• Ayala, Vado & Associates

COVID-19-Related Employee Retention Credits: FAQ's

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

Eligible Employers that are entitled to claim the Employee Retention Credit are private-sector businesses and tax-exempt organizations that carry on a trade or business during calendar year 2020 and either:

  • Have operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or

  • Experienced a significant decline in gross receipts during the calendar quarter.

16. Is the Employee Retention Credit available to employers of any size?

Yes.  The number of employees an employer has does not affect whether it is an Eligible Employer that may claim the credit.

17. What is a “trade or business” for purposes of the Employee Retention Credit?

For purposes of the Employee Retention Credit, “trade or business” has the same meaning as when used in section 162 of the Internal Revenue Code (the “Code”) other than the trade or business of performing services as an employee.  Under section 162 of the Code, an activity does not qualify as a trade or business unless its primary purpose is to make a profit and it is carried on with regularity and continuity.   The facts and circumstances of each case determine whether an activity is a trade or business.  A taxpayer does not necessarily need to make a profit in any particular year in order to be in a trade or business as long as a good faith profit motive is present.

For purposes of the Employee Retention Credit, a tax-exempt organization described in section 501(c) of the Code that is exempt from tax under section 501(a) of the Code is deemed to be engaged in a “trade or business” with respect to all operations of the organization.

18. Are Federal, State, or local government entities eligible to receive the Employee Retention Credit?

No. The Federal government, the governments of any State or political subdivision thereof, and any agency or instrumentality of those governments are not Eligible Employers and are not entitled to receive the Employee Retention Credit.  However, tribes or tribal entities may be Eligible Employers if they operate a trade or business.  See If a tribe or tribal entity operates a trade or business, is the tribe or tribal entity eligible for the Employee Retention Credit?

19. What organizations are considered an “instrumentality” of the Federal government, or of a State or local government, for purposes of determining if an employer is eligible for the Employee Retention Credit?

In general, for employment tax purposes, the IRS considers six factors in determining whether an organization is an instrumentality:

  • whether the organization is used for a governmental purpose and performs a governmental function;

  • whether performance of the organization’s function is on behalf of one or more States or political subdivisions;

  • whether there are any private interests involved, or whether the States or political subdivisions involved have the powers and interests of an owner;

  • whether control and supervision of the organization is vested in a public authority or authorities;

  • if express or implied statutory or other authority is necessary for the creation and/or use of such an instrumentality, and whether such authority exists; and

  • the degree of financial autonomy and the source of its operating expenses.

See Rev. Rul. 57-128, 1957-1 C.B. 311.  No one factor is determinative; instrumentality status is based on all the facts and circumstances.  These same factors apply to identify an instrumentality for purposes of determining whether an employer is eligible for the Employee Retention Credit.

20. Are tax-exempt employers eligible for the Employee Retention Credit?

Yes, organizations described in section 501(c) of the Internal Revenue Code (the “Code”), and exempt from tax under section 501(a) of the Code, may be Eligible Employers for purposes of the Employee Retention Credit if they are employers that otherwise meet the requirements to be eligible for the credit.

21. If a tribe or tribal entity operates a trade or business, is the tribe or tribal entity eligible for the Employee Retention Credit?

Yes, if a tribe or tribal entity operates a trade or business, the tribe or tribal entity may be an Eligible Employer for purposes of the Employee Retention Credit, if it otherwise meets the requirements for the Employee Retention Credit.  Additional information will be forthcoming regarding the determination of qualified wages for, and application of the aggregation rules to, these employers.

22. Are employers in U.S. Territories eligible for the Employee Retention Credit?

Yes.  Employers may claim the Employee Retention Credit for payments of “qualified wages.”  Section 2301(c)(5) of the CARES Act provides that qualified wages are wages as defined in section 3121(a) of the Internal Revenue Code (the “Code”) for purposes of the Federal Insurance Contributions Act (“FICA”) tax.  Under section 3121(b) of the Code, payments of wages by employers in U.S. Territories are subject to FICA.  Accordingly, Eligible Employers include employers in the U.S. Territories that pay qualified wages and otherwise meet the requirements for the credit.

23. Are self-employed individuals eligible for the Employee Retention Credit?

Self-employed individuals are not eligible for the Employee Retention Credit with respect to their own self-employment earnings.  However, a self-employed individual who employs individuals in its trade or business and who otherwise meets the requirements to be an Eligible Employer may be eligible for the Employee Retention Credit with respect to qualified wages paid to the employees.

