Good news for businesses taking the Employee Retention Credit (ERC). A number of key House Democrats have recently written a letter to Speaker Pelosi (D-CA) asking that the ERC be retained for the fourth quarter of 2021. The letter – led by Congressman Antonio Delgado (D-NY) and Stephanie Murphy (D-FL) – emphasizes the benefits of the ERC as a “crucial lifeline” for small businesses. This Democrat letter follows on from a recent bipartisan open letter by former Senators Johanns (R-NE) and Heitkamp (D-ND) and Congressmen Crowley (D-NY) and Lazio (R-NY) calling for the ERC to be retained for the fourth quarter.
The Employee Retention Credit (ERC) – provides a tax credit of up to $7,000 per employee per quarter — is quickly becoming the “go-to” for small and medium businesses that are looking to retain employees and hire new employees. The ERC is broadly available for small and medium businesses that meet one of two categories:
1) the business has seen a reduction in revenues because of Covid; OR,
2) the business’ operations have been subject to a more than nominal impact due to government orders (federal, state, local and regulatory) as to Covid (including indirect impacts such as suppliers who have been impacted by government orders related to Covid). NOTE: For businesses whose operations have been subject to government-related Covid orders – those businesses can still qualify for the ERC even if they are increasing hiring (the ERC is at its core trying to encourage retaining employees and hiring new employees).
The ERC was expanded and enhanced in a series of bills over the past year and is intended to be in place for all of 2021. However, the Senate in its proposed infrastructure bill eliminated the ERC for the fourth quarter of 2021 as a cost-saving matter (the House has not yet taken up the Senate bill). The Senate bill proposes to cut off the ERC early because there was a perception when the infrastructure bill was written in July that Covid was in the rearview mirror (pre-Delta) and that the provision wasn’t being utilized. Now businesses are dealing with Delta – and as important, small and medium businesses are now embracing the ERC with thousands applying and more each day.
What Will Happen
It is too early to say definitively what Congress will do as to the fourth quarter of ERC. The infrastructure bill is still waiting for House action as the Democrats look to put a bigger deal together including the reconciliation bill. The smart money has been that the House won’t reopen the Senate-passed infrastructure bill and just pass it as part of the overall package. However, with House Democrats showing with this letter a strong interest in ensuring that a fourth quarter remains in place for ERC (and House Republicans seem generally favorable to ERC as well) it does open the door to perhaps having ERC fourth quarter included in an end-of-year bill (or eliminating the provision if the infrastructure bill does get reopened).
What Should Businesses Do?
Number one – small and medium businesses should take a hard look at whether they qualify for the ERC for the first three quarters of 2021 (and 2020). In our work, we find approximately 70% of small and medium businesses we review are qualifying for the ERC – either because of reduction in revenues; or just as commonly, the business (or their suppliers) has had its operations subject to a more than nominal impact due to a government order related to Covid. Bottom line – businesses shouldn’t be fixated on the issue of whether or not there will be a fourth quarter for ERC or not – the strong benefits remain in place for the first three quarters. Apply.
Number two – businesses should at a minimum plan for taking the ERC for the fourth quarter – preparing the necessary paperwork and support documents.
Number three – business owners and employees should tell their elected officials about the importance of the ERC to their company. It is because Congress is finally hearing from their constituents that the fourth quarter for ERC is a real possibility.
Good news for small and medium business. A two-minute drive that may save the fourth quarter.
About the Author
Dean Zerbe is alliantgroup’s National Managing Director based in the firm’s Washington, D.C. office. Prior to joining alliantgroup, Zerbe was Senior Counsel and Tax Counsel to the U.S. Senate Committee on Finance. He worked closely with then-Chairman of the Finance Committee, Senator Charles Grassley, on tax legislation. During his tenure on the Finance Committee, Zerbe was intimately involved with nearly every major piece of tax legislation that was signed into law, including the 2001 and 2003 tax reconciliation bills, the JOBS bill in 2004 (corporate tax reform) and the Pension Protection Act.