AICPA Seeks Guidance on Employee Retention Credit

a. Provide guidance on the application of rules similar to section 280C(a).

b. Provide guidance related to an employer's deduction for payroll taxes reduced by the credit. It is unclear if an employer is allowed to take a deduction for the total amount of payroll taxes incurred or the total amount of payroll taxes paid after application of the credit.

We recommend allowing the deduction for an employer's social security tax obligation before applying the credit. Under section 41(h), certain small businesses may elect to take a credit against the Federal Insurance Contribution Act (FICA) taxes instead of income taxes for certain research expenses. Even though section 280C applies to reduce a company's deduction for the research expenses by the amount of the credit, Congress also enacted section 3111(f)(4) to reduce the employer's payroll tax deduction by the amount of the credit. A provision similar to section 3111(f)(4) is not included in Section 2301 of the CARES Act.

c. Clarify whether wages for which an employee retention credit is claimed are deductible or if section 265 precludes such a deduction.

a. Clarify that Section 2302 of the Act allows employers to defer payments of social security taxes originally due on or after March 27, 2020, regardless of when the compensation was earned.

For example, an employer has a payroll period beginning on March 15, 2020 and ending on March 30, 2020. The employer was required to pay its share of social security taxes on March 31, 2020 with respect to the wages paid on that date. The employer is allowed to defer payment of the full amount of the social security tax obligation even though some of the wages were earned prior to March 27, 2020.

b. Clarify the same question for self-employed individuals. The Self-Employment Contribution Act (SECA) portion of estimated taxes is not due until April 15, 2020 (before the current extension). Clarify the calculation for the SECA accrued in the 1^st quarter but that would generally have been deposited as part of estimated taxes after the law changed in late March.

c. Provide a mechanism to calculate net earnings from self-employment occurring before March 27, 2020 when Net Earnings from Self-Employment (NESE) is earned: (a) through a partnership, and/or; (b) as Schedule C income. Also clarify if the closing of books is required.

The FAQs published by the IRS refers to a situation where “operation can still continue to operate but not at its normal capacity.” Please provide a definition of the term “normal capacity”. The example in the FAQ refers to a restaurant that previously allowed seating for customers but after a COVID-19 related governmental order, the restaurant could only serve food through carry-out, delivery or take-out. We agree with the example that the restaurant has had a partial suspension of operations.

a. Expand the example to address the suppliers of the restaurant. For example, a wholesaler that provides food to the restaurant will affect the business operations of the restaurant because it cannot supply as much food due to the governmental order. The trucking company that delivers the food from the wholesaler to the restaurant will ship less food because of the governmental order even though the trucking company is still in operations because it is an essential operation. This guidance is especially important for businesses that are not forced to change or stop business operations because they are an essential business, but their operations have been affected because their customers cannot operate or their clientele is under a “stay at home” order.

b. Expand the example to apply to a business that is in operation as an essential business, but one of its suppliers is subject to a governmental shutdown order. As a result of the supplier being ordered to shut down, the restaurant will be affected because they will have less food to sell.