24. Are household employers eligible for the Employee Retention Credit?

No. Household employers are not considered to operate a trade or business and, therefore, are not eligible for the Employee Retention Credit, with respect to their household employees.  However, household employers who are also employers operating a trade or business and who generally report employment taxes attributable to their household employees on the same Form 941, Employer’s Quarterly Tax Return, or Form 944, Employer’s Annual Federal Tax Return, used to report the employment taxes attributable to the employees in the trade or business, may be eligible for the Employee Retention Credit, but only with respect  to the trade or business employees and their qualified wages from the trade or business.

An employer may be treated as an Eligible Employer for purposes of the Employee Retention Credit if its operations are fully or partially suspended during a calendar quarter due to "orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes)" due to COVID-19.

28. What "orders from an appropriate governmental authority" may be taken into account for purposes of the Employee Retention Credit?

Orders, proclamations, or decrees from the Federal government, or any State or local government are considered "orders from an appropriate governmental authority" if they limit commerce, travel, or group meetings due to COVID-19 in a manner that affects an employer's operation of its trade or business, including orders that limit hours of operation and, if they are from a State or local government, they are from a State or local government that has jurisdiction over the employer's operations (referred to as a "governmental order").

Statements from a governmental official, including comments made during press conferences or in interviews with the media, do not rise to the level of a governmental order for purposes of the Employee Retention Credit. Additionally, the declaration of a state of emergency by a governmental authority is not sufficient to rise to the level of a governmental order if it does not limit commerce, travel, or group meetings in any manner. Further, such a declaration that limits commerce, travel, or group meetings, but does so in a manner that does not affect the employer's operation of its trade or business does not rise to the level of a governmental order. 

A governmental order allows employers to qualify as Eligible Employers for purposes of claiming the Employee Retention Credit without regard to the level of enforcement of the governmental order.

Governmental orders include:

  • An order from the city's mayor stating that all non-essential businesses must close for a specified period;

  • A State's emergency proclamation that residents must shelter in place for a specified period, other than residents who are employed by an essential business and may travel to and work at the workplace location;

  • An order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period. 

Example 1: Governor of State Y issues an order that all non-essential businesses must close from March 20, 2020 until April 30, 2020. The order provides a list of non-essential businesses, including gyms, spas, nightclubs, barber shops, hair salons, tattoo parlors, physical therapy offices, waxing salons, fitness centers, bowling alleys, arcades, racetracks, indoor children's play areas, theaters, chiropractors, planetariums, museums, and performing arts centers. Employers that provide essential services may remain open. The governor's order is a governmental order limiting the operations of non-essential businesses, entitling employers with non-essential businesses to claim the Employee Retention Credit for qualified wages.

Example 2: Mayor of City Y holds a press conference in which she encourages residents to practice social distancing to prevent the spread of COVID-19. The statement during the press conference is not an order limiting commerce, travel, or group meetings. Accordingly, the mayor's statement would not be a governmental order for purposes of the Employee Retention Credit.

Example 3: A restaurant is ordered by a local health department to close due to a health code violation. Since the order is unrelated to COVID-19, it would not be considered a governmental order for purposes of the Employee Retention Credit.

29. If an employer voluntarily suspends operation of a trade or business or reduces hours due to COVID-19, even though that is not required by a governmental order, is the employer eligible to receive the Employee Retention Credit?

An employer that voluntarily suspends operation of a trade or business or reduces hours and is not subject to any governmental orders that restrict its operations is not eligible for the Employee Retention Credit on the basis of a full or partial suspension of its operations due to a governmental order. However, an employer that voluntarily suspends operations due to COVID-19 may be eligible for the Employee Retention Credit if it experiences a significant decline in gross receipts.

For more information about the application of this rule to an employer that operates a trade or business in multiple locations, see Is an employer that operates a trade or business in multiple locations and is subject to a governmental order requiring full or partial suspension of its operations in some jurisdictions, but not in others, considered to have a suspension of operations?. For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

An employer whose trade or business operations are fully or partially suspended during a calendar quarter due to a governmental order is an Eligible Employer that may be entitled to the Employee Retention Credit.

30. If a governmental order requires non-essential businesses to suspend operations but allows essential businesses to continue operations, is the essential business considered to have a full or partial suspension of operations?

