Tax Savings for Tribes: Updated Employee Retention Tax Credit Guidance

If your Tribal government incurred qualifying wages during required COVID-19 closures or had significant declines in gross receipts, it could receive additional funding through the employee retention tax credit (ERTC).

On November 16, 2020, the IRS updated its frequently asked questions (FAQs) for the ERTC, addressing two key matters significant to Tribes:

  • Tribal governments are now eligible for the ERTC. Tribal governments that paid employees who weren’t able to work during required COVID-19 closures or had a significant decline in gross receipts as defined by the IRS could be eligible to receive the ERTC.
  • Clarified aggregation rules. Tribes must now assess whether aggregation rules apply to their government and related enterprises. If any of your enterprises or your Tribal government received the ERTC and a loan from the Payroll Protection Program (PPP), you’ll have to consider if aggregation rules apply to your Tribe.

Below, we cover key ERTC updates, potential implications for Tribes, and next steps for your Tribal government.

About the ERTC

In summary, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides ERTC to employers that keep employees on their payroll as a result of the economic hardships due to the pandemic.

The ERTC is a refundable payroll tax credit of up to $5,000 per employee from March 13, 2020, to the end of the year, including eligible health plan expenses. The ERTC is available for employers that carry out a trade or business and:

  • Had operations that were fully or partially suspended during 2020 due to orders from a governmental authority, or
  • Experienced a significant decline in gross receipts in 2020

An employer is generally considered to have a significant decline in gross receipts if they had at least a 50% reduction in gross receipts from the same calendar quarter in 2019.

The IRS defines orders from an appropriate governmental authority as orders, proclamations, or decrees from the US Federal Government, or any state or local government. However, a Tribal government order or Tribal Council action declaring a state of emergency isn’t considered a governmental order as defined by the IRS.

Tribal Governments Now Eligible for ERTC  

Governmental agencies aren’t eligible to receive ERTC under the CARES Act. However, based on updates from the IRS in FAQ 21, Tribal governments are viewed differently and are eligible for the ERTC.

The IRS and US Department of Treasury concluded it isn’t appropriate to apply section 162 of the Internal Revenue Code (IRC) to Tribal governments when determining if they carry on a trade or business. Solely for determining eligibility of the ERTC, Tribal governments are treated as carrying on a trade or business, and all activities conducted by the Tribal government will be considered part of those trade or business activities. 

Application

If your Tribal government paid employees that weren’t able to work during required COVID-19 closures or had a significant decline in gross receipts as defined by the IRS, it’s now eligible to receive the ERTC. The ERTC benefits would apply directly to the time period in which these events occurred.

If your Tribe intended to apply the Coronavirus Relief Funds (CRF) to these costs, it may be able to reallocate the credited portion with the ERTC. Your Tribe could then apply this additional CRF to other eligible costs by December 30, 2020.

That said, there are restrictions and time constraints around this opportunity, so it will be important to adjust your Treasury Grant Solutions reporting for the December 30, 2020, period for this change.

Clarified Aggregation Rules

The IRS also introduced a more complicated requirement by adding FAQ 21(a) to ERTC guidelines. This impacts not only the Tribal government that receives an ERTC, but also any of the Tribe’s enterprises that received a separate ERTC.

This FAQ indicates Tribal governments and related entities must determine their eligibility for the ERTC by applying the aggregation rules under IRC sections 52(a) and (b) and sections 414(m) and (o). This could create some challenges for Tribes when determining their eligibility.

Single Employer Requirements

The CARES Act doesn’t allow a single employer to obtain a PPP loan and the ERTC.

For example, if Tribal Enterprise A received a PPP loan and Tribal Enterprise B—or the Tribal government—received an ERTC, the Tribe may need to apply these aggregation rules to determine whether the Tribe as a whole is a single employer, or if each individual entity qualifies to receive the ERTC.

The FAQ goes on further to say that the Tribe should use a reasonable, good faith interpretation in determining how the aggregation rules apply.

Controlling Interest

IRC Section 52 aggregation rules have historically only applied to corporations. Because these rules now apply to Tribes, you’ll need to consider whether your Tribe has a controlling interest in the Tribal enterprise that already received a PPP or ERTC.

Under this rule, entities are considered a single employer if both entities are under common control and are applying rules that are:

  • Similar to the parent-subsidiary or brother-sister controlled group rules, or
  • For a combined group of corporations
Affiliated Service Groups

Under IRC section 414(m), an affiliated service group is treated as a single employer based on how services are performed. To meet the criteria, services must be performed in either of the following ways:

  • By one entity for another, or
  • By one entity in association with another for third parties—even if the entity doesn’t have sufficient ownership or control of the other entity to form a controlled group

Factors where the aggregation rules may not apply include if the Tribal enterprises are:

  • At arm’s length,
  • Managed or operated separately from the Tribe, or
  • Legally separate from the Tribe

It’s important to consult with your attorney and accountant to verify you’re applying these aggregation rules appropriately.

We’re Here to Help

If your Tribe needs assistance calculating the ERTC, amending 941 reports filed in 2020 to claim the ERTC, or addressing general questions about these updates, please contact your Moss Adams Professional.

Additional Resources

For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources:

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