On Friday, November 5, 2021, the House of Representatives passed H.R. 3684, otherwise known as the Infrastructure Investment and Jobs Act, with 228 votes in favor and 206 votes opposed. The bill passed the Senate in August and was signed by President Biden on November 15th.
A great many employers are very concerned, as described below.
While this legislation is sparse in terms of tax law changes its passage would still have a major impact on taxpayers.
Irked by ERC Changes
One key aspect of this legislation is the early termination of the employee retention credit (ERC). This credit was first created by the CARES Act and has been amended a number of times since its enactment.
The preface to our book on the Employee Retention Credit provides the following explanation of the credit:
The Employee Retention Credit (“ERC”) was established under the March 27, 2020 CARES Act as a dollar-for-dollar credit against employment taxes available to certain employers as reimbursement for “qualified wages” paid to employees during periods of economic hardship or when a business is closed in 2020 (and now 2021). As with the Paycheck Protection Program (“PPP”), the purpose of the ERC was to incentivize employers to keep employees on the payroll.
The ERC was originally set to expire on January 1st, 2021, but it was given a second life following the passage of the Economic Aid Act on December 27, 2020. On March 11, 2021, the American Rescue Plan Act of 2021 was signed into law, and further extended the life of the ERC to the 3rd and 4th quarters of 2021 under similar rules that apply for the 1st and 2nd Quarter of 2021. The American Rescue Plan Act also added special rules that apply to a “severely financially distressed employer” or a “recovery startup business.”
As mentioned above, the American Rescue Plan Act expanded the ERC and allowed eligible employers to utilize the ERC for the third and fourth quarters of 2021.
The Infrastructure Investment and Jobs Act reverses the American Rescue Plan Act by disallowing application of the ERC for the fourth quarter of 2021. This means that any wages paid by an eligible employer after September 30th would not be eligible for the credit.
The problem lies in the fact that many employers expecting to receive the credit have been reducing current payroll tax deposits which usually are due monthly or semi-weekly depending on the dollar amount involved. In April 2021, the IRS published Notice 2021-24 to provide that failure to deposit penalties would not apply to taxpayers who do not make deposits in anticipation of receiving the paid sick and family leave credits offered under the Families First Coronavirus Response Act or the Employee Retention Credit. Specifically the Notice provides in relevant part:
b. Reduced Deposits for the Employee Retention Credit
An eligible employer will not be subject to a penalty under section 6656 for failing to deposit Employment Taxes in a calendar quarter if—
(1) The employer paid Qualified Retention Wages with respect to the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,
(2) The amount of Employment Taxes that the employer does not timely deposit, reduced by the amount of Employment Taxes not deposited in anticipation of the credits claimed under sections 7001 and 7003 of the Families First Act or sections 3131 and 3132 of the Code (as described in section 3.a of this notice), is less than or equal to the amount of the employer’s anticipated credits under section 2301 of the CARES Act or section 3134 of the Code for the calendar quarter as of the time of the required deposit, and
(3) The employer did not seek payment of an advance credit by filing Form 7200,with respect to the anticipated credits it relied upon to reduce its deposits.
Thus, after a reduction, if any, of a deposit of Employment Taxes by the amount of the anticipated paid sick or family leave credits, an employer may further reduce, without a penalty under section 6656 of the Code, the amount of the deposit of Employment Taxes by the amount of the employer’s employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as the employer does not also seek an advance credit with regard to the same amount.
For purposes of this section 3.b of this notice, the total amount of any reduction in any required deposit may not exceed the total amount of the employer’s anticipated credit under section 2301 of the CARES Act or section 3134 of the Code as of the time of the required deposit, minus any amount of such anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain the relief provided by this notice or (2) to seek payment of an advance credit.
Now that the Employee Retention Credit has effectively been retroactively repealed will Employers who were reducing deposits in anticipation of receiving the Credit be subject to failure to file penalties? We think that this is unlikely, and in fact the AICPA has penned a letter to the House Ways and Means Committee asking for the Committee to issue a directive to the IRS and Treasury to “waive any penalties and provide a reasonable, practical method for payment of unpaid employment taxes.” The letter can be read in full by clicking here:
(https://us.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/comments-on-erc-sunset-erj-comments.pdf)
The conservative approach is likely for employers that reduced deposits to go ahead and make the deposit of payroll taxes they thought would be offset with the now expired Employee Retention Credit on their next scheduled deposit date, if not before then.
