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
Notice 2021-20 Limits Employee Retention Credit For Many PPP Borrowers
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.
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A Look at IRS Guidance on the Employee Retention Credit: Part I—Broad and Pragmatic Interpretations in the Pandemic’s Early Days
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.
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Notice 2021-11 Implement’s CAA’s Extension of Time for Employers to Collect Employee Social Security Tax
Recently released IRS Notice 2021-11, implements the extension of the period for collecting from employees and depositing employee Social Security tax that was deferred in the last four months of 2020. IRS Notice 2020-65 (see earlier coverage) had specified that the employer “must withhold and pay the total [deferred 2020 taxes] . .
IRS Requires Lenders to Correct Forms 1099-MISC Reporting SBA Payments on Certain Loans
In Announcement 2021-2, released on February 1, the IRS instructed lenders not to report loan relief payments made by the Small Business Administration under Section 1112(c) of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The Announcement reflects a provision in the Consolidated Appropriations Act, 2021 (the “CAA”), excluding such payments from gross income for purposes of U.S. federal income tax. The Announcement also instructs lenders who have already furnished and/or filed Forms 1099-MISC reporting the relief payments to issue corrected Forms 1099-MISC. Given that February 1, 2020, was the deadline for furnishing Forms 1099-MISC to payees, many lenders may have to issue corrected returns.
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IRS Issues Guidance on Implementation of Expanded Employee Retention Credit
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.
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Notice 2021-7 Provides Employers Relief and Potential Opportunities on Valuation of Employer-Provided Vehicles in Light of COVID-19 Pandemic
On January 4, 2021, the Internal Revenue Service issued Notice 2021-7 pertaining to the valuation of the personal use of employer-provided vehicles. The Notice permits employers who rely on the special valuation rule of Treasury Regulation § 1.61-21(d), known as the Automobile Lease Valuation (ALV) method, to retroactively apply the vehicle cents-per-mile method of Treasury Regulation § 1.61-21(e) for purposes of valuing an employee’s personal use of a company vehicle in 2020. Due to decreased business use of employer-provided vehicles during the COVID-19 pandemic, the IRS agreed with employers that the application of the ALV method may have resulted in higher income imputation than usual for many employees and that the use of the vehicle cents-per-mile method may provide a “more accurate reflection of the employee’s income . . [,]” particularly in 2020. The ability to switch from the ALV method to the vehicle cents-per-mile method for 2020 applies only to a vehicle with a fair market value not exceeding $50,400 in 2020 and with respect to which the employer would reasonably have expected its regular use in the employer’s trade or business, were it not for the pandemic.
In addition, Notice 2021-7 provides employers, who switch from the ALV method to the vehicle cents-per-mile method for purposes of calculating personal use of the vehicle in 2020, with the option of continuing to apply the vehicle cents-per-mile method in 2021. If the employer decides to continue using the vehicle cents-per-mile method in 2021, that method must be used by the employer and employee for all subsequent years, except to the extent the commuting valuation rule applies. This decision will require employers to carefully evaluate whether the vehicle will continue to meet all of the requirements of Treasury Regulation § 1.61-21(e), other than the consistency requirement, and whether the value of the employee’s personal use of the vehicle will actually be calculated more favorably under the vehicle cents-per-mile method as compared to the ALV method, once the pandemic recedes in 2021 and vehicle use increases.
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Form 1099-NEC Creates State Filing Headaches
As the end of the year approaches, many accounts payable departments are gearing up to complete their annual Form 1099 filings. For 2020, a new form, Form 1099-NEC, will be used to report payments of non-employee compensation to vendors. (See earlier coverage.) The IRS resurrected the Form 1099-NEC, which had not been used in decades, to replace Box 7 reporting on Form 1099-MISC because the Protecting Americans from Tax Hikes (PATH) Act accelerated the filing deadline for non-employee compensation to January 31. The rules for reporting on Form 1099-NEC are generally the same as for reporting in Box 7 of Form 1099-MISC in the past. However, the reporting requirements for the two may differ at the state level.
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Fourth (and Final?) COVID Relief Measure Clears House and Senate
After months of gridlock, the House and Senate, on December 21, both passed another round of COVID relief legislation (H.R. 133). The 5,593-page bill, which gained momentum following the introduction of bipartisan compromise legislation, provides an enhanced employee retention credit (“ERC”), which is easier for employers to qualify during the first six months of 2021, as compared to the ERC enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act.
The bill also includes extensions to a number of workforce-related tax credits, including the work opportunity tax credit (“WOTC”), the paid family and medical leave tax credit included in the Tax Cuts and Jobs Act as a two-year pilot program, and the paid leave credits enacted as part of the Families First Coronavirus Response Act (“FFCRA”). The bill would also extend the period during which employers may make student loan payments or reimbursements under an Internal Revenue Code Section 127 educational assistance plan, permit employers to provide additional flexibility under flexible spending accounts, and provide employers with a longer period in which to collect employee Social Security tax which was deferred during 2020 under IRS Notice 2020-65.
The bill would also add an employer income tax credit for qualified wages paid to employees in qualified disaster areas in 2020 for disasters other than COVID-19. Finally, the bill addresses the deductibility of expenses paid with forgiven PPP loans.
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Final 162(m) Regulations Make Few Changes
On Friday, December 18, the IRS released final regulations under section 162(m) implementing the statutory changes made in 2017 by the Tax Cuts and Jobs Act. Section 162(m), as amended, generally limits the deduction for compensation (also referred to as applicable employee remuneration) paid to the a publicly held corporation’s principal executive officer (“PEO”), principal financial officer (“PFO”), and its three highest-paid executive officers other than the PEO and PFO. The final regulations are largely unchanged from the proposed regulations released almost exactly one year earlier. (See earlier coverage.) The IRS did make a small number of changes in response to taxpayer comments, but declined to make changes in a number of areas.
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