On March 7, 2023, the IRS issued a renewed warning to employers considering an Employee Retention Credit (“ERC”) claim.Continue Reading IRS Repeats Cautions Regarding Aggressive Claims for Employee Retention Credit
Section 80604 of the bipartisan Infrastructure Investment and Jobs Act (H.R. 3684) amends Section 3134 of the Internal Revenue Code to terminate the employee retention credit for employers subject to closure for COVID-19 effective October 1, 2021. The legislation, which passed the House on November 5 (after passing the Senate on August 10), was presented to President Biden for signature on November 8. It is anticipated that the President will sign the bill soon.
Once enacted, employers may not claim the credit with respect to wages paid after September 30, 2021. The employee retention credit was adopted as part of the Coronavirus Aid, Relief, and Economic Security Act in April 2020, and was modeled on a similar credit that had been adopted following natural disasters. The credit was enhanced and extended through June 30, 2021, in December 2020 as part of the Consolidated Appropriations Act. The credit was then further extended through the end of 2021 and codified in Section 3134 of the Code as part of the American Rescue Plan Act, adopted earlier this year.
The retroactive nature of the suspension creates potential issues for employers who remained eligible for the credit in October and early November. Employers were permitted to reduce their employment tax deposits (including all withheld federal employment taxes) to take advantage of? the credit. Accordingly, employers claiming the credit for wages paid in October and November likely did not deposit amounts to reflect the credit. Those amounts must now be paid. Because the employer withheld those taxes from its employees (or reduced the deposit of its own share of FICA taxes), the employer could potentially be subject to a late deposit penalty under Section 6656 of the Code. It is likely, however, that the IRS will provide relief from penalties attributable to the retroactive change. It is uncertain how an employer will signal to the IRS that its late deposits are attributable to the retroactive termination of the credit. In the interim, employers who reduced their deposits in anticipation of the credit should prepare to deposit any amounts that will now be due, as soon as possible.
Nearly 18 months into the pandemic, the IRS continues to issue guidance on the employee retention credit, a credit that was adopted in March 2020 and has been addressed in a number of articles on the Tax Withholding & Reporting Blog, most recently on August 3, 2021.
The latest guidance takes the form of Notice 2021-49 and Revenue Procedure 2021-33, which together address a range of topics, including how employers should treat cash tips for purposes of determining the amount of qualified wages, whether the credit may be claimed with respect to the same wages for which the employer receives the Code Section 45B credit, how the related individual rules work for determining qualified wages, and whether employers are required to file amended tax returns if they claim the employee retention credit retroactively. The Service has also outlined a safe harbor that employers may apply to exclude from gross receipts the amount of the forgiveness of any PPP loans or the amount of shuttered venue operator grants or restaurant revitalization grants. Continue Reading IRS Issues Additional Guidance on Employee Retention Credit
Almost a year after the employee retention credit was adopted as part of the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”), and nearly a month after the final Form 941, Employer’s Quarterly Federal Tax Return, claiming the credit for 2020 was due, the IRS issued Notice 2021-20 (the “Notice”). This is the final article in our three-part series looking at how the IRS’s guidance on the employee retention credit has changed over the past ten months. This article focuses on how Notice 2021-20 builds on previous IRS guidance to narrow the scope of the credit and limit its availability. Part I focuses on the statute and approach the IRS took in interpreting statute when the IRS issued frequently asked questions (“FAQs”) in April 2020. Part II focuses on the initial signs of trouble for employers that first appeared in the updated FAQs in June 2020.
The Notice is the proverbial effort to close the barn door after the horse is out of the barn–and in this case, clear across the pasture. Although much of the guidance in the Notice reflects the (“FAQs”) that were posted to the IRS website beginning last April and that have been revised multiple times since, the Notice continues the trend that began last June of narrowing the availability and the amount of the employee retention credit—and in some instances, narrowing it in a way not contemplated by the permissive statutory language. (For our complete coverage of the employee retention credit and IRS guidance, click here.) Continue Reading A Look at IRS Guidance on the Employee Retention Credit: Part III—The IRS Seeks to Close the Barn Door
Almost a year after the employee retention credit was adopted as part of the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”), and nearly a month after the final Form 941, Employer’s Quarterly Federal Tax Return, claiming the credit for 2020 was due, the IRS issued Notice 2021-20 (the “Notice”), providing guidance on the credit. This is the second of three articles in our series looking at how the IRS’s guidance on the employee retention credit has changed over the past ten months. This article focuses on the first signs of trouble for employers that appeared in the frequently asked questions (“FAQs”) when they were updated in June 2020. The first article focuses on the approach the IRS took in the FAQs when initially issued in April 2020. The final article focuses on how Notice 2021-20 builds on those FAQs, and their June revisions, to narrow the scope of the credit and limit its availability.
