Infrastructure Act accelerates expiration of employee retention credit

The Infrastructure Investment and Jobs Act (the Infrastructure Act) included a provision that accelerates the expiration of the employee retention credit (ERC) for most employers from Dec. 31, 2021 to Sept. 30, 2021. The ERC was enacted in March 2020 to provide relief to employers affected by the COVID-19 pandemic, and it was modified in Dec. 2020 and again in March 2021. Because of its short lifespan and frequent modifications, some employers may have missed opportunities to claim the ERC. As the provision expires, the clock begins to run on employers’ opportunity to amend previous payroll tax filings to claim the credit.

The short, unstable life of the ERC

As originally enacted, the ERC was not available to employers who obtained a loan through the Payroll Protection Program (PPP). This restriction was later retroactively modified so that employers who had gotten a PPP loan could claim the ERC as long as it was not based on any wages that were paid with proceeds of a PPP loan that had been forgiven. The change significantly increased the number of businesses that were eligible for the ERC, but many of those that could benefit from the expanded availability may have missed the news given the volume of information that employers had to manage throughout the pandemic. Employers who haven’t previously claimed the ERC should review these charts to determine if they may be eligible to amend their payroll tax returns and benefit from the credit.

The midstream modifications to the ERC also resulted in slightly different calculations of the credit available to eligible employers in different years. For 2020, the credit is equal to 50% of up to $10,000 in eligible wages per employee for the year, or $5,000. In 2021, it can apply to up to 70% of $10,000 in eligible wages per employee in each eligible quarter. That’s up to $7,000 per employee, per quarter in 2021, for a total of $21,000, given the Infrastructure Act’s accelerated expiration of the ERC at the end of the third quarter of 2021.

The change significantly increased the number of businesses that were eligible for the ERC, but many of those that could benefit from the expanded availability may have missed the news.

Recovery startup businesses get one more quarter of ERC

While most of the ERC eligibility calculations focused on businesses that saw declines in gross receipts compared to 2019, the law allowed businesses that started operations on or after Feb. 15, 2020, to claim the credit if their average annual gross receipts remained less than $1 million. These businesses, known as “recovery startup businesses” under the law, were initially eligible for the ERC beginning on July 1, 2021, and will remain eligible to claim the ERC in the fourth quarter of 2021.

How to claim the ERC: Retroactive claims will apply

Employers initially claim the ERC on their Form 941, Employer’s Quarterly Tax Return, which is due following the end of a calendar quarter. Recovery startup businesses claiming the ERC in the fourth quarter will follow that process. While the ERC is generally unavailable in the fourth quarter, new claims may still be filed for prior quarters via an amended 941 (Form 941-X) for such quarters. Generally, businesses can claim refunds for overreported taxes on a previously filed Form 941 by filing an amended form within three years of the date the original was filed or two years from the date the tax reported on the original return was paid, whichever is later. 

This gives employers that may have overlooked the ERC some time to review quarterly returns from 2020 and 2021 to determine if there’s an opportunity for additional savings under this program. Common reasons for the ERC being overlooked in prior quarters include uncertainty about the overlap between the ERC and PPP loan program as well as concerns about the eligibility of a business under the gross receipts or business suspension tests.

Our ERC experts can help

Few tax provisions have been as short-lived and changeable as the ERC. There are many moving parts when it comes to accurately calculating the value of the credit for a business, as well as big-picture eligibility considerations that can affect members of aggregated groups. To learn more about how your business could benefit from the ERC, please contact your Plante Moran advisor.