Treasury will let employers claim retention tax credit and provide insurance to furloughed workers

The Treasury Department is bowing to requests from lawmakers on both sides of the aisle and allowing employers to remain eligible for claiming the Employee Retention Credit on their tax returns while continuing to provide health insurance to their furloughed employees.

Earlier this week, three leaders of Congress’s tax-writing committees asked the IRS to reverse recent guidance that effectively denied the Employee Retention Credit in the CARES Act to employers who continue providing health insurance to their furloughed employees unless they continue paying other wages (see our story). The new item said employees aren’t eligible for the tax credit if they aren’t paying wages to their employees, but they’re still paying for health coverage — a common situation for many employees who have been furloughed.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, ranking member Ron Wyden, D-Ore., and House Ways and Means Committee Chairman Richard E. Neal, D-Mass., sent a letter Monday to Treasury Secretary Steven Mnuchin asking him to change the guidance.

A Treasury official, Frederick Vaughan, principal deputy assistant secretary in the Office of Legislative Affairs, responded in a letter Thursday agreeing to the request. “The department has taken your views under consideration and will be revising the applicable guidance,” he wrote.

Grassley applauded the decision to reverse course. “This is good news for small businesses and workers across the country,” he said in a statement. “This decision will encourage employers to help employees keep their health insurance while temporarily furloughed due to the shutdown. The decision also aligns Treasury’s policy with the original congressional intent behind the employee retention tax credit.”

Grassley, Wyden and Neal have also been asking Mnuchin to reverse another recent piece of IRS guidance, Notice 2020-32, that bars small businesses from deducting their expenses under the Paycheck Protection Program even if their loans are forgiven. They sent a separate letter this week about that matter. Vaughan responded in a separate letter Thursday, saying the Treasury will take their views into consideration and follow up with them.

Grassley isn’t ready to let the matter slide for long. “We still need to fix the issue of deducting business expenses related to the application for PPP loans,” he said, in a statement. “It’s fully my intention for that issue to get resolved quickly, whether administratively or legislatively, so small businesses maintain as much liquidity as possible during this difficult period.”

He and several of his colleagues have already introduced legislation that would require a change in the Treasury Department’s and the IRS’s position and clarify the small-business expense deductions under the Paycheck Protection Program.

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