Perhaps having come to believe that its approach to reading the statute as reflected in the FAQs—an approach entirely consistent with the language and purpose of the legislation—opened the barn door too wide, the IRS began to limit the availability of the credit as it made revisions to the FAQs. In June 2020, the IRS revised a number of FAQs providing additional guidance on what constitutes a “partial suspension.” (See earlier coverage.) Much of that guidance narrows the types of orders that constitute a partial suspension. For example, FAQ 30 was revised to indicate that an employer who maintains both essential and non-essential operations is considered to have a partial suspension if its non-essential operations are suspended as a result of a governmental order.
However, that relatively straightforward reading of the statute was accompanied by a new IRS-imposed requirement that the non-essential operations must constitute “more than a nominal portion” of the business. Similarly, changes to FAQ 34 require that many types of governmental orders must have more than a “nominal effect” on the employer’s business operations. The examples suggest that orders restricting the ability of a business to serve customers may not have more than a nominal effect, even if customers are required to wait outside in a line because of restrictions on the number of customers that may be served. (Apparently, the IRS believes that the patience of customers during a pandemic is unlimited and it should be assumed that all would-be customers will wait as long as necessary, however long that may be.)
In making these revisions, the IRS did not define or offer any insight into what constitutes a “nominal portion” of a business or a “nominal effect” on business operations. Perhaps more important, the IRS did not point to any statutory support for instituting this new “more than nominal” requirement in its informal guidance.
Tomorrow, we will look at the latest IRS guidance on the employee retention credit, Notice 2021-20.
Recently released IRS Notice 2021-20 (the “Notice”) provides guidance on the interaction between the Paycheck Protection Program (“PPP”) and the employee retention credit. Unfortunately, the Notice may limit the ability of many PPP borrowers to claim an employee retention credit that employers may have believed they would be entitled to claim. Continue Reading Notice 2021-20 Limits Employee Retention Credit For Many PPP Borrowers
Almost a year after the employee retention credit was adopted as part of the Coronavirus, Aid, Relief, and Economic Security Act (“CARES Act”), and nearly a month after the final Form 941, Employer’s Quarterly Federal Tax Return, claiming the credit for 2020 was due, the IRS issued Notice 2021-20 (the “Notice”). This is the first of three articles looking at the evolution of IRS guidance on the employee retention credit. This article focuses on Congress’s intention in enacting the employee retention credit and the guidance the IRS provided in the frequently asked questions (“FAQs”) it issued in April 2020. The second article focuses on the first signs of trouble for employers that appeared when the IRS updated the FAQs in June 2020. The final article focuses on how Notice 2021-20 builds on those FAQs to narrow the scope of the credit and limit its availability. Continue Reading A Look at IRS Guidance on the Employee Retention Credit: Part I—Broad and Pragmatic Interpretations in the Pandemic’s Early Days
As described in our previous post, on December 21, 2020, another round of COVID relief legislation was passed, providing an enhanced employee retention credit (“ERC”) with various new features and greater benefit amounts. The legislation was subsequently enacted when President Trump signed the law on December 27. On January 26, the IRS issued a news release, containing some informal guidance on how it will operationalize this enhanced program. Continue Reading IRS Issues Guidance on Implementation of Expanded Employee Retention Credit
On November 16, the IRS added two new FAQs to its website that address an issue that has been concerning employers since the CARES Act was adopted. For purposes of the employee retention credit (“ERC”), Section 2301(d) of the CARES Act includes an aggregation rule that treats all employers required to be aggregated under section 52 of the Code or certain provisions of section 414 of the Code to be treated as a single employer. (See earlier coverage of the aggregation rule.) Because the CARES Act also prohibits any employer who receives a Paycheck Protection Program (“PPP”) loan (regardless of whether the loan is forgiven) from claiming the ERC.
Based on the statutory language, practitioners have been concerned that if an employer acquires another employer that previously received a PPP loan, the acquirer’s entire aggregated group may no longer be eligible to claim the ERC. More troubling, Section 2301(l)(3) of the CARES Act instructs the Treasury to promulgate regulations for the recapture of the ERC claimed by an employer that subsequently obtains a PPP loan. This caused concerned that the acquirer could not only lose the ability to claim the ERC prospectively after the acquisition, but could be required to repay any amount or ERC previously claimed. Although the new FAQs are not binding on the IRS, they prove welcome news. Continue Reading IRS FAQs Provide Welcome Guidance on Employee Retention Credit and PPP Loans in M&A Transactions
As we noted in an earlier post, on July 27, Senate Republicans introduced new legislation in response to the continued COVID-19 pandemic. One of the introduced bills, titled the American Workers, Families, and Employers Assistance Act (the “Bill”), would enhance the existing employee retention credit. Continue Reading Senate Republican Proposal Would Enhance Employee Retention Credit