While the Infrastructure Investment and Jobs Act does eliminate the Employee Retention Credit for the last quarter of 2021, it does not prevent eligible employers from retroactively filing for the credit with respect to wages paid between March 12, 2020 and September 30, 2021 by filing an amended Form 941X before the statute of limitations expires for the filing of an amended return (generally three years from date of originally filed return).
It is also worth noting that businesses qualifying as “Eligible Recovery Startup Businesses” will still be eligible to receive ERC benefits for the fourth quarter, so long as the business was started after February 15, 2020 and such business’ gross receipts do not exceed $1 million. More information on qualifying as a “recovery startup business” is below:
Beginning July 1, 2021 the American Rescue Plan defines a new type of eligible employer called a “Recovery Startup Business.” A Recovery Startup Business is any business that was established after February 15th, 2020 for which the average annual gross receipts of the business does not exceed $1,000,000 for the 3-taxable year period ending with the taxable year which precedes the calendar quarter for which the credit is determined. The statutory language is as follows:
‘Recovery startup business’ means any employer-
(A) which began carrying on any trade or business after February 15, 2020,
(B) for which the average annual gross receipts of such employer (as determined under rules similar to the rules under section 448(c)(3)) for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined under subsection (a) does not exceed $1,000,000
***
A Recovery Startup Business must have “began carrying on a trade or business after February 15, 2020.” The Notice provides that this determination is made in the same manner as applies for purposes of Code Section 162 and states that a taxpayer has not begun carrying on a trade or business “until such time as the business has begun to function as a going concern and performed those activities for which it was organized.”
A tax-exempt organization may also qualify as a Recovery Startup Business and will make a determination as to whether it will qualify based upon all of its operations and average annual gross receipts as determined under Section 6033 of the Code.
It will be interesting to see what happens with this provision, as the bill, once passed, will apply retroactively.
The IRS: The New Crypto-Keepers
Another provision of the bill, which has garnered significant attention from both sides of the aisle, deals with the regulation of cryptocurrency. Section 80603 of the bill would create new cryptocurrency reporting requirements for “brokers.”
The definition of “brokers” under the bill has been expanded to include anyone who “transfers digital assets on behalf of another person.” This will surely implicate many children who are simply helping their technologically-illiterate parents transfer monies.
The bill defines “digital asset” to be “any digital representation of value which is recorded on a cryptographically secured distributed ledger or any similar technology as specified by the Secretary.” The changes made to cryptocurrency regulations will apply only to returns and statements required to be filed and furnished after December 31, 2023.
It is expected that this provision will raise roughly $28 billion over ten years.
Congress’ Way for the Highway
The bill also extended various highway-related taxes, such as fuel taxes and taxes on heavy vehicle use, for six years. These extended highway taxes, according to the Joint Committee on Taxation, will have an insignificant impact on the budget and is not expected to raise much revenue.
Additionally, the bill also earmarked $110 billion for repairing roadways. According to a White House report, roughly 45,000 bridges and 173,000 miles of roadway are in disrepair. Of the $110 billion that is allocated, roughly $40 billion will be solely for bridge maintenance and construction.1
On Monday, November 8, 2021, Transportation Secretary Pete Buttigieg indicated that a portion of the infrastructure bill will go towards fighting the racial inequalities that exist in the U.S. Highway system. This program, which is called the Reconnecting Communities Act, will offer grants to fund “community engagement and capacity building, as well as planning and construction of projects to remove or retrofit infrastructure barriers like highway overpasses and depressed highways.”2
Go Green, Think Clean (But It Is Ok To Print This Article)
In addition to the above items, the bill earmarks $55 billion for investment in clean water which includes funding to replace all of America’s lead service lines and to remove PFAS (a dangerous chemical) from drinking water.
The bill also targets water as it relates to the extreme flooding that millions of Americans deal with regularly. Over $50 billion will be going to protect against floods, droughts, and wildfires.
Conclusion
While the infrastructure bill seems to have support from both sides of the aisle, the changes to the ERC will have many employers reeling.
We will keep you posted as this develops.