The ERC was originally set to expire on December 31, 2021.On November 15, 2021, The Infrastructure Investment and Jobs Act into law. This legislation contains a provision that terminates the employee retention credit early, retroactively to October 1, 2021.
The American Rescue Plan Act added a new type of employer that may be eligible for the ERC, a recovery startup business. A recovery startup business is a business that began its operations after February 15, 2020, had average annual gross receipts of less than $1 million, and did not otherwise qualify for the credit. For these businesses, a credit of up to $50,000 for each of the third and fourth quarters of 2021 is available. The Infrastructure Investment and Jobs Act did not terminate the ability of a recovery startup business from claiming the credit in Q4 2021.
Important Note: Taxpayers that are not recovery startup businesses are not eligible for the employee retention credit for wages paid after September 30, 2021. Otherwise the ERC is still available for qualified wages paid from March 13, 2020 through September 30, 2021.
As a result of this early termination of the ERC, the IRS may need to amend certain employment tax forms such as Form 941 (Employer’s Quarterly Federal Tax Return) and Form 7200 (Advance Payment of Employer Credits Due to COVID-19). Be on the lookout for updated forms when filing your Q4 Form 941.
The bill language does not address penalty relief for those employers already claiming the ERC for the fourth quarter of 2021 and not making deposits. The IRS will likely need to issue additional guidance, hopefully, to provide relief for not making timely deposits of withheld taxes. In the meantime – this was posted on the IRS website November 29th:
“Some taxpayers that are no longer eligible to claim the employee retention credit for wages paid after September 30, 2021 may have already reduced their employment tax deposits in anticipation of claiming the employee retention credit for the fourth quarter of 2021. These taxpayers should monitor guidance issued by the IRS to learn if they must take any action regarding these amounts.
Some taxpayers may have already submitted Form 7200 to request an advance payment of the employee retention credit for the fourth quarter of 2021. If the Form 7200 hasn’t been processed, the IRS will use the taxpayer’s indication of whether it is a recovery startup business as part of its determination regarding whether the Form 7200 claiming the employee retention credit in the fourth quarter of 2021 should be accepted or rejected.
If an advance payment of the employee retention credit for the fourth quarter of 2021 was already sent to a taxpayer that is no longer eligible to claim the employee retention credit for the fourth quarter of 2021 because it is not a recovery startup business, the taxpayer will still include that advance payment on the appropriate line of its employment tax return for the quarter. In this case, the taxpayer may have a balance due when it files that employment tax return.”
Therefore, employers that received advance payments for fourth quarter wages will avoid “failure to pay” penalties if they repay those amounts by the due date of their applicable employment tax returns.
Employers that reduced deposits on or before December 20, 2021, for wages paid during the fourth quarter of 2021 in anticipation of the ERC will not be subject to a “failure to deposit” penalty if the employer:
- Reduced deposits in anticipation of the ERC;
- Deposits the amounts initially retained in anticipation of the ERC 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); and
- Reports the tax liability resulting from the termination of the employer’s ERC on its employment tax return or schedule that includes the period from October 1 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.
Failure to deposit penalties will not be waived for employers if they reduce deposits after December 20, 2021.
Reach Out to Us: A majority of business clients that qualify for the ERC have yet to claim it. Often, these business owners believe they are not eligible for such a valuable credit. It’s best to check with our tax experts to ensure your business is taking advantage of the ERC. We will continue to monitor guidance issued by the IRS to learn if clients claiming the credit need to take any additional action. Questions can be emailed to CPA@fuoco.com or call toll free 855-542-7537.
