A new law has retroactively ended the Employer Retention Credit (ERC) to apply only through September 30, 2021 (rather than through December 31, 2021) — unless the employer is a recovery startup business. The Infrastructure Investment and Jobs Act, which is scheduled to be signed by President Biden on November 15, only has a handful of tax provisions but this one is significant for some businesses.
As a result of the retroactive termination of the ERC, some employers may need to review their payroll tax compliance (including tax deposits) to make sure that it conforms with the changes.
Congress originally enacted the ERC in the CARES Act back in March of 2020 to encourage employers to retain employees during the COVID-19 pandemic. In subsequent laws, the credit was extended and modified to apply to wages paid before January 1, 2022.
Eligible employers could claim the refundable ERC against the employer's share of Medicare taxes (1.45% rate) equal to 70% of the qualified wages paid to each employee (up to a limit of $10,000 of qualified wages per employee per calendar quarter) in the third and fourth calendar quarters of 2021.
For the third and fourth quarters of 2021, a recovery startup business is an employer eligible to claim the ERC. Under previous law, a recovery startup business was defined as a business that:
However, recovery startup businesses are subject to a maximum total credit of $50,000 per quarter for a maximum credit of $100,000 for 2021.
The ERC was retroactively terminated by the Infrastructure Investment and Jobs Act to apply only to wages paid before October 1, 2021, unless the employer is a recovery startup business. Thus, for wages paid in the fourth calendar quarter of 2021:
In connection with the continued availability of the ERC for recovery startup businesses in the fourth quarter of 2021, the new law also modified the definition of a recovery startup business so that a recovery startup business is one that began operating after February 15, 2020, and has average annual gross receipts of less than $1 million.
The previous prerequisite that a recovery startup business must not have otherwise met the requirements for an eligible employer qualifying for the ERC (having experienced a significant decline in gross receipts or having been subject to a full or partial suspension under a government order), no longer applies. Thus, because of the modified definition, an employer that wasn't a recovery startup business in the third quarter of 2021 might qualify as a recovery startup business in the fourth quarter of 2021 and be able to claim the ERC for the fourth quarter of 2021.
The American Institute of Certified Public Accountants (AICPA) is asking Congress to direct the IRS to waive payroll tax penalties after the sunset of the ERC.
Due to the change in the Infrastructure Investment and Jobs Act, some employers may face penalties because they retained payroll taxes in anticipation of receiving the ERC. Affected businesses will need to pay back the payroll taxes they retained for wages paid after September 30, the AICPA explained. Those employers may also be subject to a 10% penalty for failure to deposit payroll taxes withheld from employees unless the IRS waives the penalties.
If you retained payroll taxes in anticipation of receiving the ERC based on post-September 30, 2021 payroll taxes, contact your tax advisor to review your situation and determine how and when to repay those taxes and address any other compliance issues. The IRS is expected to issue guidance to assist employers in handling any compliance issues.
The Infrastructure Investment and Jobs Act includes about $550 billion in new spending on roads, bridges, water infrastructure, internet access and other projects.
In addition to the Employer Retention Credit provision described in this article, the law will also require new information reporting of digital assets, such as cryptocurrency. Specifically, the law will require brokers to report to the IRS the cost basis of digital assets transferred by their clients to non-brokers. This will be similar to how securities brokers report stock and bond trades.
"Digital assets" are defined as "any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology." This definition could affect not only cryptocurrencies like Bitcoin but also certain non-fungible tokens (NFTs). The infrastructure law expands the definition of the term "broker" to include those who operate trading platforms for digital assets, such as cryptocurrency exchanges.
In addition, the law modifies existing tax law to treat digital assets as cash. As a result, individuals engaged in a trade or business must submit a form to the IRS when they receive cash payments of more than $10,000 in one transaction or multiple related transactions.
The digital assets provisions take effect for returns required to be filed, and statements required to be furnished, after December 31, 2023. The IRS is expected to provide guidance before then.
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