A provision in the recently enacted infrastructure bill that brought a retroactive early end to the employee retention credit is prompting questions and calls for guidance to help employers claiming the credit.
Tax professionals hope for timely action from the IRS to assist employers that have already taken advantage of the ERC for the fourth quarter of 2021. The Infrastructure Investment and Jobs Act (P.L. 117-58), signed into law November 15, eliminated the ERC for the fourth quarter, changing the end date of the credit from December 31, 2021, to September 30, 2021.
“The uncertainty surrounds how and when these employers should repay the under-deposited amounts,” Jeffrey Martin of Grant Thornton LLP told Tax Notes. “My hope is that the IRS will quickly tell employers how and when the amounts must be repaid and provide relief from penalties and interest as long as the amounts are deposited by a future deadline.”
Dana S. Fried of CohnReznick LLP echoed the need for guidance for employers that took advances against their fourth-quarter ERCs with the understanding that the credit was available for that quarter.
The ERC allows employers to claim a credit for wages paid to employees during the COVID-19 pandemic. The credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security Act and was available through the end of 2020. It was then extended through 2021 in subsequent legislation.
The American Institute of CPAs warned before enactment of the infrastructure bill that bringing an early end to the ERC would sow confusion among business owners and tax advisers.
Craig A. Kovarik of Husch Blackwell LLP explained that the retroactive expiration of the credit means that employers that reduced their payroll deposits in anticipation of claiming the fourth quarter credits now have underpaid employment taxes. Kovarik highlighted the need for guidance on the high penalties that can result because of underpayment.
“The Infrastructure Act does not provide penalty relief, and it is unclear whether the IRS will waive penalties or interest for these employers,” Kovarik said.
Marvin A. Kirsner of Greenberg Traurig LLP said he hopes the IRS will provide for penalty relief and a longer period to pay the taxes that employers retained with the expectation of receiving the credit for the fourth quarter. Many small businesses have likely planned their budgets with the credits included and could be facing the possibility of penalties, he added.
“There has been little in the way of publicity on the early termination of this tax credit program, and news of the repeal of the fourth-quarter credit . . . will likely be a shock that will force many businesses to scramble to make up for this lost payroll subsidy,” Kirsner said.
Employers that took advantage of the temporary payroll tax holiday face an additional burden, as those deferrals must also be repaid.
“The employee retention credit, combined with the Social Security tax deferral, helped many employers during the COVID-19 pandemic,” Kovarik said. “Retroactively repealing the credit at the same time that one-half of the 2020 Social Security tax deferrals are due could prove to be financially and administratively burdensome to many employers.”
Fried said he wouldn’t be shocked if Congress were to recognize the unfairness of the retroactive expiration — an apparent consequence of the House simply adopting the Senate bill as it was written in August — and act to revise the effective date to allow wages paid before the date of enactment.
Dean Zerbe of Alliantgroup LP also hopes Congress will revisit the decision to end the ERC early, given that it was based on an inaccurate understanding of how much the credit is being used.
“The reality is that the ERC has been a lifesaver for thousands of businesses and charities. Congress needs to take a mulligan and reinstate the ERC for the fourth quarter as was originally intended — and for which businesses and charities have planned,” Zerbe said.
Nonprofit groups have bemoaned the retroactive expiration of the ERC, saying that it’s vital to helping them deal with staff shortages and other problems associated with the pandemic. One nonprofit group recently wrote to Senate Finance Committee Chair Ron Wyden, D-Ore., urging him to restore the credit for the fourth quarter of 2021 and extend it into 2022.
“Business owners and directors of charities are extremely disheartened that this benefit that has proven so helpful — and that they were counting and planning on — has been ended a quarter early,” Zerbe said.
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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.