The CARES Act provides for a credit against old age, survivors and disability insurance (OASDI) taxes or Tier 1 Railroad Retirement excise taxes for businesses to use to offset the effects of COVID-19 related business issues. The credit will be available to all qualified employers that either had to suspend operations or had a significant drop in gross receipts in an applicable credit quarter.
Specifically, the credit applies to:
(1) Any employer who was carrying on a trade or business in calendar year 2020 that was suspended due to orders from an ‘appropriate government authority’ limiting commerce, travel, or group meetings due to COVID-19; OR
(2) any employer who during the period: 1) beginning with the first calendar quarter after 2019 in which it experienced a 50% or greater reduction in gross receipts in that quarter when compared against the gross receipts of the same quarter in the prior year; and 2) ending with the subsequent quarter (to which the credit was claimed) in which it had gross receipts greater than 80% of the gross receipts in the same quarter of the previous calendar year. Non-profits might also qualify for this credit under the suspension of operations rules.
This credit is generally allowed for 50% of qualified wages for each qualified employee. Qualified wages are generally any wages paid to employees during shutdowns caused by COVID-19, or in a quarter with a significant decrease in gross receipts as described above.
For companies with employees greater than 100, the employee must not be working because of either a suspension in operations or substantial drop in gross receipts. For companies with less than 100 employees, the wages must be paid because of a suspension in operations, or wages paid with respect to a quarter of significant drop in gross receipts. The important distinction is that companies with less than 100 employees will be allowed to claim the credit for wages paid to employees during an applicable quarter whether or not the business is operating.
The qualified wages include health care plan expenses that are allocable to wages in a group health plan (excluded from income of employees under section 106(a)). However, the qualified wages cannot exceed $10,000, or the amount the employee would have been paid for an equivalent time during the 30 preceding days. Qualified wages also cannot include any wages considered in the Families First Coronavirus Response Act (FFCRA).
This credit applies to offset employment taxes after they are reduced by credits for employment of qualified veterans, research expenses for qualified small businesses, and the payroll credits for either qualified required paid sick leave or required paid family leave under the FFCRA. Any amount in excess of these limitations is refundable under sections 6401(a) and 6413(b), and treated as other refunds under section 1324. The credit does not apply to government employers, and can be elected out of by an employer. The employer must also exclude an employee if such employee is included in a work opportunity tax credit, and the employer cannot use wages used to compute the paid family and medical leave credit enacted in the 2017 Tax Cuts and Jobs Act. Finally, an employer is not eligible if they are taking a small business interruption loan.