IRS Places Limits on COVID-19 Employment Tax Credit, Raising Concerns for DC Businesses
In a recent move, the Internal Revenue Service (IRS) has issued a memorandum that could significantly narrow the availability of the COVID-19 employment tax credit. The guidance provided by the agency suggests that it may retroactively restrict the eligibility criteria for businesses seeking to claim the credit.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), along with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, were implemented to provide employment tax credits to qualified businesses and tax-exempt organizations that continued to operate during the COVID-19 pandemic. To be eligible, these entities needed to demonstrate either a full or partial suspension of operations due to government orders or a significant decline in gross receipts.
For the year 2020, eligible employers were able to claim the employee retention credit (ERC) against the employer’s share of Social Security tax. The credit could be as much as 50% of the qualified wages paid to employees between March 12, 2020, and December 31, 2020, with a limit of $5,000 per employee. The ERC was extended until September 30, 2021, for the calendar year 2021, and the maximum amount was increased to $7,000 per employee per quarter, totaling $21,000 per employee for the year.
However, the IRS’s recent memorandum, released on July 21, 2023, outlines new requirements for employers to prove that a governmental order limiting commerce, travel, or group meetings directly caused the suspension of operations for a supplier of critical goods or materials. This, in turn, must have prevented the employer from obtaining the necessary supplies, resulting in a full or partial suspension of their own operations.
Critics argue that the IRS’s actions demonstrate a lack of understanding and appreciation for the challenges faced by employers during the pandemic. The lingering impact of government orders, supply chain disruptions, and the ongoing effects of COVID-19 on the economy have all contributed to full and partial suspensions of business operations for numerous employers.
Moreover, the memorandum highlights the importance for employers to carefully consider the risks associated with claiming the ERC during the eligible quarters of 2020 and 2021. It appears that the IRS is retroactively seeking to limit the availability of the credit for the many businesses that navigated the difficult circumstances imposed by government orders during the height of the pandemic.
The IRS’s decision has raised concerns among businesses in Washington, DC, as they worry about the potential financial implications and uncertainty surrounding the employment tax credit. Many businesses have already factored in the credit when making financial decisions and budgeting for the future.
While the IRS memorandum is not legally binding and cannot be cited as precedent, it does indicate a shift in the agency’s approach to the availability of the employment tax credit. Businesses and tax-exempt organizations must now carefully assess their eligibility and ensure they can meet the new requirements set forth by the IRS.
In conclusion, the updated guidance from the IRS regarding the COVID-19 employment tax credit is causing unease among businesses in Washington, DC. With potential limitations on the availability of the credit, businesses are left uncertain about the financial implications for their operations. It is crucial for affected entities to carefully review the specific requirements outlined by the IRS and seek professional guidance to navigate these changes effectively.
