On April 29, 2020, the IRS provided new guidance for employers affected by COVID-19 seeking relief under the employee retention tax credit (ERTC) in the form of an updated frequently asked questions (FAQs) document.
In addition to the new FAQs, a number of example scenarios were provided to help employers understand how the new guidance could apply.
An overview of key updates from the guidance follows.
Paycheck Protection Program Loan and ERTC
Many employers looking to maximize their cash opportunities hoped to take advantage of the ERTC after they exhausted their Paycheck Protection Program (PPP) loan. The IRS, however, is limiting employers to only one of these immediate cash opportunities.
Employers who received a PPP loan are ineligible from taking advantage of the ERTC regardless of if their loan is forgiven or they pay the loan back in its entirety—with a limited exception granted for employers who returned their PPP loan by May 14, 2020.
However, employers who applied for but were denied a PPP loan can still take advantage of the ERTC, to the extent they don’t apply for a PPP loan again in the future.
Determining Qualified Wages
Previously, guidance indicated that eligible employers could account any paid time-off (PTO) wages paid to qualified employees during the COVID-19 pandemic as qualified wages for the ERTC. However, new guidance restricts any PTO wages that accrued prior to the impact of COVID-19 from being qualified wages for the ERTC.
While not initially included in the updated FAQs, the Treasury announced on May 7, 2020, that the initial restriction on permitting health plan expenses for furloughed employees is expected to be reversed.
This change will allow employers who continue to provide health plan benefits to furloughed employees, even if they’re not paying the employees any wages, to generate a credit using only the health plan expenses as qualified wages.
Qualifying Government Orders
The new guidance intends to help employers understand what types of government orders qualify to determine if an employer’s full or partial suspension of operations qualifies for the ERTC.
The guidance states, “Orders, proclamations, or decrees from the federal government, or any state or local government are considered ‘orders from an appropriate governmental authority’ if they limit commerce, travel, or group meetings due to COVID-19 in a manner that affects an employer's operation of its trade or business.”
The IRS also indicates that an employer operating an essential business where the governmental order allows them to remain open wouldn’t qualify for the ERTC under the full or partial suspension unless their suppliers are unable to make deliveries of critical goods or materials due to suspending their operations as a result of a governmental order.
This doesn’t include impacts due to customers being subject to the governmental orders. However, essential businesses can also qualify if they meet the gross receipts test by having at least a 50% reduction in gross receipts during the current calendar quarter as compared to the same calendar quarter in the prior year.
Determining Qualified Employee Hours
For many employers with more than 100 full-time employees, determining the hours when an employee isn’t providing services has proven difficult to measure.
The new guidance states that “it’s not reasonable for the employer to treat an employee's hours as having been reduced based on an assessment of the employee's productivity levels during the hours the employee is working.”
Therefore, employers should use a reasonable method to track the hours the employee hasn’t been asked to work, but continues to be paid.
We’re Here to Help
While these FAQs offer helpful insight on several aspects of the credit, they should be considered initial guidance and, as the IRS notes, can’t be relied upon as legal authority.
If you have questions about these credits or would like assistance claiming them, contact your Moss Adams professional. Our web-based screening tool MaxCredits® can also help you reduce the administrative burden of pursuing other hiring and wage-based credits.
Special thanks to Senior Managers Seth Doorn and Gabe Sermeno and Managers MaryCaitlin Willcuts of our State & Local Tax Services and Lindsay Ferreira of our Tax Services for their contributions to this article.
Note on COVID-19
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: