AICPA Requests Guidance on the Paid Family and Medical Leave Credit

The American Institute of CPAs has formally requested that the IRS issue comprehensive guidance on the Paid Family and Medical Leave Credit (Section 45S) following modifications enacted through the One Big Beautiful Bill Act. The letter, submitted to the IRS Office of Chief Counsel, identifies 14 specific areas where statutory language creates ambiguity that practitioners cannot resolve without regulatory clarity.

The request underscores a growing pattern: Congress passes tax legislation with implementation details left undefined, leaving employers, payroll departments, and tax professionals navigating compliance obligations with incomplete instructions. For the estimated 2.8 million businesses that could qualify for the credit, the absence of guidance creates material filing risk.

The Credit's Structure and the OBBBA Changes

Section 45S was originally enacted as part of the Tax Cuts and Jobs Act of 2017, providing a general business credit for employers who voluntarily offer paid family and medical leave to qualifying employees. The credit ranges from 12.5% of wages paid during leave (for policies providing 50% wage replacement) up to 25% (for 100% wage replacement).

The OBBBA made several modifications that expanded the credit's scope but simultaneously created interpretive challenges:

Expanded qualifying leave categories. The act added caregiving for extended family members and bereavement leave to the list of qualifying purposes. However, the statute doesn't define "extended family" consistently with FMLA definitions, creating uncertainty about which relationships qualify.

Modified income thresholds. The wage ceiling for qualifying employees was adjusted from 60% of the "highly compensated employee" threshold to a new formula tied to area median income. The IRS has not issued tables or safe harbors for this calculation.

Extended credit availability. The expiration date was pushed to December 2029, but transition rules for employers who claimed the credit under prior parameters are not addressed.

Interaction with state mandates. Thirteen states now mandate paid family leave. The OBBBA added language suggesting the credit remains available for voluntary programs that "exceed state minimums," but the measurement methodology for what constitutes exceeding minimum requirements is undefined.

The 14 Ambiguities

The AICPA's letter identifies specific compliance gaps that prevent practitioners from confidently preparing returns:

1. How to calculate "area median income" for multi-state employers
2. Whether part-time employees qualify under the modified hourly threshold
3. Treatment of employees who work in mandated-leave states but live in non-mandated states
4. Documentation requirements for the expanded caregiving leave category
5. Whether leave policies adopted mid-year can generate a partial credit
6. Coordination rules when employers offer both FMLA-qualifying and non-FMLA leave
7. Definition of "written policy" in the context of digital employee handbooks
8. Whether the credit applies to S corporation shareholder-employees
9. Interaction between the paid leave credit and the work opportunity tax credit
10. Proper treatment when leave exceeds 12 weeks but under 16 weeks (the new maximum)
11. Whether wage replacement through short-term disability insurance qualifies
12. Retroactive claiming procedures for 2025 tax year returns filed before guidance
13. Application to professional employer organizations (PEOs) and their client worksite employers
14. Treatment of seasonal businesses with variable qualifying periods

Each ambiguity represents a potential IRS audit exposure for employers who claim the credit based on good-faith interpretations that may later be contradicted by regulations.

Why This Matters

For tax practitioners: Until guidance is issued, every Section 45S credit claim carries risk. The prudent approach is to document the interpretive basis for each claim element, establish reasonable positions supported by statutory text, and advise clients of the uncertainty. Practitioners should consider protective refund claims for prior years where expanded credit categories might apply retroactively.

For payroll professionals: Leave tracking systems need updating to capture the expanded qualifying categories, but system configuration depends on definitions the IRS hasn't provided. Investing in flexible tracking that can accommodate multiple interpretive outcomes is more cost-effective than building to assumptions that guidance may contradict.

For CFOs and controllers: The credit represents potential value of $5,000-$15,000 per qualifying employee for companies with generous leave policies. However, claiming aggressively without guidance creates reserve requirements for potential credit disallowance. Financial statement treatment should reflect the uncertainty through appropriate disclosure.

For software developers: Payroll and HR technology platforms need to build credit calculation engines that remain configurable until IRS guidance is finalized. Hard-coding assumptions about income thresholds or qualifying leave types will require expensive rework when regulations are published.

The Broader Pattern

This guidance request reflects a systemic problem in tax administration: the gap between legislative enactment and regulatory implementation continues to widen. The IRS currently has over 380 outstanding guidance projects, with average time-to-final-regulation exceeding 28 months.

For practitioners, this means operating in perpetual uncertainty on an expanding list of provisions. The professional response requires:

• Building practice workflows that track pending guidance items
• Establishing firm positions on ambiguous provisions (documented and consistent)
• Advising clients proactively about filing positions that may require amendment
• Allocating CPE budgets toward emerging regulatory developments rather than established topics

The AICPA estimates that the absence of Section 45S guidance alone affects 180,000 tax returns for the 2025 filing year, with potential credit value exceeding $4.2 billion nationally.

The key takeaway: The AICPA's 14-point guidance request reveals that employers claiming the paid leave credit are filing in the dark — practitioners must document interpretive positions now, because retroactive IRS guidance could require mass amended returns across millions of businesses.