Additional Guidance on Employee Retention Tax Credit
The CARES Act provides an “employee retention tax credit” to employers that suspend operations due to a government order or that suffer a financial downturn. The credit is a dollar-for-dollar refundable tax credit for any wages paid to eligible employees from March 12, 2020, through December 31, 2020. For employers with more than 100 employees, the credit is only available for wages paid to employees who are not providing services to the employer. On April 23, the Joint Committee on Taxation released its summary of the tax provisions of the CARES Act (known as a Joint Committee Bluebook), which provides some clarity on the scope of the tax credit. Although the Joint Committee Bluebook is not technically a part of legislative history, because it is a post-enactment document, it is often considered in determining legislative intent at the time of enactment.
The statutory language was not clear on the scope of the credit pertaining to a qualifying governmental shutdown order. However, the Joint Committee Bluebook suggests that the credit extends to employers that cease all activities other than minimum basic operations and voluntarily close their offices pursuant to a state or local “stay at home” order (see “Definition of eligible employer” excerpt below from the Joint Committee Bluebook). Furthermore, many employers questioned the scope of the statutory language relating to the requirement that the employees cannot be “providing services” to the employer. The report suggests that covered employees for whom a credit may be claimed include those who are only required to work on reduced hours or partial schedules (see “Definition of qualified wages” excerpt below from the Joint Committee Bluebook).
A copy of the entire Joint Committee Bluebook can be accessed here.
Definition of eligible employer
An eligible employer is any employer which was carrying on a trade or business during calendar year 2020 and which meets either of two additional tests.
Under the first test (the “governmental order test”), such employer is an eligible employer if it experiences a calendar quarter in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.
For example, a restaurant in a State under a Statewide order that restaurants offer only take-out service meets the governmental order test, as does a concert venue in a State under a Statewide order limiting gatherings to no more than 10 people. Similarly, an accounting firm that is in a county where accounting firms are among businesses subject to a directive form public health authorities to cease all activities other than minimum basic operations and that closes its office and does not require employees who cannot work from home (e.g., custodial employees, mail room employees) to work meets this test. However, a grocery store in a State that generally imposes limitations on food service, gathering size, and travel outside the home, but exempts grocery stores (and travel to and from grocery stores) from any COVID-19 related restrictions (e.g., because grocery stores are deemed an “essential business” that is expected from restrictions) would not meet this test.
Definition of qualified wages
The definition of qualified wages depends on the average number of full-time and full-time equivalent employees the eligible employer had during 2019. All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 are treated as one employer for purposes of the provision.
For an eligible employer that had more than 100 such employees in 2019, qualified wages and wages paid by the eligible employer with respect to which an employee is not providing services due to circumstances that cause the eligible employer to meet either the governmental order test or the reduced gross receipts test.
For example, if a restaurant that had an average of 150 full-time employees during 2019 meets the governmental order test, and the restaurant continues to pay kitchen employees’ wages as if they were working 40 hours per week but only requires them to work 15 hours per week, the wages paid to the kitchen employees for the 25 hours per week with respect to which the kitchen employees are not providing services are qualified wages. However, if the same restaurant reduces kitchen employees’ working hours from 40 hours per week to 15 hours per week and only pays wages for 15 hours per week, no wages paid to the kitchen employees are qualified wages.