Employee retention credit guidance update and rising economic confidence

On March 1, the IRS issued guidance on the employee retention credit. April Walker, CPA, CGMA, lead manager on the Tax Practice & Ethics team at the AICPA, explains the highlights of that guidance, including how the credit interacts with PPP loans. Also, Ken Witt, CPA, CGMA, senior manager for management accounting and member engagement at the AICPA, shares the important details of the latest AICPA Business & Industry Economic Outlook Survey.

What you’ll learn from this episode:

• Key points of the 102-page guidance from the IRS on the employee retention credit.
• What the IRS guidance did not yet address.
• How finance executives feel about the domestic economy and their own businesses in the coming 12 months.
• The top challenges listed by CPA decision-makers.
• The business sectors that showed rising optimism.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.

Transcript:

Neil Amato: Welcome to the Journal of Accountancy podcast. I’m senior editor Neil Amato. We’re starting this week’s podcast with news on recent IRS guidance on the employee retention credit. April Walker is a CPA and lead manager on the Tax Practice & Ethics team and a colleague of mine at the AICPA. So, to set the scene, April, late on Monday, March 1, 102 pages of guidance was issued by the IRS on employee retention credits. What clarifications did this guidance make for employers with PPP loans?

April Walker: Thanks, Neil. So, the simple answer to that question is that the notice provides an explanation on how and when employers that received PPP loans can go back and retroactively claim the employee retention credit for 2020.

I just want to provide a little bit of background. For 2020, the employee retention credit can be claimed by employers who paid qualified wages from March 12, 2020, until the end of the year, and they’re eligible if they experienced a full or partial shutdown of their operation due to a government order, or they had a significant decline in gross receipts. So, the credit is equal to 50% of qualified wages, up to $5,000 for 2020. So, the significant change and why we’re still talking about this credit — this credit is against payroll tax, it’s not an income tax credit — is because the relief act that was signed in late December lets employers who received a PPP loan, a Paycheck Protection Program loan, to also claim the employee retention credit. The caveat in the legislation was the same wages couldn’t be used for both PPP forgiveness and the employee retention credit.

So, that’s where you had a really, key unanswered question on how you do that allocation. And the answer is they said, “OK, if you’ve already applied for forgiveness, whatever wages you listed on the application, you have elected to use those wages for PPP forgiveness, and you can’t uses those wages for the employee retention credit.” And why that might be an issue for people is that in order to get forgiveness for PPP, you only have to use 60% — 60% of payroll costs have to be used in order to be forgiven for the loan. But for simplification purposes, someone might have put — here’s a simple example. An employer received $100,000 of PPP. On the forgiveness application, they could have put $60,000 of payroll and $40,000 of other qualifying costs if they had them. For simplification, they may have just put $100,000 of payroll cost.

But by doing that, that $100,000 — there’s no way to go back and change that. But at least we have the answer on how to do that. There is more flexibility on people who have not applied for forgiveness yet. Because then you can just take a look at all the qualifying wages, what qualifies for employee retention credit and what qualifies for PPP forgiveness, and make a more strategic determination.

Amato: What else was changed by this guidance?

Walker: So, it was 102 pages of guidance. However, a lot of the pages were FAQs that were already included on the IRS website, so there’s not 102 pages of new information. The primary information was what I just talked about, how to determine wages for if you did receive a PPP loan.

There were a couple of other clarifications. One particular outstanding question that they did address but we still have questions about is whether wages paid to shareholders count as eligible costs. We know that wages paid to related individuals are not included, but we’re not sure about that, so that’s still an outstanding question.

Amato: This notice only deals with 2020 employee retention credits. What should we expect regarding 2021 credits?

Walker: Right, so, as you probably know, there was an extension of the credit to 2021, and the IRS in this notice itself pretty much says, “We’re only dealing with 2020 in this notice. We’re going to deal with 2021 and address those questions.” And that should be coming out soon.

Amato: Definitely more to follow in this story. I know you’ll be keeping up with it, April. Thank you for being on today.

Walker: Happy to be here.

