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IRS Guidance Sought on Employee Retention Credit


The American Institute of CPAs (AICPA) has again submitted a letter to the IRS with an eye towards clarity, this time requesting guidance on the employee retention credit (ERC) provisions included in the CARES Act.

Oct 15th 2020
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In the letter, Chris Hesse, CPA and Chairperson of the AICPA Tax Executive Committee stated: “We believe our request for the guidance outlined in our most recent letter will help fulfill the intent of this law and give businesses the direction and support they need to continue operating during this difficult time.”

Background: The ERC is equal to 50 percent of the qualified wages an employer pays to employees after March 12, 2020 and before January 1, 2021. An eligible employer can benefit immediately by reducing payroll tax deposits that would otherwise be due. Furthermore, if payroll tax deposits aren’t enough to cover the credit, the employer may obtain an advance payment from the IRS.

For these purposes, qualified wages are limited to the first $10,000 of wages paid to each worker during the specified time period. Therefore, the maximum credit is $5,000 per employee—still a sizeable amount.

To qualify for the ERC, an employer must meet either one of these two requirements:

1. It has fully or partially suspended operations during any calendar quarter due to government orders relating to the COVID-19 outbreak.

2. It has experienced a significant decline in gross receipts. A “significant decline” occurs when gross receipts equal less than 50 percent of the gross receipts for the same calendar quarter in 2019.

The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations are suspended.

Update: In its most recent comments regarding the ERC, the AICPA has asked the IRS to provide the following:

  • Authoritative guidance that addresses the mutually exclusive nature of Paycheck Protection Program (PPP) loans and the ERC in mergers and acquisitions.
  • Guidance stating that intermediate entities (e.g., entities in the middle of a supply chain) are considered partially suspended due to a shutdown in situations where their business customers are closed due to a governmental order.
  • Guidance on how to apply the provisions of the CARES Act Section 2301(c)(3)(A)(i) stating that the credit is only available for wages with respect to employees who are not providing services in a calendar quarter in which the eligible employer experiences a significant decline in gross receipts or has a full or partial suspension of operations due to a government order.
  • Guidance stating that prepaid income and payments from the Higher Education Emergency Relief Fund are excluded from the definition of gross receipts for tax-exempt employers.
  • Guidance stating whether the aggregation rules apply to tax-exempt entities and, if so, how they apply.
  • A correction to FAQ #25 related to the aggregation rules to indicate that corporations must be aggregated with entities other than corporations.

We will likely have updates on any further developments after the IRS takes the letter into consideration. 

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