New IRS FAQs provide conflicting guidance for taxpayers, deviating from a nonpartisan congressional committee’s interpretation of applying health care expenses toward a tax break for businesses who keep employees on their payroll during the coronavirus pandemic.
The agency answered more than 90 FAQs, giving businesses much of the clarity they need to proceed with claiming the employee retention credit worth up to $5,000 per employee. But one significant difference between the IRS guidance, which was updated Wednesday, and the Joint Committee on Taxation’s recent description of the benefit could complicate employers’ decision-making, especially since neither of the items are legally binding—meaning taxpayers can’t rely on them to support an argument in court. The IRS notes this on its webpage with the FAQs.
The IRS said employers can’t claim the credit for health care expenses they continue to pay on behalf of their employees if they aren’t paying any other wages, while the JCT said Treasury and the IRS had the authority to take the opposite position. During an American Bar Association webcast Thursday, IRS officials didn’t directly answer questions about what would be considered a reasonable position for taxpayers to take when the IRS and JCT reach different conclusions in informal guidance.
Robert Delgado, a benefits tax principal at KPMG LLP, is advising taxpayers to follow the agency’s FAQs as the definitive authority since the IRS has enforcement powers.
“What’s important to remember here is that both of those sorts of guidance that have been issued really don’t rise to the level of complete authority,” he said during a Thursday KPMG webcast.
Janine Cook, deputy associate chief counsel for the IRS’s Tax-Exempt and Government Entities Division, said she didn’t have a specific comment but noted that FAQs are generally used to get guidance out quickly and that the agency is aware there are places where there could be differing opinions.
She urged tax professionals to continue to watch for further statements from IRS and Treasury on plans beyond the FAQs.
Big Questions Answered
Still, the FAQs will be a helpful tool for businesses moving forward.
The employee retention credit is available to businesses that continue to pay their workers, despite financial hardship stemming from the coronavirus pandemic. To be eligible employers must have been directed by a government order to partially or fully suspend their business operations or have experienced a significant drop in gross receipts.
Tax professionals previously said some business clients were hesitant to take advantage of the perk because they weren’t sure whether they qualified due to a lack of guidance.
Some of the new FAQs are more restrictive than taxpayers were hoping, said Jeffrey Martin, a partner in Grant Thornton LLP’s Washington National Tax Office.
“But at least we have answers now,” he said, noting that the informal guidance will provide the “vast majority” of employers the clarity they need to take advantage of the tax perk.
Many of the questions from businesses dealt with eligibility, especially for essential entities permitted to stay open under a government order.
The agency said employers operating those types of essential businesses generally aren’t considered to have fully or partially suspended operations, even though closures to other non-essential businesses may affect their operations.
The agency offered a few exceptions, including when an essential business’s suppliers aren’t able to deliver critical good and materials because they’ve been directed to close under a government order, and when a government order instructs an essential business to reduce its operating hours.
The IRS also elaborated on the types of wages that qualify for the credit, shed light on the reduced gross receipts test, and defined what a “governmental order” is for purposes of the credit.
A Few Loose Ends
The American Institute of CPAs would still like the IRS to address how tax-exempt organizations, which can also claim the credit, should determine the amount of gross receipts they have for purposes of calculating whether or not they have a significant decline in receipts, said Kristin Esposito, senior manager for tax policy and advocacy at AICPA.
The FAQs also don’t say whether a business can still qualify for the employee retention credit if it pays back a received Paycheck Protection Program (PPP) loan. Businesses can’t take advantage of both the tax break and the loan.
Treasury and the Small Business Administration have given large companies that shouldn’t have received PPP loans until May 7 to return the aid without facing negative consequences.
Under the current IRS guidance, it’s unclear if a business will still be eligible for the employee retention credit if it repays the loan, Delgado said.
Despite these loose ends, practitioners said overall they were pleased with the IRS guidance and the clarity it offers businesses.
“While FAQs are not as authoritative or binding as regulations, they can be used as a guide for employers and their CPA advisors to follow,” Esposito said.