Nonprofits, Political Consultants, and Lobbyists Feeling Jilted by Their Omission from the Paycheck Protection Program Can Receive Tax Credit under the CARES Act’s Employee Retention Tax CreditWednesday, May 13, 2020
On March 27, 2020, President Donald J. Trump signed into law a $2 trillion coronavirus relief package (the “CARES Act”) that will provide immediate assistance to many Americans, small business, and major industries facing payroll issues resulting from the ongoing COVID-19 pandemic.
What is the Employee Retention Tax Credit (“ERTC”)?
The ERTC is a fully refundable $5,000 tax credit for each employee who is paid or incurs $10,000 or more in qualified wages (including compensation and certain group health plan expenses) paid after March 12, 2020, and before January 1, 2021 (i.e., paid between March 13, 2020 – December 31, 2020).
Unlike the Paycheck Protection Program, any nonprofit organization could be eligible to claim the ERTC, as well as political consultants, lobbyists, large employers, or other employers disqualified from the PPP program.
The Internal Revenue Service (“IRS”) has issued guidance permitting an Eligible Employer to obtain an advance of the refundable credits under certain circumstances.
Who is considered an Eligible Employer?
Private employers carrying on a trade or business in 2020, or “Eligible Employers,” are eligible to receive the ERTC if they meet one of two different “economic hardship” tests:
- The employer has operations that have been partially or fully suspended as a result of orders from a government authority due to COVID-19 regardless of whether an Eligible Employer’s revenue changed. A nonprofit may consider all of its operations in determining whether its operations have been partially or fully suspended to determine its eligibility.
- The employer has experienced a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019. Eligibility terminates, however, when an Eligible Employer’s gross receipts in a quarter exceed 80% compared to the respective 2019 quarter.
Who is NOT eligible to receive the ERTC?
Employers that receive a PPP loan (even if they pay it back in full) are not eligible to also receive the ERTC.
What does it mean for an Eligible Employer’s operations to be partially or fully suspended?
The IRS has provided that an Eligible Employer includes any employer whose operations have been partially or fully suspended due to “an appropriate governmental authority impos[ing] restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can still continue to operate but not at its normal capacity.”
As a practical matter, we believe that an employer who has had to cancel meetings or events would meet the criteria, but an employer who has been able to successfully transfer all of their activities to “distance” or “virtual” programming would not. The guidance from the IRS does not answer the question of how much “suspension” is necessary before an employer would qualify. If you have questions about whether you think your organization has “suspended” activities, please reach out to discuss with us further.
What are considered “qualified wages?”
Determining what constitutes qualified wages turns on the number of full time equivalent (“FTE”) employees employed by the Eligible Employer in 2019.
If the Eligible Employer averaged less than 100 FTE employees, qualified wages are the wages paid to any employee during the periods that the Eligible Employer faced economic hardship.
If the Eligible Employer averaged more than 100 FTE employees, qualified wages are the wages paid to an employee for time that the employee is not providing services due economic hardship, as discussed above. These wages may not exceed what the employee would have been normally paid during the 30 days immediately preceding the period of economic hardship.
This amount that an Eligible Employer may claim does not include the amount of qualified and family leave wages received under the Families First Coronavirus Response Act (“FFCRA”).
How can Eligible Employer claim the ERTC?
An Eligible Employer may reduce the amount of social security taxes paid and account for taking the ETC on its Form 941. The IRS has directed that employers should not claim the ERTC on its first quarter Form 941. Instead, the IRS has advised that an Eligible Employer paying any qualified wages between the dates of March 13, 2020 and March 31, 2020, inclusively, to include 50% of those wages together with 50% of any qualified wages paid during the second quarter of 2020 on its second quarter Form 941.
The ERTC is fully refundable, meaning that if the Eligible Employer’s social security tax due is less than the amount of credit under the ERTC, they would be owed a refund from the IRS.
To request an advance of the credit, an Eligible Employer may file a Form 7200 if it lacks sufficient funds.
What sort of review would be conducted, or penalty would be assessed, if an Eligible Employer incorrectly claimed the ERTC?
We have heard stories about organizations applying for a PPP loan without fully considering their eligibility for the loan and the penalties that could go along with that. The IRS has not issued additional guidance regarding its review or audit of Eligible Employers claiming the ERTC. Without additional guidance the IRS, we believe an Eligible Employer can claim the ERTC if they have a good faith basis for believing that they meet the economic hardship test and can satisfy the three-part test below:
- The Eligible Employer paid qualified wages to its employees in the calendar quarter before the required deposit;
- The amount of federal employment taxes that the Eligible Employer does not timely deposit, reduced by any amount of federal employment taxes not deposited in anticipation of the paid sick or family leave credits claimed under the FFCRA, is less than or equal to the amount of the Eligible Employer’s anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit; and
- The Eligible Employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.
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