IRS Introduces New Form 7200 and Procedures for Employers to Receive the Benefit of Credits under Family First Coronavirus Response Act and the CARES Act

On March 31, 2020, the Internal Revenue Service issued IR-2020-62, which describes the new Employee Retention Credit created under the CARES Act and the procedure for obtaining a refund of this credit. The procedure also applies to the credits for Emergency Sick Leave and Expanded Emergency Family and Medical Leave, created under the Family First Coronavirus Response Act (FFCRA). The Service also introduced new Form 7200, which can be used to obtain an advance payment of these credits.

Background

The Employee Retention Credit applies to qualifying employers including tax-exempt organizations, except for (i) state and local governments and their instrumentalities; and (ii) small businesses that participate in CARES Act small business loans.

A qualifying employer is one that either:

1. Had its business fully or partially suspended by government due to COVID-19 during the calendar quarter; or
2. Whose gross receipts are below 50% of the comparable quarter in 2019.

Under the latter scenario, the employer remains qualified until gross receipts exceed 80% of the company’s comparable quarter in 2019.

The Employee Retention Credit is 50% of qualified wages for an employee paid from March 13, 2020, through December 31, 2020. The qualifying wages cannot exceed $10,000 per employee for all quarters and includes an allocable portion of the cost of employer-provided healthcare.

The computation of the credit differs depending on the business’ average number of employees in 2019:

• Employers with fewer than 100 employees in 2019 can take the credit on wages to all employees (whether working or not).
• Employers with 100 or more employees in 2019 can take the credit only for wages paid to employees who did not work during the calendar quarter.

In determining the number of employees, the following are treated as single entities:

1. A controlled group of corporations,
2. Commonly controlled businesses,
3. Affiliated service groups, or
4. Certain management companies.

The FFCRA created new employee rights, starting on April 1, related to paid leave for emergency sick leave and expanded emergency family and medical leave caused by certain conditions related to COVID-19. These benefits are funded by a dollar-for-dollar refundable credit to the employer against payroll taxes. Wages paid under the FFCRA are not eligible wages for purposes of the Employer Retention Credit.

Procedure

The Release provides that an employer can receive the benefit of the Employer Retention Credit in a manner similar to the FFCRA credits for Emergency Sick Pay and Expanded Emergency Family and Medical Leave, which had been discussed in prior guidance.

• The employer can reduce its required deposits of payroll taxes withheld from employees’ wages during the quarter by the amount of the credit. The employer will not be subject to deposit penalties for failure to remit the withheld taxes due to this retention of funds.
• Any excess credit (where the credits exceed the withheld deposits) can be claimed as a refund or credit on the filing of the employment tax return (e.g., Form 941) for the quarter.
• Alternately, to avoid the employer having to wait for the funds, the excess credit can be accelerated through a request for an advance payment from IRS by submitting new Form 7200, Advance Payment of Employer Credits Due to COVID-19. There must be a reconciliation of any advanced credits and reduced deposits on the employment tax returns filed in 2020. The employer should request the advance only for the anticipated excess credit and should be reducing the available deposits which would be made for the quarter.

The Service states that the common-law employer of employees is entitled to the benefit of the applicable payroll tax credit even if the wages are paid through a third-party provider (e.g., a payroll service provider, professional employer organization (PEO) or certified professional employer organization (CPEO) or other agent). The instructions to Form 7200 provide that the common-law employer can request the advance even though employment tax return information is included on the aggregate return of the non-certified PEO.

Significant tax changes in response to the coronavirus pandemic are continuing at a rapid pace. If you have any questions, contact your Marcum tax professional or contact Michael D’Addio at 203.781.9665 or email Michael.

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