The Employee Retention Tax Credit (ERTC) will end early due to the passage of the Infrastructure Investment and Jobs Act (IIJA). On Friday, November 5, 2021, the House of Representatives passed the IIJA which is expected to be signed by the President on Monday. The Senate approved the legislation back in August. While the majority of this $1+ trillion legislation is not tax-related, it does amend ERTC provisions.
Enacted in 2020 to encourage employers to retain employees during the pandemic, the ERTC is a refundable payroll tax credit originally available from March 2020 through December 31, 2021. IIJA shortens the ERC timeframe to end three months earlier, on September 30, 2021, unless the employer is a recovery startup business. IIJA also modified the definition of a recovery startup business.
Prior to IIJA, a recovery startup business was defined as a business that (1) began operating after February 15, 2020, (2) had average annual gross receipts of less than $1 million and (3) didn’t meet the eligibility requirement applicable to other employers of having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order.
To allow continued availability of the ERTC to recovery startup businesses, IIAJ amends the definition of these businesses to only include (1) began operating after February 15, 2020, and (2) had average annual gross receipts of less than $1 million; thereby excluding the third prerequisite. Due to this modified definition, an employer that was not a recovery startup business in 2021 Q3 might qualify as one in 2021 Q4 and be able to claim ERTC benefits for the fourth quarter of 2021.
For employers who retained 4th quarter payroll taxes in October and November 2021 in anticipation of receiving the ERTC for this quarter, those amounts will need to be repaid. At this point, the IRS has not yet provided guidance on how to do this or whether any interest or penalty relief will be provided.
Click here to read previous JPS articles on the ERTC.
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Asheville Boone Marion
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