The bipartisan Infrastructure Investment and Jobs Act (IIJA) containing $550 billion in new funding for the nation’s traditional infrastructure and broadband was signed into law by President Biden on November 15, 2021. The IIJA doesn’t have nearly the breadth of tax provisions that the “Build Back Better” bill is proposing, but it does contain a few noteworthy changes. Particularly of interest, it ends the Employee Retention Credit (ERC) one quarter early for many employers.

Background

The COVID-19 ERC is a payroll tax credit originally made available by the CARES Act to employers for calendar quarters in 2020 who experience either a significant decline in receipts or suspension of business operations as a result of the pandemic. Subsequent relief legislation expanded and enhanced the credit for 2021 and added eligibility for the third and fourth quarters of 2021 for “Recovery Startup Businesses” (RSB).

An RSB is an employer that:

• Began carrying on a trade or business after February 15, 2020;
• Has average annual gross receipts (determined on an aggregate basis) of $1M or less for the three-year tax period ending with the tax year preceding the calendar quarter in which an ERC is considered; and
• Does not qualify for the ERC based up on the two general eligibility tests of a significant decline in receipts or suspension of business operations.

Employers qualifying for the ERC as an RSB are limited to $50,000 of credit per quarter, a limitation that does not apply to employers who otherwise qualify based upon the two general eligibility requirements.

Infrastructure Bill Change

The ERC was previously available for a majority of 2020 and all of 2021, but the IIJA ends it one quarter early, on September 30, 2021, for all but RSBs. The bill also removes the requirement that an RSB must not be able to qualify under the decline in receipts or suspension of business operations tests, maintaining eligibility of the credit for RSBs in the fourth quarter of 2021 so long as they meet the new trade or business and gross receipts requirements mentioned above.

Because the bill was drafted prior to the beginning of the fourth quarter of 2021 but not enacted until after its start, it is now a retroactive change to the ERC. This creates a potential problem for employers that are not RSBs. Employers who may have qualified for the ERC in the fourth quarter of 2021 based upon a decline in receipts or suspension of operations may have refrained from making related payroll tax deposits.

At the time of this decision, it was an available option for eligible employers prior to the late repeal of the credit in that quarter. But now these employers may be facing penalties for following the law at the time and are looking for answers. It's possible the Build Back Better bill will include penalty relief for these employers or it could reverse the early repeal of the credit altogether. However, we'll have to wait and see if either of those measures are added, assuming the bill has enough support to make it to the finish line. Alternatively, the Internal Revenue Service may be able to remedy the situation without congressional action.

If you have questions about qualifying for the ERC in a 2020 or 2021 calendar quarter or have not deposited fourth quarter payroll tax related to the credit, please reach out to your RubinBrown representative.

By: Amie Kuntz, CPA, MA
National Tax
amie.kuntz@rubinbrown.com  
 

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