No.  An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer to remain open, even though the governmental order requiring non-essential businesses to close may have an effect on the employer’s operations.  For more information regarding the application of the full and partial suspension rules if the essential business’ suppliers are required to close due to a governmental order, see If a governmental order causes the suppliers to an essential business to suspend their operations, is the essential business considered to have a suspension of operations?  For more information regarding the application of the full and partial suspension rules if the essential business’s operating hours are affected by a governmental order, see Are an employer’s operations considered to be partially suspended for purposes of the Employee Retention Credit if the employer is required to reduce its operating hours by a governmental order?

Although an employer with an essential business may not be considered an Eligible Employer as a result of a full or partial suspension of its operations due to a governmental order, the employer may be considered an Eligible Employer if it experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

31. If a governmental order causes the suppliers to an essential business to suspend their operations, is the essential business considered to have a suspension of operations?

An employer with an essential business may be considered to have a full or partial suspension of operations if the business’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations.  If the facts and circumstances indicate that the essential business’s operations are fully or partially suspended as a result of the inability to obtain critical goods or materials from its suppliers that were required to suspend operations, then the essential business would be considered an Eligible Employer and may be eligible to receive the Employee Retention Credit.

Alternatively, the employer may be an Eligible Employer if it experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

Example: Employer A operates an auto parts manufacturing business that is considered an essential trade or business in the jurisdiction where it operates. Employer A’s supplier of raw materials is required to shut down its operations due to a governmental order.  Employer A is unable to procure these raw materials from an alternate supplier.  As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations.  Under these facts and circumstances, Employer A would be considered an Eligible Employer because its operations have been suspended as a result of the governmental order that suspended operations of its supplier. 

32. If a governmental order causes the customers of an essential business to stay at home is the essential business considered to have a suspension of operations?

No.  An employer that operates an essential business that is not required to close its physical locations or otherwise suspend its operations is not considered to have a full or partial suspension of its operations for the sole reason that its customers are subject to a government order requiring them to stay at home.

The employer may be considered an Eligible Employer and may be eligible for the Employee Retention Credit if it experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

Example:  Employer B, an automobile repair service business, is an essential business and is not required to close its locations or suspend its operations.  Due to a governmental order that limits travel and requires members of the community to stay at home except for certain essential travel, such as going to the grocery store, Employer B’s business has declined significantly.  Employer B is not considered to have a full or partial suspension of operations due to a governmental order.  However, Employer B may be considered an Eligible Employer if it has a significant decline in gross receipts.

33. If a governmental order requires an employer to close its workplace, but the employer is able to continue operations comparable to its operations prior to the closure by requiring employees to telework, is the employer considered to have a suspension of operations?

No.  If an employer’s workplace is closed by a governmental order, but the employer is able to continue operations comparable to its operations prior to the closure by requiring its employees to telework, the employer’s operations are not considered to have been fully or partially suspended as a consequence of a governmental order.

The employer may be considered an Eligible Employer and may be eligible for the Employee Retention Credit if it experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

Example: Employer C, a software development company maintains an office in a city where the mayor has ordered that only essential businesses may operate.  Employer C’s business is not essential under the mayor’s order and must close its office.  Prior to the order, all employees at the company teleworked once or twice per week, and business meetings were held at various locations.  Following the order, the company ordered mandatory telework for all employees and limited client meetings to telephone or video conferences.  Employer C’s business operations are not considered to be fully or partially suspended by the governmental order because its employees may continue to conduct its business operations by teleworking. 

34. If a governmental order requires an employer to close its workplace for certain purposes, but the workplace may remain operational for limited purposes, is the employer considered to have a suspension of operations?

Yes.  If an employer’s workplace is closed by a governmental order for certain purposes, but the employer’s workplace may remain open for other purposes or the employer is able to continue certain operations remotely, the employer’s operations would be considered to be partially suspended. 

Example 1:  Employer D, a restaurant business, must close its restaurant locations to in-room dining due to a governmental order closing all restaurants, bars, and similar establishments for sit-down service.  Employer D is allowed to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis.  Employer D’s business operations are considered to be partially suspended due to the governmental order closing all restaurants, bars, and similar establishments to sit-down service. 

Example 2:  Employer E, a retail business, is forced to close its retail storefront locations due to a governmental order.  The retail business also maintains a website through which it continues to fulfill online orders; the retailer’s online ordering and fulfillment system is unaffected by the governmental order.  Employer E’s business operations would be considered to have been partially suspended due to the governmental order requiring it to close its retail store locations.

