IRS Released New FAQs on Employee Retention Credit

On April 29, 2020, the IRS released new FAQs providing significant guidance on the employee retention credit.  We are still analyzing the guidance, but in general, we are concerned that the IRS’s approach to interpreting its application may make it difficult for some employers in difficult financial conditions to claim the credit.  Moreover, given that the credit has been available for over a month with respect to qualified wages paid as many as six weeks ago, employer may have made a reasonable good faith determination of their eligibility for and the amount of the credit, which now conflicts with some of the guidance in the FAQs.  Although caution should be taken to consider the IRS’s position in the FAQs, the information posted on the IRS website is the lowest form of guidance that the IRS issues.  As noted prominently on each page of FAQs posted to the IRS website, “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.”

We will post a series of articles summarizing the various aspects of the guidance over the next few days.  In the interim, Q&A-74 specifically confirms our analysis of the earlier guidance and is consistent with the methodology described in this post.

On April 30, we posted two articles in the series.  The first article analyzes the IRS FAQs related to the employer aggregation rules and an employer’s eligibility based on a governmental order fully or partially suspending its operations.  The second article analyzes employer eligibility on account of a “significant decline in gross receipts.”

 

A Primer for Employers: How to Stack the Employer Social Security Tax Deferral with the COVID-19 Payroll Tax Credits

Employers electing to defer the deposit of the employer share of Social Security taxes on wages, as permitted under section 2302 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, are challenged with how to take the deferral in conjunction with the COVID-19 payroll tax credits—the employee retention credit authorized by section 2301 of the CARES Act and, if applicable, the two payroll tax credits applicable to employers employers of 500 or fewer employees that are required to provide paid leave under the Families First Coronavirus Relief Act (“FFCRA”).

The benefit of electing to defer the deposit of the employer share of Social Security taxes or claiming payroll tax credits may be realized in real time when the employer runs its payroll providing a near-immediate cash injection into the employer’s business to help defray the cost of employee wages.  In other words, the employer does not have to wait to enjoy the benefit until it files its quarterly employment tax return (Form 941).  The IRS is in the process of revising that return so that the reporting of the deferral and credits are reconciled with the payroll taxes (e.g., employer share of FICA taxes, the employee share of FICA taxes and federal income tax withholding) paid and withheld on payments made to employees during the calendar quarter. Continue Reading

IRS Reiterates Scope of Section 139 Disaster Relief Payments in FAQ

The IRS recently updated its FAQs discussing the two COVID-19-related payroll tax credits under the Families First Coronavirus Response Act (“FFCRA”) to confirm the availability of section 139 disaster relief programs to respond to employee needs during the COVID-19 pandemic.  However, the FAQ also serves to remind employers of the scope of Section 139:

58.  Are qualified sick leave wages and qualified family leave wages excluded from gross income as “qualified disaster relief payments”?

No.  Section 139 of the Internal Revenue Code (Code) excludes from a taxpayer’s gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster (“qualified disaster relief payments”).  Although the COVID-19 outbreak is a “qualified disaster” for purposes of section 139 the Code (see below), qualified leave wages are not excludible qualified disaster relief payments, because qualified leave wages are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19.

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IRS Releases FAQs on Federal Tax Consequences of Payroll Support for Air Carriers and Contractors under CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) authorizes the Treasury Department to provide payments to passenger air carriers, cargo air carriers, and certain contractors that must be exclusively used for the continuation of payment of employee wages, salaries, and benefits.  The Payroll Support to Air Carriers and Contractors Program provides a total of up to $32 billion in payroll support to avoid layoffs and furloughs in the airline industry, which has been hard hit by the COVID-19 pandemic. The CARES Act authorizes up to $25 billion in payroll support for passenger air carriers; other air carriers and certain contractors may receive up to $4 billion and $3 billion in payroll support, respectively.  Section 4117 of the CARES Act provides that the Treasury Department may receive warrants, options, preferred stock, debt securities, notes, or other financial instruments issued by a company receiving payroll support payments to provide appropriate compensation to the Federal Government for the provision of the financial assistance.  Treasury has released a form to memorialize the terms and conditions of the Payroll Support Program Agreement. Continue Reading

IRS Releases Guidance on Coronavirus-Related Payroll Tax Credits

On March 31, the IRS released multiple pieces of guidance regarding provisions of the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus, Aid, Relief, and Economic Stability (“CARES”) Act.  The FFCRA includes two employer social security tax credits for employers of 500 or fewer employees equal to the amount of paid leave that the employer is required to provide to employees related to the COVID-19 pandemic.  (See earlier coverage.)  The CARES Act provides a credit against employer social security tax equal to 50% of qualified wages paid to employees after March 12, 2020, and before December 31, 2020.

