COVID-19-Related Employee Retention Credits: Determining Which Employers are Eligible to Claim the Employee Retention Credit FAQs

 

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? (updated November 16, 2020)

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, tribal governments and tribal entities may be Eligible Employers.  See Are tribal governments and tribal entities 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. Are tribal governments and  tribal entities eligible for the Employee Retention Credit? (updated November 16, 2020)

Yes. Any tribal government or tribal entity that carries on a trade or business  may be an Eligible Employer for purposes of the Employee Retention Credit, if it otherwise meets the requirements for the credit.

As a general rule, whether activities constitute a trade or business for purposes of the Employee Retention Credit is determined under section 162  of the Code. However, because tribal governments are not subject to income tax under the Code and, therefore, are generally not otherwise required to determine whether a tribal activity is a trade or business under section 162 of the Code, the Treasury Department and the IRS have concluded that the section 162 standards are not the appropriate bases for determining whether a tribal government is carrying on a trade or business for purposes of the Employee Retention Credit. Instead, solely for purposes of the Employee Retention Credit, a tribal government is treated as carrying on trade or business activities, and all activities conducted by the tribal government will be considered part of those trade or business activities.  In addition, solely for purposes of the Employee Retention Credit, any entity that a tribal government reasonably believes shares the same tax status as the tribal government (tribal entity employer) is treated as carrying on trade or business activities, and all activities conducted by the tribal entity employer will be considered part of those trade or business activities.  Any entity other than a tribal government or a tribal entity employer must determine whether its activities constitute carrying on a trade or business under section 162 for purpose of determining eligibility for the Employee Retention Credit.

21a. How do the aggregation rules apply to tribal governments and tribal entities? (added November 16, 2020)

For purposes of determining eligibility for the Employee Retention Credit, all employers, including tribal governments and tribal entities, must apply the aggregation rules under sections 52(a) and (b) of the Code and sections 414(m) and (o) of the Code.  Tribal governments and tribal entity employers should use a reasonable, good faith interpretation in determining how the aggregation rules apply.

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.

 

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