35. Are an employer’s operations considered to be partially suspended for purposes of the Employee Retention Credit if the employer is required to reduce its operating hours by a governmental order?

Yes.  An employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations since the employer’s operations have been limited by a governmental order.

The employer may also be an Eligible Employer if it experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

36. Is an employer that operates a trade or business in multiple locations and is subject to a governmental order requiring full or partial suspension of its operations in some jurisdictions, but not in others, considered to have a suspension of operations?

Yes. Employers that operate a trade or business in multiple locations and are subject to State and local governmental orders limiting operations in some, but not all, jurisdictions are considered to have a partial suspension of operations.  Employers that operate a trade or business on a national or regional basis may be subject to governmental orders requiring closure of their locations in certain jurisdictions, but may not be subject to such a governmental order in other jurisdictions, including because it may be an essential business in some of those jurisdictions.  To operate in a consistent manner in all jurisdictions, these employers may establish a policy that complies with the local governmental orders, as well as the Center for Disease Control and Prevention (CDC) recommendations and the Department of Homeland Security (DHS) guidance; in this case, even though the employer may not be subject to a governmental order to suspend operations of its trade or business in certain jurisdictions, and may merely be following CDC or DHS guidelines in those jurisdictions, the employer would still be considered to have partially suspended operations.  Therefore, the employer would be an Eligible Employer with respect to all of its operations in all locations.  For more information regarding the application of the aggregation rules, see If the operations of a trade or business of one member of an aggregated group are suspended by a governmental order, are the operations of that trade or business of the other members of the aggregated group considered to be fully or partially suspended for purposes of the Employee Retention Credit?

Example:  Employer F is a national retail store chain with operations in every state in the United States.   In some jurisdictions, Employer F is subject to a governmental order to close its stores, but it is permitted to provide customers with curbside service to pick up items ordered online or by phone.  In other jurisdictions, Employer F is not subject to any governmental order to close its stores or is considered an essential business permitting its stores to remain open.  Employer F establishes a company-wide policy, in compliance with the local governmental orders and consistent with the CDC and DHS recommendations and guidance, requiring the closure of all stores and operating with curbside pick-up only, even in those jurisdictions where the business was not subject to a governmental order.   As a result of the governmental orders requiring closure of Employer F’s stores in certain jurisdictions, Employer F has a partial suspension of operations of its trade or business. The partial suspension results in Employer F being an Eligible Employer nationwide.

The employer may also be an Eligible Employer if it experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

37. If the operations of a trade or business of one member of an aggregated group are suspended by a governmental order, are the operations of that trade or business of the other members of the aggregated group considered to be fully or partially suspended for purposes of the Employee Retention Credit? 

Yes.  All members of an aggregated group are treated as a single employer for purposes of the Employee Retention Credit.  Accordingly, if a trade or business is operated by multiple members of an aggregated group and if the operations of one member of the aggregated group are suspended by a governmental order, then all members of the aggregated group are considered to have their operations partially suspended, even if another member of the group is in a jurisdiction that is not subject to a governmental order. 

Example:  Employer Group G is a restaurant chain that operates a single trade or business through multiple subsidiary corporations located in various jurisdictions.  Certain members of Employer Group G’s operations are closed by a governmental order, while other members of Employer Group G’s operations remain open.  As a result of a governmental order causing the suspension of operations of certain of Employer Group G members, the operations of all members of Employer Group G’s controlled group of corporations are treated as partially suspended due to the governmental order. 

For more information on the aggregation rules, see Determining Which Entities are Considered a Single Employer Under the Aggregation Rules.

Alternatively, the employer may be an Eligible Employer if the aggregated group experiences a significant decline in gross receipts.  For more information on what constitutes a significant decline in gross receipts, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

38. If an employer is subject to a governmental order to fully or partially suspend its business operations and the order is subsequently lifted, is the employer considered to have business operations that were suspended?

Yes, but only for periods during the calendar quarters in which the trade or business operations were fully or partially suspended.  If the order was effective for a portion of the calendar quarter, then the employer is an Eligible Employer for the entire calendar quarter but can only claim a credit for wages paid during the period the order is in force.

Example: State Y issued a governmental order for all non-essential businesses to close from March 10 through April 30 and the governmental order was not extended. Pursuant to the order, Employer H, which operates a non-essential business in State Y, closes from March 10 through April 30.  Employer H is an Eligible Employer in the first quarter (for wages paid from March 13, the effective date of section 2301 of the CARES Act, through March 31) and the second quarter (for wages paid from April 1 through April 30). 

