Last Friday, the IRS updated its Frequently Asked Questions (FAQs) with respect to the Employee Retention Credit (ERC). As noted previously, unlike the Paycheck Protection Program (PPP) loans which require certain levels of maintained employees, the ERC does not inhibit a company’s ability to adjust employee headcount and compensation (although such an adjustment could impact the amount of the ERC). The updated FAQs, for the most part, are helpful as more taxpayers are seeking to obtain much needed liquidity by claiming the ERC. However, taxpayers still have many unanswered questions and the FAQs are not binding authority and are subject to change. 

The following is a high-level summary of some of the more relevant FAQs, as well as some of the questions that taxpayers are still faced with to address on their own.

Expansion of eligibility for the ERC

A taxpayer may be eligible for the ERC if it either has (1) a full or partial suspension of operations due to order from an appropriate governmental authority with respect to a trade or business (FPSO) or (2) a significant decline in gross receipts. The updated FAQs expand the scope of taxpayers that may have incurred a FPSO.  Specifically, they provide:

1. An order from a local health department mandating a workplace closure for cleaning and disinfecting constitutes an order from an appropriate governmental authority.

A&M Observation: This addition addresses the situation in which a taxpayer’s trade or business opens but is subsequently closed for cleaning due to an infected patron or employee.  As businesses are slowly opening, this addition provides some certainty that taxpayers can qualify for the ERC even after reopening (regardless of their gross receipts).  

2. A taxpayer incurs a partial suspension of operations if more than a “nominal portion” of its business operations are suspended, or if the governmental order requires the business to close for a period of time during normal working hours.

Under this provision, a restaurant that is permitted to offer outdoor sit-down or carry-out service, or indoor dining service, can still qualify as subject to a partial suspension of operations if a governmental order restricts the spacing of tables, and the spacing affects service capacity and has more than a nominal effect on business operations.  On the other hand, a supermarket that closes its salad bar and other self-serve offerings, but replaces them with prepackaged salads and other items, is not treated as having been subject to more than a nominal effect, even though it was required to modify its business operations. 

A&M Observation: This clarification provides flexibility to many essential businesses that have suffered a reduction in business operations due to the COVID-19 pandemic, even if these businesses were allowed to remain open or to reopen subject to restrictions. However, due to the factual nature of the determination, taxpayers may want to consider the impact COVID-19 has had on their operations and determine whether it has impacted more than a “nominal portion” of their business.  If taxpayers have any questions, A&M is happy to discuss them.

Questions Remaining

Unfortunately, there are still several areas in which the IRS has not provided guidance and so taxpayers are left having to take a position without guidance from the IRS.  Two of the areas that could impact M&A transactions are:

• The implications if a new entity becomes part of an employer.
  • For purposes of the ERC, multiple entities can be treated as a single employer and therefore their activities are aggregated for purposes of determining whether the employer qualifies for the ERC.  An employer is prohibited from claiming the ERC if they had received a Paycheck Protection Program loan.  Therefore, there is uncertainty as to the consequences if an entity becomes part of a single employer and at the time it joins, it either has a PPP loan in place, or had a PPP loan that was either forgiven or paid off.  Is the single employer treated as having a PPP loan and therefore ineligible for the ERC?  This question becomes further complicated if the entity joins in a subsequent year, as the potential retroactive disqualification may cause a failure to pay employment taxes that may pose a fiduciary liability.
• The implications if an entity is no longer part of an employer.
  • Conversely, it is unclear what happens if an entity, which is part of a single employer because of the aggregation rules is no longer part of an employer, and that employer is treated as having received a PPP loan because another entity received a PPP loan.  Is that employer still treated as having previously had a PPP loan and therefore ineligible for the ERC?   What if the entity did in fact have a PPP loan, but it was forgiven or paid off before leaving the single employer?

A&M Taxand Says

The guidance covered in this TAW is part of the government’s efforts to provide relief to taxpayers because of the ongoing COVID-19 pandemic. As noted in prior Tax Alerts, the ERC provides a significant benefit to employers who do not receive PPP loans. The most recent changes to the ERC FAQs provide some flexibility to employers claiming the ERC as well as certainty on certain open issues. A&M would be happy to discuss your particular situation and help address your questions.

Please stay up to date by visiting A&M’s COVID-19 Resource Center.