New legislation proposes to terminate the $7,000 credit per employee for the fourth quarter of 2021 for qualifying organizations.
Key insights
- The Employee Retention Credit may terminate after September 30, 2021.
- Recovery startup businesses would still qualify to claim the credit for the fourth quarter of 2021.
- A second bill dealing with “human” infrastructure may reinstate the credit for the remainder of the year, but there is no guarantee.
If your organization expected to qualify for the ERC for all four quarters of 2021, adjust your planning.
Update
This article was originally published on August 2, 2021. It was updated on October 19, 2021 to reflect guidance for Q4, given that the Infrastructure Investment and Jobs Act has not yet passed.
The proposed Infrastructure Investment and Jobs Act (infrastructure bill) would greatly change the qualifications for the Employee Retention Credit (ERC) for the remainder of 2021. If enacted, the ERC would no longer be available, other than for recovery startup businesses, for wages paid after September 30, 2021. Whereas some businesses were expecting to be able to claim the credit for the duration of 2021 as a result of the American Rescue Plan, the recently introduced bill would shorten the lifespan of the ERC and terminate the credit on October 1, 2021.
What does this mean for organizations? Regardless of circumstances, with the exception of recovery startup businesses as defined in Section 3134 of the Internal Revenue Code, the ERC would not be available for the fourth quarter of 2021. The maximum credit that any one employee will be able to generate for a qualifying business in 2021 will be $21,000 (or $7,000 per quarter for each of the first three quarters of the year).
A recovery startup business is defined as a business that began operations after February 15, 2020, and for which the average annual gross receipts do not exceed $1 million for the three-taxable-year period ending with the year that precedes the calendar quarter for which the credit is determined.
All other provisions related to the ERC in the Consolidated Appropriations Act, 2021, as well as the American Rescue Plan, would remain unchanged.
It’s Q4, what now?
With no final decision on the infrastructure bill and talk, but no confirmation, of a potential reinstatement with a second “human” infrastructure bill, talk to your advisor about an appropriate action for Q4. It may be prudent to claim an ERC in January versus claim directly against your normal payroll tax deposits.