- The ERC was updated by the infrastructure spending bill and is now available to qualified businesses from March 13, 2020 through September 30, 2021. Qualified businesses that have not yet claimed the ERC for those periods may continue to do so by amending payroll tax returns.
- Businesses considered recover startup businesses may still claim a version of the ERC for the fourth quarter of 2021.
- With respect to the fourth quarter of 2021, any business that reduced payroll tax deposits in anticipation of an ERC or requested an advanced ERC payment through a Form 7200 should take immediate action to ensure that their fourth quarter payroll tax liability is paid in full, reported properly, and avoids any unnecessary penalty / interest assessments.
- The IRS is expected to provide penalty relief for businesses that reduced payroll tax deposits after September 30 due to the ERC.
ERC Q4 2021 Amendment
On Friday, November 5th, Congress passed the Infrastructure Investment and Jobs Act which retroactively amended the COVID relief Employee Retention Tax Credit (ERC). The retroactive amendment changed the end date of the ERC from December 31, 2021 to September 30, 2021. Because the ERC can be claimed retroactively for up to 5 years (3 years for 2020 and Q1/Q2 2021) after the original form 941 is due, this change only applies to the availability of the ERC in the fourth quarter of 2021 and in no way alters the 2020 credit nor the credit for the first three quarters of 2021. This amendment will likely be viewed as a minor change to the ERC for most employers who have found the credit to be most valuable in 2020 or in the first 3 quarters of 2021.
Legislative History of ERC Extension
The ERC was originally enacted in the CARES Act on March 27, 2020 and provided a tax credit for businesses impacted by the pandemic for wages paid after March 12, 2020 and before January 1, 2021. The credit was expanded in Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, which extended the credit for wages paid after December 31, 2020 and before July 1, 2021. The credit was further extended by the American Rescue Plan Act, enacted on March 11, 2021 for wages paid through the end of 2021.
Then, on August 10, 2021, the Senate passed the Infrastructure Investment and Jobs Act which included the early termination of the ERC at the end of the third quarter 2021. The infrastructure bill was held up in political negotiations in the House of Representatives from mid-August until its passage this past week, which now makes the early cancelation of the ERC retroactive.
Concern Over Fourth Quarter 941, Underpayments, and Potential Penalties
Taxpayers who, with respect to the fourth quarter of 2021, legally reduced payroll tax deposits in anticipation of an ERC or requested an advanced payment via Form 7200 may now be concerned with the following: (1) ensuring that their fourth quarter 2021 tax liability is paid in full (i.e., account for ERC related deposit reductions and /or advanced payments), (2) ensuring that their fourth quarter Form 941 is completed properly, and (3) ensuring that they avoid unnecessary penalty and/or interest assessments due to the retroactive change in the tax code. We recommend that all businesses reach out to their tax advisor and / or payroll provider immediately to take the necessary corrective action and avoid compounding issues in the future. Additionally, The American Institute of CPAs has already alerted Congress to the potential penalty concern in a letter. Past experience indicates that the IRS will provide relief for any penalties stemming from the retroactive change.
Possible Restoration of ERC
The infrastructure bill represents just one part of the Biden administration’s legislative agenda. Negotiations are ongoing regarding the “Build Back Better” plan, otherwise known as the reconciliation bill. Some in Congress are advocating that the ERC be restored for the fourth quarter of 2021 in the context of this legislation which is unlikely to be passed before the end of November. Various proposed versions of the reconciliation bill have yet to include such an extension of the ERC. While not impossible, this appears to be only a remote possibility.
Recovery Startup Business
There is an important caveat in the early termination of the ERC. The American Rescue Plan introduced a new segment of the tax credit effective beginning July 1, 2021 called the “recovery startup business” ERC. These are businesses that began carrying on any trade or business after February 15, 2020, and for which the average annual gross receipts of such employer for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined does not exceed $1 million. These businesses are eligible for an ERC up to a cap of $50,000 per quarter for both the third and fourth calendar quarters of 2021 despite the early termination of ERC for other types of businesses in the fourth quarter.