the provision, which can provide significant liquidity, according to Hecimovich.

The credit is intended to be monetized immediately — it can be done with each payroll deposit, which is the fastest approach because no forms are required, Grace Melton of Deloitte Tax said.

Companies have used different strategies, with some trying to monetize the credit for quick cash while others are waiting for guidance to evolve "to make sure that they have a solid understanding of the law before they file the claim,” Hecimovich said.

Employers can also file Form 7200, “Advance Payment of Employer Credits Due to COVID-19,” during the quarter for the refundable payroll tax credit if their credits have exceeded their payroll deposits. Form 941 and Form 941-X, “Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund,” are the last resorts, which can be filed “on a quarterly or a year-end basis to do the reconciliation and recapture the credit,” Melton said.

Eligible Employer

To be eligible for the credit, an employer must carry on a trade or business during calendar year 2020 and either completely or partially suspend operations in any calendar quarter of 2020 because of government orders limiting commerce, travel, or group meetings, or the employer must have a significant decline in gross receipts during the calendar quarter.

The eligible employer determination presented various challenges, some of which the IRS clarified in an FAQ updated June 19.

Hecimovich said most employers are looking at the government order test because the 50 percent gross receipts test is difficult to meet. However, he said the government order test involves a facts and circumstances analysis that has proven to be fairly complicated to apply, raising questions about nexus and the eligibility period.

Hecimovich also noted that the government orders vary among states and the phasing of orders has “raised a lot of questions in determining the period in which you are an eligible employer.”

The statute requires employers to determine the wages on an employee-by-employee basis for individuals who aren’t providing services because of the government order, which has been challenging for larger employers trying “to justify and determine the final amount of wages,” Hecimovich said.

Considering the potential of audit, Melton advised that “it’s prudent and necessary for employers to have good documentation of their methodology to identify people and their eligible employer status and for support for calculating the credit.”

Essential Business Eligibility

Questions arose from early guidance that led many essential businesses — exempt from the general stay-at-home orders — to believe that “an essential business just simply cannot claim the employee retention credit even if a portion of the business is impacted by the government order,” Hecimovich said.

But the IRS provided clarifications and more examples in its latest FAQ on what constitutes a full or partial shutdown of operations.

One lingering question that was addressed was whether hospitals with essential businesses of caring for urgent care, emergency, and COVID-19 patients “could qualify for the employee retention credit to the extent they are still paying doctors and staff” for elective and non-urgent medical procedures that were suspended under the government order, Hecimovich said.

In other areas, “we’re being asked to call balls and strikes on fact scenarios for our clients [in which] it’s not an all-or-nothing shutdown,” Hecimovich said.

The IRS clarified some situations in which businesses continue to operate, but not necessarily as they did before the government order. The IRS was unclear in its earlier FAQ, explaining that businesses that could continue comparable operations wouldn’t be eligible for the employee retention credit, Hecimovich said,  but he pointed to the IRS’s recent example of a scientific research company having a qualifying partial suspension of a trade or business.

The IRS's restaurant example, resulting in a partial suspension of the business, helps illustrate “how the lifting of the orders would . . . continue to allow an employer to qualify as an eligible employer,” Hecimovich said, noting that restaurants progressed from carryout dining to outdoor dining and ultimately to indoor dining but with reduced capacity because of physical distance requirements.

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