The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for, among other things, an “employee retention tax credit” for employers that are forced to suspend operations or experience a financial downturn. The CARES Act disqualified employers that received Paycheck Protection Program (PPP) loans from taking the employee retention tax credit. Some employers that received PPP loans are now contemplating repaying the loans based on recently released guidance clarifying the scope of employers that are eligible for the PPP. The guidance allows employers that received PPP funds to repay the funds by May 14 without penalty.

In recently promulgated guidance, the IRS clarified that a company that repays its PPP loan by May 14 will not be disqualified from taking the employee retention tax credit. See Q&A 79, “COVID-19 Related Employee Retention Credits.” This guidance is welcome news for companies that are eligible for the retention tax credit but instead decided to apply for PPP funds.

A summary of the employee retention tax credit is below.

• The CARES Act provides a tax credit to employers that are forced to suspend operations due to a government order related to the coronavirus outbreak or continue to operate but suffer a financial downturn.

• For companies that experience a financial downturn, the credit is available for any calendar quarter during which the company’s gross receipts are less than 50% of the gross receipts in the same calendar quarter in the preceding calendar year, and continuing until the calendar quarter in which gross receipts exceed 80% of receipts in the same calendar quarter in the preceding calendar year.

• The credit is calculated quarterly and is a credit against the employer’s federal tax deposit liability. The credit applies to wages and healthcare premiums paid to employees and cannot exceed $5,000 per employee, reduced by any credit granted to the same employer under the Families First Coronavirus Response Act (FFCRA) during any quarter in which the retention tax credit is claimed.

• Tax-exempt employers are eligible for the credit, but governmental employers and employers that accept Small Business Administration (SBA) loans under the CARES Act are not.

• The credit may be claimed in a manner similar to the credit provided under FFCRA with any refunds issued in a similar manner. The credit is available only for wages paid after March 12, 2020, and expires on January 1, 2021.