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Written by Frank Lopez
In mid-November, President Joe Biden signed his $1.2 trillion infrastructure bill into law, setting into place a major part of the administration’s economic agenda.
The plan is focused on investment — $550 billion for the nation’s infrastructure over the next five years, including bridges, roads, water, energy and broadband.
However, to repurpose the $205 billion remaining in untapped Covid-19 relief funds, some programs are going away, which could present a challenge for business owners.
Under Biden’s infrastructure plan, the Employee Retention Tax Credit (ERTC) expired three months earlier than scheduled, ending on Sept. 30.
The ERTC was a 70% refundable tax credit for wages paid that was available to eligible businesses, which were ones that employed 500 or fewer full-time employees in 2019, if the business had a greater than 20% reduction in gross receipts for the quarter when compared to the same quarter in 2019.
The tax credit for wages paid amounted to $7,000 per employee per quarter, which would have been $28,000 per employee for four quarters.
Because of the early sunsetting of the ERTC however, no credit for wages were paid beginning Oct. 1.
Brent Johnson is co-founder and CEO of Ohio-based Clarus, a software company that builds cloud-based software to deliver access, compliance and clarity for federal and state programs to help business get the full value of tax incentives for innovation and growth.
In August, Clarus announced that it helped small to mid-sized business claim $50 million in ERTC support.
The early termination of the ERTC program is “unwelcome news” for businesses, Johnson said.
This is the first time in his career that he has seen a change to the tax code that was retroactive to the tax law in such a way, Johnson said.
“Part of the reason that they changed it was because a lot of business were not participating, or weren’t aware of it,” Johnson said. “It didn’t get as much participation as they thought it would. Certainly, awareness was an issue, but it was very surprising that they made the change retroactively.”
According to a July 2021 Government Accountability Office report, as of May 2021, about 146,500 employers had claimed about $10.2 billion in ERTCs.
Some businesses continued to monetize the credit, paying wages with an allowance from the IRS to retain payroll taxes withheld from their employees in the form of advancements because they believed they’d be receiving the credit.
With the anticipation of the credit, companies were allowed to “pocket” the withheld taxes as a credit toward the entire retention credit claimed on their quarterly payroll tax return.
However, because of the retroactive repeal of the credit, a business owner that was unaware of the early repeal may have continued to keep payroll taxes that would have been deposited with U.S. Treasury.
A more disconcerting detail from the infrastructure bill is that it does not provide for penalty relief for the businesses that have been retaining payroll taxes.
The infrastructure bill comes with a penalty that goes up to 10% of the total amount of payroll taxes that should have been deposited if the deposit is over 15 days late.
Johnson said that many in the tax community were surprised by the retroactive repeal of the ERTC at the end of September since the program was scheduled to sunset by the end of the year anyway.
There have been businesses that reduced their payroll taxes in anticipation of receiving the credit, and they will have to figure how to true them up, which will cause “administrative headaches”.
For the businesses that were eligible, the ERTC was quite lucrative, said Johnson. With $7,000 per employee per quarter, the dollar amount could add up to be significant, and now with the early repeal of the program, businesses owners are worried because they won’t receive the final credit.
Congress passed the ERTC to help stimulate the economy and keep jobs in place, but with employment issues facing the nation, and with more available jobs than workers, Congress made the assessment that the ERTC dollars were not as necessary.
Because employers have three years to claim the ERTC, Johnson expects there will still be businesses that will claim it over the next year or two because they have not yet realized that they are eligible to claim it.
A survey from Clarus of 500 businesses decision makers showed that nearly half of businesses haven’t participated in any incentive programs beyond the Paycheck Protection Program because they don’t know if their company qualifies.
Businesses that tend to have the highest rate of eligibility include the restaurants, health care providers, gyms, yoga studios, assisted living facilities and businesses where customers were physically present.
Johnson advises all business owners to review all available stimulus programs that were part of Congress’s response to the Covid-19 crisis.
“There’s PPP, ERTC, the Restaurant Revitalization Fund grant—a number of different programs. Make sure you have thoroughly assessed whether you are available for each of those, because the dollars involved with them are quite significant,” Johnson said.