Congress Terminates the Employee Retention Credit Early
President Biden signed the Infrastructure Investment and Jobs Act (IIJA) into law on November 15, 2021. One of the provisions of that legislation retroactively terminated the employee retention credit (ERC) early. The credit was previously available to eligible employers for wages paid through the end of 2021. Under this change the credit terminates after the third quarter.
Although the Senate passed the IIJA well before the 4th quarter of 2021 began, issues in the House caused that chamber’s vote in favor of the Act to be delayed until late in the evening of November 5, 2021, over a month after the 4th quarter began, which has created a problem for employers who, based on prior law, were claiming the ERC for the 4th quarter and were reducing their payroll deposits based upon the ERC.
Under the IIJA, employers are not qualified for the credit for wages paid after September 30, and thus employers should have been making their normal payroll deposits during fourth quarter. IIJA includes no provision to deal with employers who were planning to use the ERC to offset payroll taxes. For now, it’s not clear if employers who would have qualified due to the drop in gross receipts tests or full/partial suspension of operations test and reduced their payroll tax deposits prior to passage of the Act will face late deposit penalties for the payroll taxes they failed to deposit.
If neither Congress nor the IRS provides relief, employers will not only have to deposit payroll taxes for the 4th quarter they thought were covered by the ERC, they may also be subject to penalties up to 10%.
The problems created by this issue may be magnified as some firms had taken advantage of a CARES Act provision allowing the deferral of certain 2020 payroll taxes with the deferred amounts payable in two payments, one by December 31, 2021, and the other by December 31, 2022. This, combined with having to make up for the unpaid 4th quarter 2021 employment taxes, may prove be a heavy burden for smaller employers. Although the ERC and payroll tax deferral was supposedly intended to help small firms struggling because of the COVID pandemic, it may have the opposite effect, by increasing the burden on these financially fragile businesses and perhaps contribute to their demise.
There is an exception to the early termination of the ERC that applies to Recovery Startup Businesses that will be allowed to claim the credit through the end of 2021. A recovery startup business is an employer that began carrying on any trade or business after February 15, 2020 and has gross receipts under $1,000,000 for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the employee retention tax credit is determined.
Let’s hope the government does the right thing and waives the penalties for the 4th quarter of 2021. Please call this office for further details and assistance with dealing with this issue.
Want tax & accounting tips and insights?
Sign up for our newsletter.
“Bernard and his team at BR tax group are top notch. This is my first year using them after switching from a different local CPA and I didn't realize how much tax info I've been missing. His communication is great. The additional information he provides to maximize tax savings is something I didn't get from my previous CPA. Thanks Bernard”
Frequently Asked Questions
-
You can prepare your taxes yourself, especially if your business is simple.
But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.
-
Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.
That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.
-
Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.
-
Possibly, if it was truly for your business and you have proof.
Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.
-
Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.
The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.
Our Offices
Georgetown
Austin - Arboretum
Austin Downtown
Let's Get Started
Our services are designed specifically for business start-ups, entrepreneurs and small businesses of all sizes. Let’s start the conversation.
Site managed by http://www.webstrategyboost.com/