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

Determining When an Employer is Considered to have a Significant Decline in Gross Receipts

An employer that has a significant decline in gross receipts is an Eligible Employer that may be entitled to the Employee Retention Credit. An employer is considered to have a significant decline in gross receipts for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50 percent of gross receipts from the same calendar quarter in 2019 and ending with the earlier of January 1, 2021 or the first calendar quarter after the quarter for which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019.

39. How is the significant decline in gross receipts calculated?

A significant decline in gross receipts is calculated by determining the first calendar quarter in 2020 (if any) in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. If the gross receipts decline to that extent, the employer also must later determine if there is a later calendar quarter in 2020 in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019. If so, the significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

Example: Employer I’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, Employer I’s 2020 first, second, and third quarter gross receipts were approximately 48 percent, 83 percent, and 92 percent of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, Employer I had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50 percent of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80 percent of the same quarter in 2019). Thus, Employer I is entitled to a retention credit with respect to the first and second calendar quarters.

40. What are “gross receipts” for an employer other than a tax-exempt organization?

“Gross receipts” for purposes of the Employee Retention Credit for an employer other than a tax-exempt organization has the same meaning as when used under section 448(c) of the Internal Revenue Code (the “Code”). Under the section 448(c) regulations, “gross receipts” means gross receipts of the taxable year and generally includes total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax-exempt interest within the meaning of section 103 of the Code), dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer's trade or business. Gross receipts are generally not reduced by cost of goods sold, but are generally reduced by the taxpayer’s adjusted basis in capital assets sold. Gross receipts do not include the repayment of a loan, or amounts received with respect to sales tax if the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the sales tax to the taxing authority.

41. Does an employer need to prove that a significant decline in gross receipts is related to COVID-19?

No. The CARES Act does not require that the significant decline in gross receipts be related to COVID-19. However, employers should keep records for the relevant calendar quarters in 2019 and 2020 to document the significant decline in gross receipts. The records should be available for IRS review for at least four years.

42. If an Eligible Employer does not determine that it had a significant decline in gross receipts in 2020 until after January 1, 2021, may it still be eligible for the Employee Retention Credit on qualified wages paid in 2020?

Yes. The employer may claim the Employee Retention Credit on qualified wages paid in 2020 if it determines that a significant decline in gross receipts occurred in 2020 even if it does not make the determination until after January 1, 2021. In this case, the employer may claim the credit by filing the appropriate form to report adjustments to its employment taxes, typically Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.

For more information on correcting employment taxes, see Correcting Employment Taxes.

43. For an aggregated group, is the significant decline in gross receipts test determined based on the entire group?

Yes. All entities are considered a single employer for purposes of determining whether the employer had a significant decline in gross receipts if they are aggregated as a controlled group of corporations under section 52(a) of the Internal Revenue Code (the “Code”); are partnerships, trusts or sole proprietorships under common control under section 52(b) of the Code; or are entities that are aggregated under section 414(m) or (o) of the Code. For more information, see Determining Which Entities are Considered a Single Employer Under the Aggregation Rules.

To be an Eligible Employer on the basis of a significant decline of gross receipts, the employer must take into account the gross receipts of all members of the aggregated group. If the aggregated group does not experience a significant decline in gross receipts, then no member of the group may claim the Employee Retention Credit on that basis.

Example: Employer J and Employer K are members of a section 52(a) controlled group of corporations. Neither Employer J nor Employer K is subject to a governmental order suspending business operations, and neither received a Paycheck Protection Program loan. Employer J has gross receipts of $1,000,000 in the second quarter of 2019 and $400,000 in the second quarter of 2020. Employer K has gross receipts of $1,000,000 in second quarter of 2019 and $750,000 in second quarter of 2020. Although Employer J’s gross receipts in the second quarter of 2020 were 40 percent of its 2019 second quarter gross receipts, neither Employer J nor Employer K can claim the Employee Retention Credit under the gross receipts test. Employers J and K had combined gross receipts of $2,000,000 in the second quarter of 2019 and $1,150,000 in the second quarter of 2020. Their combined gross receipts for the second quarter of 2020 would have had to be less than $1,000,000 (50 percent of $2,000,000) for Employers J and K to have experienced a significant decline in gross receipts for the second quarter of 2020.

