Managing the Retroactive Repeal of the Q4 Employee Retention Tax Credit
President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law on November 15, which paves the way for investments in roads, bridges, and other projects. Nevertheless, investments in the aging infrastructure of the U.S. weren’t the only feature of the legislation. The IIJA will bring an early sunset to the popular Employee Retention Tax Credit (ERTC) program. The fact that the fourth quarter is well underway may put businesses who are benefitting from the ERTC in a difficult position. Our article recaps what your business needs to know about the latest development.
How We Got Here
Inklings of the ERTC’s demise had been in the works since late summer when Congress began mulling both the bipartisan-supported hard infrastructure plan, and the plan for green energy and social safety net programs supported by the Biden administration. Making the budget work for both legislative packages was essential, and so each contained measures that would offset the cost of the package, such as the change to the ERTC or the bevy of proposed tax increases under discussion with the “soft infrastructure” Build Back Better Act (BBBA).
In hopes of getting the BBBA through both chambers of Congress, a group of House Democrats wanted to tie a vote on the IIJA together with the vote on the BBBA. Discussions on the legislation stalled as the third quarter closed, and it appeared unlikely that anything would come of either legislative effort. The IIJA passed the Senate in August with bipartisan support, which meant that Democrats would not need to use the reconciliation rules for passage; however, the House could not make any changes without risking another vote in the Senate. And at the time the bill passed the Senate, the repeal of the ERTC for the fourth quarter of 2021 was not “retroactive.” But as the Biden Administration was under increasing pressure to get some portion of its agenda enacted, talks resumed on the BBBA over the past several weeks, which led to the House passage of the IIJA on Nov. 5, 2021.
What Changed with the ERTC
The IIJA changes the end date of the ERTC from Dec. 31, 2021 to Sept. 30, 2021 for most businesses. It creates an exception for recovery start-up businesses, defined as any company that began operations after Feb. 15, 2020 that has average gross receipts of $1 million or less. Recovery start-up businesses will be able to use the ERTC through the fourth quarter of 2021. All other employers experiencing COVID-19-related financial disruption will only be able to apply this payroll credit toward the cost of retaining employees for wages and other eligible expenses through the third quarter of 2021.
What Remains the Same
Changes to the ERTC only impact the fourth quarter of 2021. The ERTC can still be claimed for wages paid between March 13, 2020, and Sept. 30, 2021. Companies that haven’t already evaluated whether they qualify for the ERTC still have time to consider applying for a refund based on these prior periods. You can claim the ERTC on an amended payroll tax return.
The repeal of the ERTC for the fourth quarter of 2021 in November has caused confusion, as many businesses have treated the wages as qualifying for the credit, and as a result have not withheld the appropriate amounts from employee wages. There are also issues regarding whether those wages are deductible. If your business was anticipating the ERTC in the fourth quarter, there may be other ways to minimize your tax liabilities before year-end. Please contact a member of our team for more information. Published on November 15, 2021