Consolidated Appropriations Act – 2021

The $2 trillion Consolidated Appropriations Act, 2021, which passed in December 2020, authorized another $900 billion in COVID-19 relief funding, significantly expanding and extending certain CARES Act relief programs while adding some new programs.

American Rescue Plan Act of 2021

The $2 trillion American Rescue Plan even further expanded and extended certain relief programs include ERTC, at the time extending it through the end of 2021.

Paycheck Protection Program (PPP)

The CARES Act authorized the Small Business Administration (SBA) to create PPP, a loan guarantee program that helps certain affected businesses meet payroll needs and other covered operating expenses resulting from the COVID-19 pandemic. PPP provided a direct incentive for small businesses to keep their workers on payroll and was used to help fund associated payroll costs including benefits. PPP loans could also be used for certain nonpayroll costs.

The Consolidated Appropriations Act, 2021 provided several amendments to the PPP, including significant additional funding and a second round of PPP loans for certain borrowers. PPP officially ended on May 31, 2021, but there was still one significant federal relief program still available to many businesses –ERTC.

Employee Retention Tax Credit (ERTC)

ERTC is one of many relief provisions included in the CARES Act to encourage small businesses to keep employees on the payroll instead of furloughing or laying them off. It is a refundable federal tax credit against employer payroll taxes for businesses that complied with government orders to partially or fully suspend operations or recognized significant reduction in gross receipts but retained their employees.

This credit could be used by eligible businesses to claim qualified wages, including certain health insurance costs paid to employees. The 70% refundable tax credit for wages paid, up to a maximum of $7,000 per employee per quarter, was originally available to be claimed quarterly in 2021 by an eligible business – one with 500 or fewer full-time employees in 2019 – if the business will have a greater than 20% reduction in gross receipts for the quarter, compared to the same quarter in 2019.

Early end to the ERTC

The ERTC provided many businesses with a sigh of relief, as it remained one of the few programs still available for businesses to apply for and was scheduled to run through the remainder of 2021. But the signing of the Infrastructure Bill on November 15, 2021, has resulted in a significant impact with the early termination of the employee retention tax credits moving up the end date retroactively to September 30, 2021. 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 a much-needed funding source from small businesses.

This news is very worrisome for small businesses and owners that had budgeted for ERTC credits for the fourth quarter. For now, businesses will need to pay back any payroll taxes they had already retained from October 1, 2021 forward to monetize their anticipated credit.

What's next for small businesses?

Now with the retroactive law change, business owners may need to recast their tax strategy, cash flow plans and financial reporting. But there are steps businesses can take to respond to this change. 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. Eligible businesses can file a claim for a retroactive ERTC refund on previously paid qualified wages for past calendar quarters by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return.

The ERTC has been an invaluable lifeline for many small businesses still struggling from the pandemic to retain employees. As businesses await the much-needed guidance from the IRS on repayment of any payroll taxes retained for the fourth quarter and the process to mitigate potential fines and penalties, now is the time for businesses to review past PPP loans or ERTC claims or consult with trusted partners to ensure their business is protected.

Marc Valerio is a CPA and Partner at The Bonadio Group.

Disclaimer: The summary information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal questions, it is recommended they consult with their attorney.