On November 15, 2021, the Infrastructure Investment and Jobs Act (“Act”) was signed into law. Among other things, the Act retroactively terminates the Employee Retention Credit (“Credit”) as of October 1, 2021, which is 3 months earlier than the Credit was scheduled to terminate.
The Credit, originally passed as a part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in April 2020 and subsequently extended by the Consolidated Appropriations Act (“CAA”) and the American Rescue Plan Act (“ARPA”), provided eligible employers with tax credits for qualified wages and health expenses provided to employees during a decrease in business or shutdown due to COVID-19. In anticipation of receiving the Credit, eligible employers were permitted to reduce their employment tax deposits in the amount of the Credit.
Impact of Retroactive Termination
The retroactive termination of the Credit means that most employers cannot claim the Credit for wages paid after September 30, 2021. Note that employers that meet the definition of a “Recovery Startup Business” under the ARPA are permitted claim the Credit for the last quarter of 2021.
Internal Revenue Code Sec. 3134(c)(5) defines a “Recovery Startup Business” as one that:
- Began operating after February 15, 2020;
- Has average annual gross receipts for the three tax years preceding the quarter in which it claims the credit of no more than $1 million (using the rules under Internal Revenue Code Sec. 448(c)(3) for the calculation of gross receipts with respect to an entity that has not been in existence for three tax years, including taking into account predecessor entities); and
- Is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
Possible Employer Action
If an employer reduced their employment tax deposits for October and November in anticipation of receiving the Credit, the employer must now pay those reduced amounts to the IRS. It is important to note that the Act does not provide penalty relief to employers that reduced their payroll tax credits after September 30, 2021 and these employers may be subject to interest and late penalties on those amounts. The IRS is expected, however, to provide additional guidance which may provide transition relief from late penalties and/or instructions on how employers can pay back any Credit advances taken after September 30, 2021.
Accordingly, employers who are not a “Recovery Startup Business” and who reduced tax deposits after September 30, 2021 in anticipation of the Credit should repay advances of the Credit to the IRS.
- Infrastructure Investment and Jobs Act
- Coronavirus Aid, Relief, and Economic Security Act
- Consolidated Appropriations Act of 2021
- Employer Tax Credits under the FFCRA and CARES Act
- Employer Tax Credits for Health Care Expenses Under the FFCRA and the CARES Act
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