Legislative Update: Senate Amendment Proposes Changes to the ERC

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March 5, 2021Senate amendment proposes changes to the employee retention credit

The U.S. Senate released the text of its changes to the American Rescue Plan Act on Thursday. While the bill which passed the House on February 27 simply extended the expiration date of the employee retention credit from June 30, 2021, through the end of the year, the Senate has introduced more substantive changes.

All of the following proposed changes would only apply to wages paid after June 30, 2021, and before January 1, 2022.

  • The ERC has been available to businesses that were either suspended due to government orders or experienced a significant decline in gross receipts. The new bill adds a third, albeit limited, the pathway to eligibility. Businesses defined as “Recovery Startup Businesses” could receive up to $50,000 in refundable credits per calendar quarter even if they don’t meet either of the preceding tests. A recovery startup business is a business started after February 15, 2020, and “for which the average annual gross receipts … for the 3-taxable-year period ending with the taxable year which precedes such quarter does not exceed $1,000,000.” This is not clear. Apparently, it means that if gross receipts earned between when the business started in 2020 and the end of it’s tax-year, divided by three are less than $1 million, the business will be eligible even without a suspension from a government order or reduction in gross receipts.

 

  • The new bill would allow “severely financially distressed employers” to include all wages as qualified wages irrespective of the number of full-time employees they had in 2019. To be considered a severely financially distressed employer, the business must demonstrate a more than  90% reduction in gross receipts when compared to 2019. Since this change is only applicable to the third and fourth quarters of 2021, that means it applies to businesses whose gross receipts in Q3 2021 are less than 10% of what they were in Q3 of 2019. This change is apparently in response to this interesting letter signed by nine U.S. Senators.

 

  • The bill would also extend the normal statute of limitation for taxpayers to amend their returns to claim this credit from three to five years. Of course, that would also extend the time that IRS would have to audit claims.

Learn more about the Employee Retention Credit (ERC).

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