44. How does an employer that started a business in 2019 determine whether it had a significant decline in gross receipts for purposes of the Employee Retention Credit?

An employer that started a business in the first quarter of 2019 should use the gross receipts for the applicable quarter of 2019 for comparison to the gross receipts for the same quarter in 2020 to determine whether it experienced a significant decline in gross receipts in any quarter of 2020.

An employer that started a business in the second quarter of 2019 should use that quarter as the base period to determine whether it experienced a significant decline in gross receipts for the first two quarters in 2020 and should use the third and fourth quarters of 2019 for comparison to the third and fourth quarters of 2020, respectively, to determine whether it experienced a significant decline in gross receipts for those quarters.

An employer that started a business in the third quarter of 2019 should use that quarter as the base period to determine whether it experienced a significant decline in gross receipts for the first three quarters in 2020 and should use the fourth quarter of 2019 for comparison to the fourth quarter of 2020 to determine whether it experienced a significant decline in gross receipts for that quarter.

An employer that started a business in the fourth quarter of 2019 should use that quarter as the base period to determine whether it had a significant decline in gross receipts for any quarter in 2020.

If the employer commenced business in the middle of a quarter in 2019, the employer should estimate the gross receipts it would have had for the entire quarter based on the gross receipts for the portion of the quarter that the business was in operation.

45. How does an employer that acquires a trade or business during the 2020 calendar year determine if the employer had a significant decline in gross receipts?

For purposes of the Employee Retention Credit, to determine whether an employer has a significant decline in gross receipts, an employer that acquires (in an asset purchase, stock purchase, or any other form of acquisition) a trade or business during 2020 (an “acquired business”) is required to include the gross receipts from the acquired business in its gross receipts computation for each calendar quarter that it owns and operates the acquired business. Solely for purposes of the Employee Retention Credit, when an employer compares its gross receipts for a 2020 calendar quarter when it owns an acquired business to its gross receipts for the same calendar quarter in 2019, the employer may, to the extent the information is available, include the gross receipts of the acquired business in its gross receipts for the 2019 calendar quarter. Under this safe harbor approach, the employer may include these gross receipts regardless of the fact that the employer did not own the acquired business during that 2019 calendar quarter.

An employer that acquires a trade or business in the middle of a calendar quarter in 2020 and that chooses to use this safe harbor approach must estimate the gross receipts it would have had from that acquired business for the entire quarter based on the gross receipts for the portion of the quarter that it owned and operated the acquired business. However, an employer that chooses not to use this safe harbor approach is only required to include the gross receipts from the acquired business for the portion of the quarter that it owned and operated the acquired business.

Example: Employer L acquired all of the assets of a trade or business in a taxable transaction on January 1, 2020. The gross receipts of the acquired business were $50,000 for the quarter beginning January 1, 2020 and ending March 31, 2020 and $200,000 for the quarter beginning January 1, 2019 and ending March 31, 2019. Employer L has access to the books and records from the prior owner of the acquired trade or business and can determine the amount of gross receipts attributable to the trade or business for the quarter beginning January 1, 2019 and ending March 31, 2019. For purposes of the Employee Retention Credit, Employer L must include $50,000 in its gross receipts computation for the quarter beginning January 1, 2020 and ending March 31, 2020 (Employer L actually owned the trade or business) and may include $200,000 in its gross receipts computation for the quarter beginning January 1, 2019 and ending March 31, 2019.

46. How does a tax-exempt employer determine whether it has experienced a significant decline in gross receipts?

The IRS plans to issue future guidance addressing how tax-exempt organizations determine their gross receipts for the purpose of determining whether the organization had a significant decline in gross receipts (i.e., had less than 50 percent of gross receipts during a calendar quarter in 2020 compared with the same calendar quarter in 2019).

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Determining the Maximum Amount of an Eligible Employer’s Employee Retention Credit

47. How is the maximum amount of the Employee Retention Credit available to Eligible Employers determined?

The credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.

Example 1: Employer M pays $10,000 in qualified wages to Employee A in the second quarter of 2020. The Employee Retention Credit available to Employer M for the qualified wages paid to Employee A is $5,000.

Example 2: Employer N pays $8,000 in qualified wages to Employee B in the second quarter 2020 and $8,000 in qualified wages in the third quarter 2020. The credit available to Employer N for the qualified wages paid to Employee B is equal to $4,000 in the second quarter and $1,000 in the third quarter due to the overall limit of 50 percent of $10,000 of qualified wages per employee for all calendar quarters.

