Our own Lynn Mucenski-Keck has been selected as a Forbes contributor and writes guest articles on changes and developments in the federal tax law on a regular basis. The below article discusses The Infrastructure Investment and Jobs Act.
This article originally appeared on Forbes here.
UPDATE: The Infrastructure Investment and Jobs Act passed by Congress on Friday, November 5th, included the removal of the employee retention credit for the fourth quarter of 2021. Under Section 80604 the bill eliminates the credit for wages paid after October 1, 2021, unless the wages are paid by an eligible employer which is a recovery startup business. The effective date of the law change is to apply to calendar quarter beginning after September 30, 2021.
On August 10th, the Senate approved 69-30 the Infrastructure Investment and Jobs Act (H.R. 3684), a bipartisan infrastructure package that makes investments in roads, bridges, broadband, water, and power, IRS cryptocurrency reporting and other provisions. The Senate has proposed that the bill will be partially paid for with unused COVID funds. The misnomer in that statement is that businesses in need were counting on the cash impact that these funds were going to provide in order to survive the tumultuous 18-months they have suffered through COVID. In addition, the Senate bill would withdraw these funds for businesses at the same time the COVID delta variant is surging and making many business owners uncertain about the near future.
When the American Rescue Plan Act of 2021 was passed in March of 2021, the employee retention credit was originally expanded for wages paid through December 31, 2021. However, buried in section 80604 of the Infrastructure bill is legislation to end the Employee Retention Credit early, and not allow business to claim up to a $7,000 per employee credit for the fourth quarter of 2021. This modification by the Senate to the employee retention credit would strip businesses of the expected fourth quarter credit of $51 billion, and re-direct the funding to the infrastructure plan.
The employee retention credit is generally available to eligible employers whose operations were limited by a full or partial governmental shutdown or had a significant decline in gross receipts. With many of the state and local government shutdown orders lifted, most employers will only be able to avail themselves of the credit if they can reflect a significant decline in gross receipts. In other words, employers must establish that their business still has not recovered to their pre-pandemic revenue streams. A significant decline in gross receipts is met for the 2021 taxable year if the business shows a greater than 20% gross receipts decline in a 2021 quarter when compared to their gross receipts in 2019 for that same quarter.
For example, if a business in the fourth quarter of 2021 had $200,000 of gross receipts and in the 2019 fourth quarter had $270,000 of gross receipts, they would have reflected a decline of approximately 26% and be deemed an eligible employer for purposes of the Employee Retention Credit.
ERC: 2021 Decline in Gross Receipts THE BONADIO GROUP
In 2021, the ability to demonstrate a significant decline in gross receipts is also available for employers if the immediately preceding quarter reflected a greater than 20% gross receipts decline when compared to 2019.
As the business is deemed an eligible employer in our example, and assuming they employ less than 500 full time employees in the 2019 taxable year, they were able to claim up to a $7,000 credit for each $10,000 of wages paid to each employee in the fourth quarter of 2021. Assuming this business had 10 employees that were paid at least $10,000 in the quarter, the business would have been able to generate a $70,000 employee retention credit. As the number of employees goes up, the amount of the employee retention credit does too.
Many businesses have been cash forecasting with the anticipation for the employee retention credits through the end of December 31, 2021. The need for cash is readily apparent. More and more businesses are struggling to hire workers, as many are hesitant to come back to work due to a variety of reasons including extended unemployment benefits, fear of the Delta variant surge, and the unknown for families with young children. These concerns have blossomed into businesses trying to hire professionals with limited success, and the need for higher wages and additional benefits to be offered in order to operate. It is not unusual for clients to express their inability to run their businesses at full capacity due to a lack of labor force. The presumption that businesses do not need the employee retention credit in the fourth quarter of 2021 doesn’t seem to hold true. Businesses are still in need of cash to offset a decline in revenue due to limited operations or to battle the labor shortage.
So, employers are sitting there scratching their heads. On the one hand the government recognized that the ability to recover from the COVID- pandemic was going to take time, and therefore extended the employee retention credit through the end of the 2021 year in March of 2021. Now Senators are proposing to eliminate the benefit and essentially indicating that businesses are no longer in need.
So, who is left holding the bag if the ability for business to obtain the fourth quarter employee retention credit is removed? Small business owners that were relying on over $50 billion of stimulus funding to recover and compete in the post-COVID world are now left to find different cash sources in order to survive or may even be forced to close their businesses. If they are able to identify alternative funding streams, they will most likely be coupled with additional fees and interest. You can’t blame business for feeling a bit slighted by this Senate bill. It would appear their immediate needs are being put on the back burner in order to fund an infrastructure bill that will not be felt until the future.
The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.