CARES Act: Economic Relief
On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act provides an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, small business loans, increased unemployment benefits, and a variety of tax breaks.
Specifically for small businesses, it is anticipated that the Small Business Administration’s (“SBA’s”) Paycheck Protection Program (“PPP”) and Economic Injury Disaster Loans (“EIDL”) will be popular programs for loans that provide business relief. However, the CARES Act also affords economic relief that is not tied to these programs which relief might be available for businesses that are either not eligible to, or choose not to, participate in SBA programs. Such relief includes the Employee Retention Credit and the deferral of payroll taxes.
Employee Retention Credit (Sec. 2301)
The CARES Act offers “eligible employers” a tax credit equal to 50% of “qualified wages” paid or incurred to each of the employer’s employees from March 13 to December 31, 2020. Any eligible employer may elect to disregard this credit for any calendar quarter.
To be an “eligible employer” for the employee retention credit:
- the employer must not receive a Paycheck Protection Program 7(a) loan under CARES Act section 1102; and
- must be engaged in a trade or business (including 501(c) tax exempt organizations) during the 2020 calendar year and either:
- had its operations fully or partially suspended by an order of a governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious or other purposes) due to Covid-19; or
- beginning with the first calendar quarter beginning after December 31, 2019, had its gross receipts decline by more than 50% as compared to the same quarter in the prior year. The period for measuring this credit ends following any quarter for which gross receipts are restored to greater than 80% of gross receipts for the same calendar quarter in the prior year.
“Eligible employers” cannot include the Government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing.
“Qualified wages” (which may include allocated amounts of “qualified health plan expenses”) is determined based on the number of full-time employees:
- For employers with more than 100 full-time employees, qualified wages only include amounts paid to employees that are not providing services due to a shutdown order of a governmental authority.
- For employers with 100 or fewer full-time employees, all employee wages qualify for the employee retention credit.
This credit may be limited by the following:
- The amount of qualified wages with respect to any employee which may be taken into account by the eligible employer for all calendar quarters shall not exceed $10,000; and
- The allowed credit with respect to any calendar quarter shall not exceed the applicable employment taxes (reduced by any credits allowed under subsections (e) and (f) of section 3111 of the Internal Revenue Code of 1986 and sections 7001 and 7003 of the Families First Coronavirus Response Act) on the wages paid with respect to the employment of all the employees of the eligible employer for such calendar quarter.
However, the CARES Act further provides that if the amount of the credit exceeds this employment tax limitation in any quarter, then such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) 6 and 6413(b) of the Internal Revenue Code of 7 1986.
At the time of this writing, additional regulatory guidance, forms and instructions with respect to the credit are anticipated from the Secretary of the Treasury but have not yet been promulgated.
Deferral of Employer Payroll Taxes (Section 2302)
The CARES Act permits employers to defer payment of the 6.2% excise tax on wages paid by an employer. The tax can be paid over a two year period; with half required to be paid by December 31, 2021, and the other half by December 31, 2022.
The deferral of payroll taxes is not available to a person that has a Paycheck Protection Program 7(a) loan forgiven under the CARES Act.
At the time of this writing, additional regulatory guidance and rules with respect to the credit are anticipated from the Secretary of the Treasury but have not yet been released.