This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.

Determining When an Employer is Considered to have a Significant Decline in Gross Receipts

An employer that has a significant decline in gross receipts is an Eligible Employer that may be entitled to the Employee Retention Credit. An employer is considered to have a significant decline in gross receipts for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50 percent of gross receipts from the same calendar quarter in 2019 and ending with the earlier of January 1, 2021 or the first calendar quarter after the quarter for which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019.

39. How is the significant decline in gross receipts calculated?

A significant decline in gross receipts is calculated by determining the first calendar quarter in 2020 (if any) in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. If the gross receipts decline to that extent, the employer also must later determine if there is a later calendar quarter in 2020 in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019. If so, the significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

Example: Employer I’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, Employer I’s 2020 first, second, and third quarter gross receipts were approximately 48 percent, 83 percent, and 92 percent of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, Employer I had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50 percent of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80 percent of the same quarter in 2019). Thus, Employer I is entitled to a retention credit with respect to the first and second calendar quarters.

40. What are “gross receipts” for an employer other than a tax-exempt organization?

“Gross receipts” for purposes of the Employee Retention Credit for an employer other than a tax-exempt organization has the same meaning as when used under section 448(c) of the Internal Revenue Code (the “Code”). Under the section 448(c) regulations, “gross receipts” means gross receipts of the taxable year and generally includes total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax-exempt interest within the meaning of section 103 of the Code), dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer's trade or business. Gross receipts are generally not reduced by cost of goods sold, but are generally reduced by the taxpayer’s adjusted basis in capital assets sold. Gross receipts do not include the repayment of a loan, or amounts received with respect to sales tax if the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the sales tax to the taxing authority.

41. Does an employer need to prove that a significant decline in gross receipts is related to COVID-19?

No. The CARES Act does not require that the significant decline in gross receipts be related to COVID-19. However, employers should keep records for the relevant calendar quarters in 2019 and 2020 to document the significant decline in gross receipts. The records should be available for IRS review for at least four years.

42. If an Eligible Employer does not determine that it had a significant decline in gross receipts in 2020 until after January 1, 2021, may it still be eligible for the Employee Retention Credit on qualified wages paid in 2020?

Yes. The employer may claim the Employee Retention Credit on qualified wages paid in 2020 if it determines that a significant decline in gross receipts occurred in 2020 even if it does not make the determination until after January 1, 2021. In this case, the employer may claim the credit by filing the appropriate form to report adjustments to its employment taxes, typically Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.

For more information on correcting employment taxes, see Correcting Employment Taxes.

43. For an aggregated group, is the significant decline in gross receipts test determined based on the entire group?

Yes. All entities are considered a single employer for purposes of determining whether the employer had a significant decline in gross receipts if they are aggregated as a controlled group of corporations under section 52(a) of the Internal Revenue Code (the “Code”); are partnerships, trusts or sole proprietorships under common control under section 52(b) of the Code; or are entities that are aggregated under section 414(m) or (o) of the Code. For more information, see Determining Which Entities are Considered a Single Employer Under the Aggregation Rules.

To be an Eligible Employer on the basis of a significant decline of gross receipts, the employer must take into account the gross receipts of all members of the aggregated group. If the aggregated group does not experience a significant decline in gross receipts, then no member of the group may claim the Employee Retention Credit on that basis.

Example: Employer J and Employer K are members of a section 52(a) controlled group of corporations. Neither Employer J nor Employer K is subject to a governmental order suspending business operations, and neither received a Paycheck Protection Program loan. Employer J has gross receipts of $1,000,000 in the second quarter of 2019 and $400,000 in the second quarter of 2020. Employer K has gross receipts of $1,000,000 in second quarter of 2019 and $750,000 in second quarter of 2020. Although Employer J’s gross receipts in the second quarter of 2020 were 40 percent of its 2019 second quarter gross receipts, neither Employer J nor Employer K can claim the Employee Retention Credit under the gross receipts test. Employers J and K had combined gross receipts of $2,000,000 in the second quarter of 2019 and $1,150,000 in the second quarter of 2020. Their combined gross receipts for the second quarter of 2020 would have had to be less than $1,000,000 (50 percent of $2,000,000) for Employers J and K to have experienced a significant decline in gross receipts for the second quarter of 2020.

44. How does an employer that started a business in 2019 determine whether it had a significant decline in gross receipts for purposes of the Employee Retention Credit?

