IRS Issues Guidance on the Retroactive Termination of the Employee Retention Credit
When the Infrastructure Investment and Jobs Act was signed into law on November 15, 2021, it opened the door for necessary repair and upgrades to the nation’s crumbling infrastructure. The massive spending bill calls for a $1.2T investment in roads and bridges, power grids, rail services, broadband access, water infrastructure, airport development, and environmental remediation. When Congress was negotiating the legislation, there was significant concern about how it would be funded without inflating the national debt. This need for funding resulted in the early termination of the Employee Retention Credit (ERC). It has been estimated that the move will save the federal government $8B, redirected to offset expenses.
The early termination of the ERC means that employers, unless classified as a recovery start-up business, are no longer eligible to claim the credit after September 30, 2021. While the program’s cancellation may seem straightforward, the devil is most certainly in the details. As a result, many New Jersey and Pennsylvania-area businesses have been left with questions about advances received for the 4th quarter, credit repayment concerns, and more. The good news is the IRS recently released Notice 2021-65 which provides important details, of which we have summarized the key points below.
ERC Termination
The guidance confirms that any business except a recovery start-up business cannot claim the ERC for wages paid between October 1, 2021, and December 31, 2021. This also includes severely financially distressed employers. There was also the termination of the requirement that a recovery start-up business not otherwise be an eligible employee due to suspension of operations or decline in gross receipts.
There was also information on how businesses that requested advance payments of the credit for wages expected to be paid in the fourth quarter will be affected. First, the IRS now viewed any advance payment as an erroneous refund and must be repaid. The excess advance payments will need to be done via the quarterly employment tax return (IRS form 941), which includes the 4th quarter of 2021.
This exact repayment process also applies to employers that have already started reducing amounts remitted in anticipation of the credit. In addition, since the program has officially terminated, the IRS will no longer waive the failure to deposit penalties for those who reduce payroll taxes in anticipation of the credit. This means if a company has set up payroll to reduce payments to the IRS automatically, then it is imperative to undue that immediately or risk further complications.
Penalty Relief
The IRS does provide some lenience in the form of penalty relief. For wages paid between October 1, 2021, and December 31, 2021, with payroll tax deposits due on or before December 20, 2021, a business will not be subjected to a penalty if all the following conditions are met, including:
- An employer reduced the amount of employment tax deposits in anticipation of the ERC, and
- A deposit is made in the amount initially retained in anticipation of the credit on, or before, the due date for wages paid on December 31, 2021, and,
- The tax liability arising from credit termination is reported on the applicable employment tax return.
Suppose an employer does not qualify for this relief. In that case, it is possible to reply to a penalty notice with an explanation of circumstances, and the IRS will consider whether a reasonable cause existed that warrants penalty abatement.
Although the early termination of the ERC is undoubtedly unwelcome news, it does not mean the savings has ended. Eligible businesses can still retroactively claim the credit for the 2nd quarter of 2020 through the 3rd quarter of 2021 if they qualify.
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If you have questions about the early termination of the ERC or if you need assistance calculating or claiming the credit, click here to contact us. We look forward to speaking with you soon.
©2021 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date. The content is provided for informational purposes only and does not constitute accounting, tax, or financial advice. Please consult your advisor concerning your specific situation.