Several issues involving the new employee retention credit are in need of clarity and guidance, the AICPA told Treasury and the IRS on Friday. In a letter from Christopher Hesse, CPA, chair of the AICPA Tax Executive Committee, to David Kautter, the assistant secretary for tax policy at Treasury, and IRS Commissioner Charles Rettig, the AICPA identified eight areas where taxpayers and practitioners need guidance and made recommendations.
The employee retention credit is available for employers that close or suspend operations or have much-reduced gross receipts due to the coronavirus pandemic. The credit, which was enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, is designed to encourage businesses to keep employees on their payroll by providing a refundable tax credit of 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
The CARES Act says that rules similar to the rules of Sec. 280C(a) will apply to the employee retention credit. The AICPA asked for guidance on the application of those rules. The AICPA specifically asked for guidance related to an employer’s deduction for payroll taxes that are reduced by the credit because it is unclear if an employer is allowed to take a deduction for only the total amount of payroll taxes incurred or the total amount of payroll taxes paid after application of the credit. The AICPA recommends allowing the deduction for an employer’s Social Security tax obligation before applying the credit.
The AICPA asked for guidance on the deferral of the payment of Social Security taxes and asked the IRS to clarify that Section 2302 of the CARES Act allows employers to defer payments of Social Security taxes originally due on or after March 27, 2020, regardless of when the compensation was earned.
It also asked for clarification for the same question for self-employed individuals.
Other topics were identified by the AICPA as needing guidance. The letter asked the IRS to:
- Clarify, in situations where employees work a reduced schedule but continue to be paid their regular wage, whether a portion of the employees’ wages and qualified health care costs can be claimed as a credit;
- Provide additional guidance regarding the definition of a “partial” suspension of operations for purposes of Section 2301 of the CARES Act;
- Define the term “trade or business” for purposes of Section 2301 of the CARES Act and clarify whether the suspension test is applied to each trade or business in which the employer operates or if the situation constitutes a partial suspension;
- Clarify whether an employer aggregated under the aggregation rules under Section 2301 of the CARES Act is barred from claiming the retention credit if another related entity (under the Sec. 52 rules) receives a U.S. Small Business Administration loan;
- Clarify whether a not-for-profit organization that has not been fully or partially suspended can use the gross receipts test to qualify for payment of retention pay — Section 2301(c)(2)(C) of the CARES Act implies that it cannot; however, IRS FAQ No. 2 implies that it can.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page.
For tax-related resources, visit the AICPA’s Coronavirus (COVID-19) Tax Resources page.
— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor in chief.