By Tony Montanaro, CPA/ABV, CFE
Late Friday night, Congress passed the $1.2 Trillion “Infrastructure Investment and Jobs Act” which is expected to be signed into law by President Biden next week. The legislation includes $550 billion in infrastructure spending and is being partially funded by reappropriating unused funds from prior COVID-19 relief programs such as the Economic Injury Disaster loans and the early termination of the Employee Retention Credits (“ERC”) effective September 30, 2021.
Overview of Employee Retention Credits
The ERC as established by the CARES Act is a fully refundable credit of up to $5,000 per employee for 2020. This was later extended into 2021 with the credit amount increased to up to $7,000 per employee, per quarter.
Employers can generally qualify for the credit if they experienced a significant drop in quarterly gross receipts (50% for the 2020 credit and 20% for the 2021 credit) as compared to that same quarter in 2019 OR had operations fully or partially suspended by government order due to COVID-19. The credits are also calculated differently for employers with over a certain employee threshold (100 for 2020 and 500 for 2021).
What This Means for Wages Paid After September 30, 2021
The employee retention credits will no longer be available for qualified employee wages paid after September 30, 2021, unless that employer qualifies as a Recovery Start-up Business (“RSB”). RSB was a new eligibility category created by the American Rescue Plan Act (“ARPA”) for businesses that started operations after February 15, 2020, have no more than $1m in annual gross receipts, and are not otherwise eligible for the ERC. The total allowed credit for an RSB is capped at $50k per quarter.
Employers who reduced its federal payroll tax deposits in anticipation of claiming the credits for the 4th quarter of 2021 are expected to be required to make repayments. The IRS had previously issued an exemption to the failure to deposit penalty (https://www.irs.gov/pub/irs-drop/n-20-22.pdf) relating to these deposit reductions. It is not currently known if this penalty relief will be extended to the 4th quarter deposits.
What This Means for Wages Paid Before September 30, 2021
Employers may still obtain employee retention credits for qualified wages paid prior to September 30, 2021. The credit can be claimed by filing amended payroll tax returns as long as the statute of limitation remains open, which is three years from the date the original return was filed.
While the early termination of the employee retention credits is very disappointing for businesses that are still struggling due to the pandemic, there are still opportunities for qualifying employers who have not yet applied for the credits. Due to the complex qualification requirements and strong likelihood of IRS scrutiny, we recommend consulting with a tax professional prior to applying for any credits.
Please reach out to your Louis Plung advisor or contact us at [email protected].