An employer that started a business in the first quarter of 2019 should use the gross receipts for the applicable quarter of 2019 for comparison to the gross receipts for the same quarter in 2020 to determine whether it experienced a significant decline in gross receipts in any quarter of 2020.

An employer that started a business in the second quarter of 2019 should use that quarter as the base period to determine whether it experienced a significant decline in gross receipts for the first two quarters in 2020 and should use the third and fourth quarters of 2019 for comparison to the third and fourth quarters of 2020, respectively, to determine whether it experienced a significant decline in gross receipts for those quarters.

An employer that started a business in the third quarter of 2019 should use that quarter as the base period to determine whether it experienced a significant decline in gross receipts for the first three quarters in 2020 and should use the fourth quarter of 2019 for comparison to the fourth quarter of 2020 to determine whether it experienced a significant decline in gross receipts for that quarter.

An employer that started a business in the fourth quarter of 2019 should use that quarter as the base period to determine whether it had a significant decline in gross receipts for any quarter in 2020.

If the employer commenced business in the middle of a quarter in 2019, the employer should estimate the gross receipts it would have had for the entire quarter based on the gross receipts for the portion of the quarter that the business was in operation.

45. How does an employer that acquires a trade or business during the 2020 calendar year determine if the employer had a significant decline in gross receipts?

For purposes of the Employee Retention Credit, to determine whether an employer has a significant decline in gross receipts, an employer that acquires (in an asset purchase, stock purchase, or any other form of acquisition) a trade or business during 2020 (an “acquired business”) is required to include the gross receipts from the acquired business in its gross receipts computation for each calendar quarter that it owns and operates the acquired business. Solely for purposes of the Employee Retention Credit, when an employer compares its gross receipts for a 2020 calendar quarter when it owns an acquired business to its gross receipts for the same calendar quarter in 2019, the employer may, to the extent the information is available, include the gross receipts of the acquired business in its gross receipts for the 2019 calendar quarter. Under this safe harbor approach, the employer may include these gross receipts regardless of the fact that the employer did not own the acquired business during that 2019 calendar quarter.

An employer that acquires a trade or business in the middle of a calendar quarter in 2020 and that chooses to use this safe harbor approach must estimate the gross receipts it would have had from that acquired business for the entire quarter based on the gross receipts for the portion of the quarter that it owned and operated the acquired business. However, an employer that chooses not to use this safe harbor approach is only required to include the gross receipts from the acquired business for the portion of the quarter that it owned and operated the acquired business.

Example: Employer L acquired all of the assets of a trade or business in a taxable transaction on January 1, 2020. The gross receipts of the acquired business were $50,000 for the quarter beginning January 1, 2020 and ending March 31, 2020 and $200,000 for the quarter beginning January 1, 2019 and ending March 31, 2019. Employer L has access to the books and records from the prior owner of the acquired trade or business and can determine the amount of gross receipts attributable to the trade or business for the quarter beginning January 1, 2019 and ending March 31, 2019. For purposes of the Employee Retention Credit, Employer L must include $50,000 in its gross receipts computation for the quarter beginning January 1, 2020 and ending March 31, 2020 (Employer L actually owned the trade or business) and may include $200,000 in its gross receipts computation for the quarter beginning January 1, 2019 and ending March 31, 2019.

46. How does a tax-exempt employer determine whether it has experienced a significant decline in gross receipts?

The IRS plans to issue future guidance addressing how tax-exempt organizations determine their gross receipts for the purpose of determining whether the organization had a significant decline in gross receipts (i.e., had less than 50 percent of gross receipts during a calendar quarter in 2020 compared with the same calendar quarter in 2019).

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Determining the Maximum Amount of an Eligible Employer’s Employee Retention Credit

47. How is the maximum amount of the Employee Retention Credit available to Eligible Employers determined?

The credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.

Example 1: Employer M pays $10,000 in qualified wages to Employee A in the second quarter of 2020. The Employee Retention Credit available to Employer M for the qualified wages paid to Employee A is $5,000.

Example 2: Employer N pays $8,000 in qualified wages to Employee B in the second quarter 2020 and $8,000 in qualified wages in the third quarter 2020. The credit available to Employer N for the qualified wages paid to Employee B is equal to $4,000 in the second quarter and $1,000 in the third quarter due to the overall limit of 50 percent of $10,000 of qualified wages per employee for all calendar quarters.

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