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Bipartisan Proposal Seeks Restoration of Employee Retention Tax Credit

  • Legislation introduced this week calls for the restoration of the Employee Retention Tax Credit, which was ended one quarter early under a major infrastructure bill
  • Supports say it helps support small businesses and allows them to avoid tax compliance headaches
  • One survey suggests the credit has seen only modest use from small businesses

Summary by Dirk Langeveld

A bipartisan group is seeking the restoration of the Employee Retention Tax Credit, which was terminated early as part of the Infrastructure Investment and Jobs Act.

The Employee Retention Tax Credit Reinstatement Act was introduced Tuesday by Rep. Carol D. Miller, a West Virginia Republican. The bill, which has been referred to the House Committee on Ways and Means and has nine co-sponsors, six of whom are Republicans and three of whom are Democrats.

“By reinstating the ERTC, struggling small businesses can access one of the last remaining pandemic recovery programs to receive the help they need to replenish their workforce and get back on track,” said Miller.

The refundable tax credit, established under the Coronavirus Aid, Relief, and Economic Security Act passed in March 2020, intended to encourage small businesses to retain and rehire workers. It allowed businesses to claim 70 percent of qualified wages paid to employees, capped at $7,000 per employee per quarter. The credit initially applied only to 2020, but was later extended through 2021.

The credit was available to businesses with 500 or fewer employees that could demonstrate an annual decline in gross receipts of at least 50 percent for the 2020 period, or a 20 percent decline in gross receipts in 2021 compared to the previous quarter or the same quarter in 2019. Businesses that had to fully or partially suspend operations due to a government shutdown order could also qualify.

Under the Infrastructure Investment and Jobs Act, the Employee Retention Tax Credit was ended early so that businesses were only able to claim the credit for wages paid until Oct. 1, 2021, rather than Jan. 1, 2022. The change potentially creates headaches for businesses that retained payroll taxes or deferred Social Security taxes in October and November, since these must now be repaid.

“Eliminating the Employee Retention Tax Credit was the wrong decision and hurts our small businesses who are still recovering from the economic fallout of the pandemic,” said Rep.  Kevin Hern of Oklahoma. “We must provide certainty and predictability to American small business owners.”

For the third and fourth quarters of 2021, businesses could qualify as recovery startup businesses or severely financially distressed employers. Recovery startup businesses can still claim the credit for the fourth quarter, but their definition was modified to only include businesses that began operating after Feb. 15, 2020 and had annual gross receipts under $1 million, eliminating a previous stipulation that these businesses also couldn’t meet other requirements for the credit. This means some businesses that were previously ineligible to qualify as recovery startup businesses may be able to do so for the fourth quarter.

Courtney Titus Brooks, senior manager of federal government relations at the National Federation of Independent Business, praised the legislation.

“Small businesses continue to manage several challenges such as the labor shortage, supply chain disruptions, and COVID-19 variants,” said Brooks. “The Employee Retention Tax Credit is one of the last COVID-19 recovery programs available to small businesses and by reinstating it for the fourth quarter, owners who were planning on using the tax credit will no longer face a retroactive tax increase or burdensome paperwork.”

However, NFIB data shows that only about one in four small businesses have utilized the Employee Retention Tax Credit. A survey by the organization found that just 13 percent of small businesses used the credit for wages paid in 2020, with another 13 percent using it for wages paid in 2021.

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