IRS FAQs on Employee Retention Credits and How They Apply to You

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.

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

• Being classified as an “essential business” does not automatically disqualify an employer from being an “eligible employer.”
• If an essential business has operations suspended due to a supplier being fully or partially suspended, the essential business can be an eligible employer.
• If an employer’s workplace is closed by a governmental order for certain purposes, but the employer’s workplace may remain open or other purposes, or the employer is able to continue certain operations remotely, the employer’s operations would be considered partially suspended.
• If a business can do all usual functions via “teleworking,” its operations have not been partially suspended.
• An “order from an appropriate governmental authority” includes “orders, proclamations, or decrees” but wouldn’t, for example, include statements made during a press conference.
• A governmental order limiting hours of operations for a business would constitute a partial suspension of operations.
• An employer that operates an essential business that is not required to close its physical location or otherwise suspend operations is not considered to have a full or partial suspension of its operations.
• Employers that operate a trade or business in multiple locations and are subject to state and local government orders limiting operations at some, but not all, locations are considered to have a partial suspension of operations.

• Severance payments do not qualify for the ERC.
• Wages paid for vacation, sick, or other personal leave under a preexisting plan aren’t qualified wages for ERC for employers with over 100 employees because the leave time was accrued during a time when the employees were providing services.
• For employers over the 100 full-time employee level, the FAQs reinforce the idea that you can claim the ERC hours/partial days where an employee is being paid but not providing services. Specifically, an example in the FAQ states “Employer U has determined that is employees are working 20 percent of the time. Employer U is entitled to treat 80 percent of the wages paid as qualified wages and claim an Employee Retention Credit for 80 percent of the wages paid.”

 
Healthcare Costs
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.
 
Controlled Groups
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.