ERTC is a fully refundable tax credit employers can claim if they kept employees on payroll in 2020/2021 during the COVID-19 pandemic. The goal of the ERTC is to help employers bounce back from the fallout of the pandemic and regain economic security.
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The Infrastructure Investment and Jobs Act passed both chambers of U.S. Congress and has been signed into law by President Joe Biden. The most significant tax impact of the bill is the early termination of the employee retention tax credits. Many business owners have needed ERTC as a lifeline to stabilize their workforce and fund the demand for increased wages over the past year. The early termination of this incentive will strip an estimated $8.2 billion in funding from small businesses.Â
This retroactive law change has many business owners scrambling to recast their tax strategy, cash flow plans and, perhaps most importantly, ask the question, “What's next?”
ERTC is a fully refundable tax credit employers can claim if they kept employees on payroll in 2020/2021 during the COVID-19 pandemic. The goal of the ERTC is to help employers bounce back from the fallout of the pandemic and regain economic security.
Through several bills passed by Congress, businesses could claim retention credits through the end of 2021. Unlike the Paycheck Protection Program, the funding is realized as a direct cash tax refund. This provided latitude to business owners in how they used the funding. Organizations reinvested in the business, including technology upgrades to operate in the evolving digital economy, absorbing increased supply costs, and wage increases.
ERTC allows employers to receive a refund of up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. Before the infrastructure bill passed, the benefit prior could be up to $33,000 per employee. The IIJA moves up the end date of the incentive from Jan. 1, 2022, to Oct. 1, 2021, stripping a significant source of capital from companies overnight. The cash flow impact to an eligible organization with 100 employees will be up to $700,000.
What business owners can do today, in response to these changes:
1) The elimination is a retroactive change. Organizations need to immediately and thoroughly vet their eligibility to ensure they have maximized the periods still covered under the current tax law.
2) Know how you may qualify for the credits. Many businesses are eligible for ERTC but have not filed their claims. This is mainly due to revisions to guidance documents and the abundance of misinformation in the market.
To clarify, businesses can be eligible if they:
A) Saw a revenue decline due to COVIC-19; or
B) Experienced a greater-than-nominal business disruption due to government orders or mandates.
Most businesses experienced significant disruption, including capacity restrictions, work-from-home requirements, supply chain disruption, customer closings, or travel restrictions.
3) If your business has been reducing its employment tax withholdings in anticipation of receiving the ERTC in the fourth quarter 2021, you need to prepare to pay those taxes back.
4) Reach out to trade associations and political leaders to encourage them to support reinstating the fourth quarter 2021 ERTC.
5) Winter is coming. The bulk of the tax provisions are still making their way through Congress under the Build Back Better Act. Companies need to evaluate their tax position as soon as possible to avoid any adverse tax impacts to their business or estate.
