Getty Images; Illustration by Halie Chavez
It's well-known that lawmakers intend to repurpose some $205 billion in untapped Covid-19 relief funds to pay for part of the $1 trillion infrastructure bill that awaits a House vote this month. But it's only now becoming clear which programs will get the ax, and what the consequences will be.
The employee retention tax credit (ERTC), a refundable credit designed to make it easier for businesses to keep employees on the payroll, is on the hit list and will be a particular headache to unwind.
The credit, first authorized by the Cares Act and extended by the American Rescue Plan Act, is scheduled to run through the end of the year. It lets business owners access as much as $28,000 in incentives per employee for 2021. Ending it a quarter early--that is, on October 1 instead of December 31--will reduce that incentive to $21,000 per employee for the year.
While any free money is a good thing, the timing of the haircut couldn't be worse. The economic picture, which had been brightening early in the summer, is now growing dimmer, as the highly contagious Delta variant rampages across the U.S., particularly in southern states with low vaccination rates. Consumer sentiment fell to a six-month low in August, and many companies are delaying their return to the office.
"There's a lot of uncertainty about where revenues are headed for small businesses--particularly service-based businesses--as we enter the fall and into the winter, that may not have been considered when [the infrastructure bill] was originally drafted," says Garrett Watson, senior policy analyst at the Tax Foundation, a conservative-leaning think tank in Washington, D.C. "Even in an ideal world in which things were a lot stronger, it would still be a late change to a program that a lot of small businesses were relying on."
As of May, just under 146,500 employers had claimed about $10.2 billion in ERTCs, according to a July 2021 Government Accountability Office report. Lawmakers estimate that eliminating the program early would save the U.S. government an estimated $8 billion. While less than 1 percent of the approximately 17 million employment tax return filings received included claims for the ERTC, many more businesses that are eligible for the credit don't realize it, says Bill Smith, national director of tax technical services at CBIZ MHM's National Tax Office in Washington, D.C.
"We're seeing businesses that thought they didn't qualify because they had more than 500 employees, or because they didn't realize they could use their first quarter revenue loss numbers to apply in the second quarter," says Smith. "We're seeing some very large credits. So it's inconceivable to me that every business isn't all over this."
Some employers may also qualify for a look back to 2020, to access an additional credit per full time employee. The Consolidated Appropriations Act, passed in December 2020, expanded eligibility to businesses that also received Paycheck Protection Program loans, provided the companies don't use the same wages for the credit and to obtain forgiveness of the PPP loan.
Note that the 2021 credit amounts to 70 percent of qualified wages paid, up to $7,000 per employee per quarter. Companies have been ordered to close, or show that quarterly gross receipts dropped to 80 percent of what they were during the same quarter in 2019. Companies may also use the prior quarter's numbers when calculating eligibility.
Changing the rules governing the ERTC may complicate matters for the Internal Revenue Service too. The agency, which on August 4 issued new guidance governing the ERTC, is still processing returns received in 2020, according to the GAO. And as of June 9, the agency has about 2.5 million unprocessed Forms 941, which employers use to file for the ERTC. "When you have changes like this midyear, it can distract the IRS from just catching up," and that, too, can roil small businesses, says Watson.
Of course, swift passage of the infrastructure bill could prove beneficial for the same businesses that were counting on the ERTC. The bill represents billions in new spending for high-speed internet, electric vehicle charging stations, and public transit. For certain programs, agencies will be directed to spend at least 10 percent of the money available towards small businesses owned and controlled by socially and economically disadvantaged individuals. That includes women-owned businesses.