The Infrastructure Investment and Jobs Act (P.L. 117-58), enacted on November 15, 2021, retroactively terminated the Employee Retention Credit (ERC) for the fourth quarter of 2021. This early termination does not apply if the employer is a recovery startup business, the credit continues to apply to wages paid before January 1, 2022.
A “recovery start-up business” is an employer:
- That began carrying on any trade or business after February 15, 2020;
- For which the average annual gross receipts of the employer for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000; and
- That is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
For an eligible employer that is a recovery start-up business, that amount of the credit allowed for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000. In the third and fourth calendar quarters of 2021, a recovery start-up business that is a small eligible employer may treat all wages paid with respect to an employee during the quarter as qualified wages. Whether an employer is a recovery start-up business is determined separately for each quarter.
The IRS issued guidance through Notice 2021-65 on the retroactive termination of the (ERC) for employers that:
- Paid wages after September 30. 2021,
- Either received an advanced payment of the credit for those wages, or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021, but
- Are ineligible for the credit due to the change in the law.
Employers who received advance payments of the employee retention credit for fourth quarter wages of 2021, other than recovery startup businesses, can avoid failure to pay penalties if they repay those amounts by the due date of their applicable employment tax returns. Failing to repay the advance payments by the due date may result in failure to pay penalties.
Employers who reduced deposits on or before December 20, 2021, for wages paid during the fourth calendar quarter of 2021 in anticipation of the employee retention credit but are not recovery startup businesses will not be subject to a failure to deposit penalty for the retained deposits if they:
- Reduced deposits in anticipation of the credit, consistent with the rules in Notice 2021-24;
- Deposit the amounts initially retained in anticipation of the credit on or before the relevant due date for wages paid on December 31, 2021, regardless of whether the employer actually pays wages on that date; and
- Report the tax liability resulting from the termination of the credit on the applicable employment tax return or schedule that includes the period from October 1, 2021 through December 31, 2021.
The IRS has indicated that it will not waive failure to deposit penalties for employers that reduced their deposits in anticipation of the employee retention credit after December 20, 2021. This does not apply for recovery startup businesses.
Employers that do not qualify for relief under this guidance can reply to an IRS penalty notice with an explanation and the IRS will consider reasonable cause relief.
Even though the ERC is terminated, there is still opportunity to claim credits related to 2020 and the first three quarters of 2021.
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