On March 20, the IRS issued a news release providing details of how the FFCRA credits will be administered.  (See earlier coverage.)   On March 31, the IRS released IR 2020-62 providing guidance on the availability of the employee retention credit in the CARES Act, Notice 2020-22 providing relief from late deposit penalties for employment tax deposits reduced in anticipation of one of the employer social security tax credits, and new IRS Form 7200 (and form instructions) for claiming a refund of excess social security tax credits.  Below, we discuss the employee retention credit and the guidance released yesterday. Continue Reading

CARES Act Enacted; Employers May Defer Some Payroll Tax Deposits Due on Monday

UPDATE: President Trump signed the bill into law on Friday afternoon.

Earlier this afternoon, the House passed by voice vote the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the third Coronavirus-related piece of legislation, which was passed by the Senate on Wednesday with a 96-0 vote.  At $2 trillion, the CARES Act is the largest stimulus package in U.S. history and is headed to the White House for President Trump’s signature later today.

In our previous article, we provided a Client Alert summarizing the tax-related provisions in the CARES Act.  Our next two articles will highlight two provisions available to qualifying employers as they navigate this challenging time.  Today, we focus on Section 2302, which permits employers to defer deposits of the employer share of social security taxes. Given that it is a near certainty that the President will sign the Act before Monday, employers may seek to cancel payroll tax deposits initiated for wages paid today and initiate a same-day wire transfer deposit on Monday of the payroll deposits less employer social security tax. The deferral provision applies only to the employer’s share of social security tax.  It does not apply to the employer’s Medicare taxes nor to the employee’s share of social security or Medicare taxes. Continue Reading

Senate-Passed COVID-19 Legislation Includes Payroll Tax Provisions

Late Wednesday night, the Senate passed (96-0) the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the third Coronavirus-related piece of legislation. Early Wednesday, the Senate announced that an agreement had been reached among Senate Republicans, Senate Democrats, and the Trump Administration on the package, but late concerns from a quartet of Republican senators stalled the package momentarily before a deal was reach Wednesday evening.  The bill includes a number of tax-related provisions including a significant deferral of payroll tax deposits and a credit against employer social security tax for certain employers affected by the COVID-19 outbreak.   This Client Alert provides a summary of all of the tax-related provisions in the legislation.

The House is expected to consider the bill on Friday.

IRS Offers Informal Guidance on New Paid Leave Tax Credits; More to Come Next Week

Earlier this evening, the IRS offered informal guidance in IR-2020-57 regarding its administration of the payroll tax credits enacted as part of the Families First Coronavirus Response Act (the “Act”) earlier this week.  The Act mandates two forms of paid leave for employees of employers of 500 or fewer employees.  Employers of more than 500 employees are neither subject to the Act’s paid leave requirements or eligible for the payroll tax credits provided under the bill.

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COVID-19 Emergency Declaration: Notice 2020-17 Suggests Code § 139 is Available to Provide Tax-Free Payments for Certain Expenses

In an earlier alert, we expressed concern about the applicability of Section 139.  Our concern was based on the fact that the President’s declaration of an emergency on March 13, 2020, with respect to the COVID-19 pandemic was under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”) pertaining to national emergencies, rather than Section 401 pertaining to disasters.  Our alert called on the IRS to issue guidance immediately confirming the application of Section 139, which would permit employers to offer “qualified disaster relief payments” to employees as a means of mitigating the expenses associated with the pandemic’s effects.  Based on communications with the IRS, we understand the IRS is considering that request.  We now believe, based on recent IRS guidance, that it would be reasonable for employers to take the position that Section 139 is available to employers, but  IRS guidance is still needed to make this clear and to provide further clarity on the types of expenses for which it may be used given the unique circumstances of the present emergency.

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Paid Leave Measure Enacted in Response to COVID-19 Outbreak

UPDATE: President Trump signed the bill into law this evening.

This afternoon, the Senate voted 90-8 to approve the House-backed Families First Coronavirus Response Act.  The legislation will provide up to ten weeks of paid FMLA leave and two weeks of paid sick leave to certain employees affected by COVID-19.  Details on the legislation, which largely applies to employers of 500 or fewer employees, are available in our earlier article detailing the House measure.  The Senate voted down amendments to the bill that would have expanded the bill’s paid FMLA provisions or replaced the paid leave with state unemployment benefits.  The measure now heads to President Trump, who is expected to sign the bill into law.

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