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AICPA Asks for Authoritative Guidance on CARES Act Effects

Posted on Oct. 13, 2020

Taxpayers need authoritative guidance on the effect of the mutual exclusivity of the Paycheck Protection Program and the employee retention tax credit, according to the American Institute of CPAs.

In an October 8 letter to Treasury and the IRS, the AICPA requested additional clarification and guidance regarding the interaction of two provisions from the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136). This latest request follows an initial letter sent in April.

The letter makes six recommendations, but only the first — concerning how the mutual exclusivity of the PPP and the ERTC could affect mergers — asks for “authoritative” guidance. That’s an apparent reference to the low level of reliance a taxpayer can place on FAQs compared with IRS guidance published in the Internal Revenue Bulletin.

Only three days before the AICPA sent its letter, IRS Chief Counsel Michael J. Desmond said the agency is receptive to suggestions that FAQ guidance be published in the IRB. The CARES Act guidance issued as FAQs was provided in that form primarily for the sake of speed, he noted.

The IRS’s use of FAQs to provide CARES Act guidance has drawn some notable attention from the courts, particularly in an October 8 decision that took the extraordinary step of mandating a change to the IRS FAQ concerning prisoners’ eligibility for economic impact payments.

Side Effects

The PPP provides for special loans that can be forgiven on a tax-free basis, but the CARES Act says taxpayers who avail themselves of those loans can’t also take the ERTC, and vice versa. There are also aggregation rules for treating multiple entities as a single employer, requiring that one entity’s choice between the two programs be distributed to the rest.

The AICPA said the economic stress from the COVID-19 pandemic makes guidance about the interaction of the PPP and the ERTC particularly important because some businesses need to merge to survive. The letter provides examples of businesses in the healthcare industry.

“Small health clinics in underserved communities have been heavily affected by COVID-19. These clinics experienced increased costs for telehealth technology and personal protective equipment and reduced revenue due to providing less patient care,” according to the AICPA.

When one entity encounters financial hardship that could cause it to close and reduce options for a potentially underserved community, another often steps in to buy the assets or stock of the struggling clinic, the AICPA explained. The distressed clinic then enters the purchaser’s aggregated group under the ERTC rules, the letter notes.

“In these situations, it is common that one party to the transaction received a PPP loan while the other party claimed the ERTC,” the AICPA said.

If the buyer claimed the credit and the target received a PPP loan, the buyer would lose eligibility for that credit, leading to at least a repayment requirement and potentially interest and penalties as well, according to the AICPA. Hence, the cost of the deal rises, potentially making it unviable, the AICPA said.

The inverse situation — in which the buyer took a loan and the target took the credit — would lead to the same result, according to the AICPA. “It is unclear whether penalties would apply for having claimed a credit for which, due to subsequent actions, [the business] has become ineligible,” the group said.

The statute of limitations makes the situation murkier because, for example, a 2023 merger could affect eligibility for a credit claimed in 2020, the AICPA said.

In addition to making guidance in this area authoritative, the AICPA recommended that the IRS and Treasury rule that “an eligible employer within the meaning of Section 2301(c)(2) of the CARES Act should be allowed to claim an ERTC on qualified wages paid or incurred prior to becoming a member of an aggregated group that includes a member that received a PPP loan.” And qualified wages for the credit shouldn’t include payroll costs used for PPP loan forgiveness, the group asserted.

The AICPA also requested more guidance on the effect of reduced employee hours caused by a significant decline in gross receipts on the computation of qualified wages, the effect of prepaid income on tax-exempt employers’ gross receipts, and how to apply the aggregation rules to tax-exempt entities.

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