Additional information on the Employee Retention Credit is here. The Internal Revenue Service recently released another round of frequently asked questions providing additional information on how they will assess various transactional aspects related to claiming the refundable Employee Retention Credit (ERC).
The Employee Retention Credit allows a maximum credit of $5,000 for each qualified employee, based on 50% of qualified wages paid during a calendar quarter by an eligible employer from March 12, 2020, through December 31, 2020.
We broke down what's included in the Employee Retention Credit
Key Takeaways from the FAQs
A few of the latest FAQs were disappointing in application, particularly related to employers with over 100 employees. But, with recent discussions related to larger organizations potentially returning proceeds of a Paycheck Protection Program (PPP) loan, the IRS may have felt they needed some protection related to the ERC provisions. After all, the ERC potentially offers a replacement benefit for a larger organization returning a PPP loan.
The full listing of FAQs can be found on the IRS website but some key takeaways from the recent release are:
Partially Suspended Operations
One of the biggest disappointments from this new set of FAQs was the guidance that healthcare costs paid to furloughed employees are not qualified wages for the ERC unless the employer pays some level of actual wages to the furloughed employees.
Historically, a furloughed employee does not receive actual wages. According to a May 4 letter sent by top congressional taxwriters to Treasury, the FAQs on this issue contradict congressional intent. In addition, the Joint Committee on Taxation had indicated earlier that the law provided the IRS the authority to allow employers to allocate healthcare costs to employees that weren’t being paid any other wage for the purpose of the ERC. However, the IRS appears to have come to a different conclusion. It remains to be seen if the IRS will reconsider its determination on the inclusion of these costs.
The FAQ also makes a comment on controlled groups. Specifically, if one member of a controlled group has fully or partially suspended operations due to a government order related to COVID-19, all members of the controlled group are deemed an eligible employer for purposes of the credit.
But example FAQ 37 seems to indicate that the full or partial suspension test is applied to each trade or business separately. The examples don’t seem to indicate that if separate trades or businesses are operated by the controlled group, all trades or businesses would be considered partially suspended. Employers would likely welcome additional clarification on this issue from the IRS.
What the Additional ERC Guidance Means For You
With this new set of guidance, the IRS now has 94 separate FAQs dedicated to the ERC on its website, with more likely coming. Employers navigating through the complexity of the new ERC provisions will likely have some of the answers they were hoping for, but additional guidance will be needed to allow for employers to appropriately apply the ERC to their situation.
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