IRS Provides Guidance on Retroactive Termination of Employee Retention Credit.

(Parker Tax Publishing December 2021)

The IRS issued a notice providing guidance for employers regarding the retroactive termination of the employee retention credit (ERC) by the Infrastructure Investment and Jobs Act, so that the ERC generally applies only to wages paid before October 1, 2021, unless the employer is a recovery startup business. The notice also (1) provides guidance to employers that paid wages after September 30, 2021, and received an advance payment of the ERC for those wages or reduced employment tax deposits in anticipation of the credit for the fourth quarter of 2021, but are now ineligible for the credit due to the change in the law, and (2) provides guidance regarding how the rules apply to recovery startup businesses during the fourth quarter of 2021. Notice 2021-65.

Background

Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as originally enacted, provides for an employee retention credit (ERC) for eligible employers, including tax-exempt organizations, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) adopted retroactive amendments and technical changes to the CARES Act for qualified wages paid after March 12, 2020, and before January 1, 2021, primarily expanding eligibility for certain employers to claim the credit. Section 207 of the Relief Act, effective for calendar quarters beginning after December 31, 2020, further amended Section 2301 of the CARES Act to extend the application of the ERC to qualified wages paid after December 31, 2020, and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time.

Section 9651 of the American Rescue Plan Act of 2021 (ARP), enacted Code Sec. 3134, effective for calendar quarters beginning after June 30, 2021, and provides an ERC for wages paid after June 30, 2021, and before January 1, 2022. Code Sec. 3134(c)(2) expanded the ERC to create "recovery startup businesses" as a third category of employers that are eligible for the ERC for qualified wages paid in the third and fourth calendar quarters of 2021.

Section 80604 of the Infrastructure Investment and Jobs Act (Infrastructure Act), which was enacted on November 15, 2021, amended Code Sec. 3134(n) to provide that the ERC under Code Sec. 3134 applies only to wages paid after June 30, 2021, and before October 1, 2021 (or, in the case of wages paid by an eligible employer which is a recovery startup business, January 1, 2022). Additionally, effective for calendar quarters beginning after September 30, 2021, the Infrastructure Act amended the definition of a recovery startup business under Code Sec. 3134(c)(5) to remove the requirement that a recovery startup business not otherwise be an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.

On Monday, the IRS issued Notice 2021-65, which provides guidance to taxpayers on the early termination of the ERC.

Termination of ERC for Employers Other Than Recovery Startup Businesses

In Notice 2021-49, the IRS provided that the rules set forth in Notice 2021-20 and Notice 2021-23 addressing CARES Act provisions that are the same as those provided under Code Sec. 3134 continued to apply for the third and fourth calendar quarters of 2021. Due to the amendments made by the Infrastructure Act, however, rules for determining whether an employer is an eligible employer due to a full or partial suspension of operations or a decline in gross receipts no longer apply for the fourth calendar quarter of 2021. Any rules based upon the determination that an employer is an eligible employer due to a full or partial suspension of operations or a decline in gross receipts, such as rules relating to "severely financially distressed employers" discussed in Notice 2021-49, also no longer apply for the fourth calendar quarter of 2021. Further, references in Notice 2021-49 to eligible employers claiming the ERC for qualified wages paid in the fourth calendar quarter of 2021 no longer apply unless the employer is a recovery startup business. The rules related to recovery startup businesses in Section III.D. of Notice 2021-49 include the requirement that a recovery startup business not otherwise be an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. The Infrastructure Act removes this requirement for the fourth calendar quarter of 2021. Accordingly, this requirement no longer applies to recovery startup businesses in the fourth calendar quarter of 2021.

Repayment of Advance Payments for Employers Other Than Recovery Startup Businesses

In Notice 2021-65, the IRS notes that employers may have requested advance payments of the ERC for wages paid in the fourth calendar quarter of 2021 before the enactment of the Infrastructure Act. An advance payment of any portion of the ERC to a taxpayer in excess of the amount to which the taxpayer is entitled is an erroneous refund that the employer must repay. Accordingly, if an employer requested and received an advance payment of the ERC for wages paid in the fourth calendar quarter of 2021, and the employer is not a recovery startup business, the employer is not eligible for an ERC and must repay the amount of the advance.

Employers who need to repay these ERC excess advance payments must do so by the due date for the applicable employment tax return that includes the fourth calendar quarter of 2021. Failure to repay the advance payment by the due date of the applicable employment tax return may result in the imposition of failure to pay penalties under Code Sec. 6651.

Failure to Deposit Penalties for Employers Other Than Recovery Startup Businesses

Before the enactment of the Infrastructure Act, Notice 2021-24 allowed employers to reduce deposits of employment taxes by the amount of the ERC the employer anticipated for the fourth calendar quarter of 2021 based on a full or partial suspension of operations or a decline in gross receipts. Due to the termination of the ERC for wages paid in the fourth calendar quarter of 2021 for employers that are not recovery startup businesses, the IRS will no longer waive failure to deposit penalties for employers that reduce deposits in anticipation of the ERC after December 20, 2021, unless the employer is a recovery startup business.

For deposits due on or before December 20, 2021, with respect to wages paid on or after October 1, 2021, but before January 1, 2022, an employer that is not a recovery startup business will not be subject to a penalty under Code Sec. 6656 for failing to deposit employment taxes for the fourth calendar quarter of 2021 if the following conditions are met:

(1) the employer reduced its deposits in anticipation of the ERC, consistent with the rules provided in Section 3.b. of Notice 2021-24;

(2) the employer deposits the amounts initially retained in anticipation of the ERC 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) (deposit due dates will vary based on the deposit schedule of the employer); and

(3) the employer reports the tax liability resulting from the termination of the employer's ERC on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021.

For a discussion of the ERC, see Parker Tax ¶106,460.

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