Amato: In other news, U.S. CPA decision-makers are growing more optimistic about their organizations and the domestic and global economy. After the onset of COVID-19 about a year ago, sentiment in the Business and Industry Economic Outlook Survey by the AICPA dropped from the mid-70s on a 100-point scale to the high 30s between the first and second quarters of 2020.

In the most recent results, released March 4, that sentiment is back close to pre-pandemic levels, at 68 in the CPA Outlook Index. For more on the results, here’s my conversation with the AICPA’s Ken Witt, a senior manager for management accounting and member engagement.

Another quarter, which means another quarterly Business and Industry Economic Outlook Survey is in the books. Here to talk about those results is Ken Witt. Ken, thank you for being on. Tell me what to you are kind of the top highlights of this quarter’s survey.

Ken Witt: Thanks, Neil, good to be with you as always. And I think a couple of things. I think just the overall optimism and the increase in sentiment about the economy and people’s organizations, especially how that’s translating into sectors that have had more difficulty during the pandemic and the impact on hiring. I think overall a pretty guarded yet optimistic outlook going forward.

Amato: Yeah, so it’s three straight quarters that there’s been an increase. Obviously, there was a major disruptive event that wasn’t just one quarter but many parts of the year and still affecting us, but what does the rising optimism tell you about the economy in general and I guess hiring in particular?

Witt: In general — of course, both optimists and pessimists cited the change in administration as a factor in the responses they provided. Among the optimists, it was sort of the rolling out of the vaccinations and the impact on the economy that really was noteworthy. So, I think it’s a positive step forward. I think people are beginning to see a little light at the end of the tunnel.

Amato: So, some sectors that were especially hit hard — hospitality and then also retail in some sense — how are those responding this quarter compared with the last quarter and also maybe compared to this time a year ago?

Witt: I think retail is a big one. Retail optimism had increased in the fourth quarter. It was 42% of our retail execs were optimistic in the fourth quarter, and that’s now up to 63%. They were projecting a decline in hiring going forward, which we always see in the fourth quarter, you know, if retailers have a concern about what things are going to look like after they get through the Christmas busy season. We’re actually seeing they top the charts in terms of protecting employment at 3.8% versus a decline in the fourth quarter. So, retail is strong, hospitality/food services, and mining, oil and gas, the extractive sector had both shown negatives going forward from the fourth quarter, and they’re showing positive employment looking ahead from the first quarter.

Amato: You mentioned cautious optimism. Obviously, there are challenges ahead. On the list that respondents are polled on each quarter, what are the top challenges, what stands out to you?

Witt: Yeah, well, I think this is one of those ironic situations where the list of challenges actually presents some good news, too, because what we’re seeing this quarter is that, based on the challenges, that we’re kind of back to business as usual. Obviously, we’re not out of the woods yet, so domestic economic conditions still top the list, but availability of skilled personnel has found its way back to the No. 2 slot. Employee and benefit costs moved up four slots to No. 5, and staff turnover found its way back into the top 10 at No. 9. So, when we have those employment-related challenges showing up on our top challenges for business, I think that there’s some good news in the bad news.

Amato: Ken, anything else to add in closing on this quarter’s survey?

Witt: I think the construction industry is a bit of a mixed bag. Employment is now projected to increase, where it was flat in the fourth quarter, but optimism has eased off a little bit. I think commercial construction in particular with people downsizing their workforces and doing so much work from home, there are some big changes I think in the commercial sector. And there’s also been some challenges in residential construction, both good and bad, so it will be interesting to see how that evolves going forward.

Amato: Ken, thank you very much.

Witt: You’re welcome, Neil. Good to be with you.

Amato: For more information on the Economic Outlook Survey, visit journalofaccountancy.com and type “economic outlook” into the search bar.

Also, look for more coverage related to the $1.9 trillion stimulus bill that is working its way through Congress. The bill, passed initially by the House of Representatives on Feb. 27, contains new tax provisions, aid for small businesses, and relief for state and local governments. For the latest on the bill, visit journalofaccoutancy.com. Thanks for listening to the JofA podcast.