On April 29, the IRS released extensive new guidance in the form of frequently asked questions (“FAQs”) on the IRS website addressing various aspects of the employee retention credit. Section 2301(l) of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) instructs Treasury to issue regulations concerning the application of the credit to employers that use third-party payers. This is the fifth and final article in our series addressing various aspects of the FAQs. This article addresses issues related to the use of a third-party payer, such as a reporting agent, payroll processor, section 3504 agent, or professional employer organization (“PEO”). Continue Reading IRS FAQs Provide More Guidance on Employee Retention Credit for Employers Using Third Party Payers
Late Wednesday, the IRS released extensive new guidance in the form of frequently asked questions (“FAQs”) on the IRS website addressing various aspects of the employee retention credit. This is the fourth in a series of articles that will address various aspects of the FAQs. This article addresses income and deduction issues related to the payment of qualified wages and the employee retention credit. In our first article, we discussed the IRS’s interpretation of the aggregation rules under section 2301(d) of the CARES Act and the determination of employer eligibility based on a full or partial suspension of operations due to a government order. Our second article addressed employer eligibility for the credit based on a significant decline in gross receipts, and our third article addressed the calculation of qualified wages and allocable qualified health plan expenses. Our final article will address issues related to the use of third-party payers. Before the release of the IRS FAQs, we addressed how employers can claim the employee retention credit and its interaction with the deferral of employer social security tax deposits (see earlier article).
Employers should carefully consider the FAQs, but remain mindful that although they represent the current thinking of the IRS, the FAQs are not binding guidance.
On Wednesday, the IRS released extensive new guidance in the form of frequently asked questions (“FAQs”) on the IRS website addressing various aspects of the employee retention credit. This is the third in a series of articles addressing various aspects of these FAQs. This article addresses the determination of qualified wages and allocable qualified health plan expenses. Our first article discussed the IRS’s interpretation of the aggregation rules under section 2301(d) of the CARES Act and the determination of employer eligibility based on a full or partial suspension of operations due to a government order. Our second article focused on employer eligibility for the credit based on a significant decline in gross receipts. Subsequent articles will address issues related to the income and deduction treatment of qualified wages for employees and employers and issues related to the use of third-party payers. Before the release of the IRS FAQs, we addressed how employers can claim the employee retention credit and its interaction with the deferral of employer social security tax deposits (see earlier article).
Although employers should carefully consider the FAQs, they should be mindful that these FAQs are not binding guidance but instead represent the current thinking of the IRS on the 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.”
On March 10, 2021, the House passed the fifth major COVID-relief legislation, the American Rescue Plan Act (the “Act”), which it originally passed last week before its amendment and passage by the Senate on March 6. President Biden is expected to sign the Act on Friday, March 12, 2021.
The Act adopts a new payroll tax credit that is similar to the employee retention credit, which was originally enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and amended by the Consolidated Appropriations Act, 2021 (the “CAA”). The new credit will be in effect from July 1, 2021, through December 31, 2021. In addition, the Act significantly increases the exclusion for employer-provided dependent care assistance for 2021, and makes prospective changes to extend the availability of paid leave credits similar to those originally adopted as part of the Families First Coronavirus Response Act (the “FFCRA”) and that are set to expire on March 31. Finally, the Act will extend the deduction limitation under section 162(m) to additional employees. Continue Reading American Rescue Plan Act Goes to Biden for Signature: Includes Changes to Employee Retention Tax Credit, Employer-Provided Dependent Care, Paid Leave Credits, and Deduction Limitations for Executive Compensation
The bipartisan infrastructure bill introduced in the Senate earlier this week includes a provision that would end early the employee retention credit, which was codified in Section 3134 of the Internal Revenue Code by the American Recovery Plan Act earlier this year. The Section 3134 credit, which took effect on July 1 but mirrors the credit originally adopted in the CARES Act and enhanced last December, is currently scheduled to expire at the end of 2021. However, the infrastructure bill would preclude employers, other than Startup Recovery Businesses established during the COVID-19 Pandemic, from claiming the credit for wages paid after the end of the third quarter. Startup Recovery Businesses would remain eligible for the credit through the end of 2021.
According to the Joint Committee on Taxation, the early termination of the credit is expected to save $8.2 billion. To remain eligible for the credit in the fourth quarter, employers generally must experience a 20% decline in quarterly gross receipts in the third or fourth quarter of 2021 compared to the same quarter in 2019 or continue to experience full or partial suspension of their trade or business. We will continue to monitor the legislation to see if the provision is included in the final bill.
The IRS recently announced that it erroneously sent failure-to-deposit (“FTD”) penalty notices to certain employers that reduced their employment tax deposits on Form 941 (Employer’s Quarterly Federal Tax Return) in anticipation of claiming sick and family leave credits under the Families First Coronavirus Response Act (“FFCRA”) or the employee retention credit (“ERC”) under the Coronavirus, Aid, Relief and Economic Securities (“CARES”) Act. Continue Reading IRS Warns Employers Claiming New Tax Credits of Erroneous Penalty Notices
On July 27, 2020, the IRS published Information Release 2020-169 announcing the issuance of new temporary and proposed regulations to implement procedures to assess, reconcile, and recapture any portion of the credits under the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) erroneously credited, paid, or refunded in excess of the actual amount allowed. Continue Reading Recapture of Excess COVID-19 Payroll Tax Credits Addressed in New Regs
On May 7, the IRS updated its frequently asked questions to reverse its earlier determination that health plan expenses paid or incurred by an employer to provide health benefits to furloughed employees who were not paid other wages were not qualified health plan expenses for which an employer could claim the employee retention credit. The IRS revised Q&A-64 and Q&A-65 after the guidance came under bipartisan criticism from both Senate Finance Committee and House Ways and Means Committee leadership. Senators Grassley and Wyden, chair and ranking member of the Senate Finance Committee, and Representative Neal, chair of the House Ways and Means Committee, sent a letter to Treasury Secretary Mnuchin on May 5 urging Treasury and the IRS to change its position. The guidance came as a surprise because it conflicted with the Joint Committee on Taxation report that indicated such expenses were intended to be treated as eligible for the employee retention credit. Left unchanged by Treasury and the IRS is the distinction between payments made to furloughed employees and severance paid to terminated employees (see earlier article).
On May 4, the IRS revised its newly released frequently asked questions (“FAQs”) to clarify the interaction of the Paycheck Protection Program (“PPP”) with the employee retention credit. FAQ 79 now indicates that an employer that repays its PPP loan by May 7, 2020, in accordance with rules issued by the Small Business Administration (“SBA”), the employer will be treated as though it had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit provided the employer is otherwise an “eligible employer.”
In our article of April 30, we highlighted a concern that the shifting PPP terms combined with media attention and a public outcry had led many employers who “received” a PPP loan to repay them during a safe harbor period for repayment under SBA rules. Because the FAQs did not address the issue, we were worried that some employers might be left ineligible for both the PPP and the retention credit. That may still be true for employers who are required to be aggregated with another employer who received a PPP loan, but will no longer be a concern for those who received a PPP loan, and repaid it by May 7, 2020.