In addition to a new Employee Retention Credit FAQ published on July 28, 2023, the IRS has published two new guidance memos.
An information letter to Congressman Matt Cartwright released on June 30th responds to the representative’s inquiry on behalf of a constituent regarding the timing of the income tax adjustment resulting from the ERC. The letter from Treasury reiterates guidance previously provided in IRS Notices:
“Section 280C(a) generally disallows a deduction for the portion of wages or salaries paid or incurred equal to the sum of certain credits determined for the taxable year. Accordingly, a similar deduction disallowance applies to the ERC. This means that an employer’s deduction for qualified wages is reduced by the amount of the ERC. Section IV.C. of Notice 2021-49 explains that Section 280C(a) requires tracing to the specific wages generating the applicable credit. Because of this tracing requirement, the timing of the reduction in the employer’s deduction occurs in the tax year in which the qualified wages were paid or incurred, not the year the ERC is received.”
A Chief Counsel memo released August 18, 2023, discusses the ability of federal credit unions to claim the ERC. The memo clarifies that federal credit unions are instrumentalities of the United States government and are therefore ineligible to participate in the ERC for wages paid after March 12, 2020 and before January 1, 2021. However, because of amendments to the ERC made in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, federal credit unions may claim the ERC for wages paid after December 31, 2020 and before October 1, 2021 (or, in the case of a Recovery Startup Business, before January 1, 2022) because they are also organizations described in section 501(c)(1) of the Code and are exempt from tax under section 501(a) of the Code.
None of these recent examples of IRS guidance offer any new information but merely restate guidance that has been previously available. In a recent interview with Tax Notes, Tom Cullinan, who served as part of IRS Commissioner Charles Rettig’s leadership team as acting IRS chief of staff, responded to the question, “Do you think that further guidance regarding the ERC is needed from the IRS?” Mr. Cullinan responded:
“The IRS has put out a lot of guidance already on IRS.gov. There have been several notices. There are FAQs. The hardest questions, in my mind, are case-specific. For example, whether there was a full or partial suspension of operations resulting from a government order due to the pandemic. That’s very fact specific. The IRS has given examples, but it’s going to be up to the advisers to apply those examples to a particular business situation to make an assessment of whether the business is eligible or not. And that’s what we do. But I think it would be hard for the IRS to really be more specific about how exactly to apply that. And then, of course, you’ve got the fact that the clock is ticking … And so with that, I think the value of IRS guidance, as every day passes, is diminished little by little. So, I wouldn’t expect them to do anything earth-shattering at this point. And, of course, there’s been a lot of recent litigation about how the Administrative Procedure Act applies to the IRS, so if they were going to do anything earth-shattering, so to speak, that might be something that would need to be done by regulation, and that can take just an awfully long time, unfortunately. So again, given the fact that we’ve got these deadlines coming up, my personal view is that I don’t expect to see anything significant.”
Connected with the IRS’s handling of the ERC, Senator J.D. Vance (R-OH) published an op-ed in the Wall Street Journal on August 18, 2023 critical of the Service’s management of the program. The Senator wrote,
“For thousands of small businesses, the IRS hasn’t only failed to change its ways, it’s gotten worse. Millions in promised tax relief from the Employee Retention Credit, or ERC, has yet to be processed—while the threat of enforcement and the challenge of compliance grow. The ERC was drawn up by Congress during the height of the Covid pandemic as businesses closed and sent their workers home. In an effort to protect payrolls and avert mass layoffs, the Cares Act included the refundable tax credit, which compensated businesses for pandemic-related losses and wages paid to employees … The ERC was a pragmatic policy with a sensible goal. Congress was right to relieve the tax burden on small businesses as they bore the brunt of government-mandated lockdowns. But even Washington’s best efforts ran into a roadblock: the IRS. The agency is buried under more than half a million unprocessed ERC tax forms submitted by businesses across the country.”
