Employee Retention Credit Mostly Terminated Sept. 30

In response to the COVID pandemic, Congress passed the American Rescue Plan in March of this year that provided employers with the Employee Retention Credit (ERC) through the end of 2021. However, the bipartisan infrastructure bill, H.R. 3684, signed into law by President Biden on Nov. 15, generally terminates the ERC Sept. 30. 

Accordingly, for most employers, it will only apply to qualified wages paid before Oct. 1, 2021. The exception is for “recovery startup businesses” that are enabled to continue to claim the ERC for wages paid before Jan. 1, 2022. For this purpose, a business qualifies as a recovery startup business if it has had average annual gross receipts of no more than $1 million over the three-year period 2018-2020 and a new trade or business was begun after Feb. 15, 2020 (a new company or an existing company that has begun a new line of business).

Employers that do not qualify as recovery startup businesses will have to repay any ERC benefits taken after September. Practitioners of these employers should watch for additional IRS guidance.

 

UPDATE: On Dec. 6, the IRS released guidance regarding the retroactive termination of the ERC in Notice 2021-65:

Notice 2021-65, Termination of the Employee Retention Credit under Section 3134 of the Code in the Fourth Calendar Quarter 0f 2021 for Certain Employers (irs.gov)

Comments

[Patty Wyatt]

Heather, thank you for your inquiry. Here is today's news release:

IRS issues guidance regarding the retroactive termination of the Employee Retention Credit

IR-2021-242, Dec. 6, 2021

WASHINGTON – The Internal Revenue Service today issued guidance for employers regarding the retroactive termination
of the Employee Retention Credit. The Infrastructure
Investment and Jobs Act, which was enacted on Nov. 15,
2021, amended the law so that the Employee Retention
Credit applies only to wages paid before October 1, 2021,
unless the employer is a recovery startup business.

Notice 2021-65 applies to employers that paid wages after September 30, 2021, and received an advance payment of the Employee Retention Credit for those wages or reduced
employment tax deposits in anticipation of the credit
for the fourth quarter of 2021, but are now ineligible
for the credit due to the change in the law. The notice
also provides guidance regarding how the rules apply to
recovery startup businesses during the fourth quarter of 2021.

Employers who Received Advance Payments
Generally, employers that are not recovery startup
businesses and received advance payments for fourth
quarter wages of 2021 will avoid failure to pay penalties
if they repay those amounts by the due date of their
applicable employment tax returns.

Employers who Reduced Employment Tax Deposits Employers that reduced deposits on or before Dec. 20, 2021,
for wages paid during the fourth calendar quarter of 2021 in anticipation of the Employee Retention Credit and that are
not recovery startup businesses will not be subject to a
failure to deposit penalty with respect to the retained
deposits if—
1. The employer reduced deposits in anticipation of the Employee Retention Credit, consistent with the rules in Notice 2021-24,
2. The employer deposits the amounts initially retained in anticipation of the Employee Retention Credit on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer, and
3. The employer reports the tax liability resulting from the termination of the employer’s Employee Retention Credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021. Employers should refer to the instructions to the applicable employment tax return or schedule for additional information on how to report the tax liability.
Due to the termination of the Employee Retention Credit for
wages paid in the fourth quarter of 2021 for employers that
are not recovery startup businesses, failure to deposit
penalties are not waived for these employers if they reduce deposits after Dec. 20, 2021.

If an employer does not qualify for relief under this Notice,
it may reply to a notice about a penalty with an explanation
and the IRS will consider reasonable cause relief.

More information for businesses seeking coronavirus-
related tax relief can be found at IRS.gov.

[Heather Hutchins]

When will we see guidance on the corporate income tax liability related to the ERC?