By Liz Farmer | Senior Contributor
Oct. 26, 2021
This story was originally published on Forbes.com
Ironically, President Biden’s “Build Back Better” plan could remove an important tax credit designed to help thousands of businesses do just that. And it’s likely that small businesses owners in blue states would feel it the most.
Called the Employee Retention Credit (ERC), it awards small- and medium-sized businesses up to $28,000 per employee for the 2021 tax year to retain workers and grow business. But the $1.2 trillion infrastructure bill passed by the Senate in August would retroactively end the program three months early, meaning small businesses couldn’t collect the credit for wages paid after Sept. 30.
According to alliantgroup National Managing Director Dean Zerbe, businesses in places that have had extended coronavirus-related shutdowns are most likely to be adversely affected by an early sunset of the ERC.
“From the thousands of taxpayers that we continue to help claim the credit, we are seeing that the areas with the tightest lockdowns, such as California, New York, Massachusetts, Minnesota and the cities of Chicago and Los Angeles will be hit the hardest if the ERC sees an early sunset,” said Zerbe, who is also former senior counsel to the U.S. Senate Finance Committee. “These are areas from which we continue to see eligible taxpayers claiming the ERC, particularly in industries like hospitality, manufacturing, construction, real estate services, and healthcare.”
Who benefits from the ERC
The ERC is a refundable payroll tax credit for wages paid since the beginning of the pandemic. For tax year 2021, businesses can claim it on their tax returns and receive up to $7,000 per employee each quarter and use the money for hiring and retaining employees and other business expenses.
Awareness of this tax credit has only recently begun gaining steam, thanks to the fact that it has been extended through the end of this year and eligibility has been extended to businesses who also have received a paycheck protection loan. Still, even before all that, the IRS by end end of February had processed 102,422 tax returns for Tax Year 2020 claiming Employee Retention Credits totaling $4.5 billion.
Evan Morris, the owner of Calavera Coffee in Hollister, California said he found out about the tax credit through a friend and applied for it late this summer. Morris previously received a PPP loan and was able to retain his employees during the pandemic with those funds and through revamping his business model to include delivery. He plans to use his ERC funds for payroll and for additional equipment now that business is picking up.
He is even considering expanding to a second location if things continue to go well, but that plan could be curtailed if the ERC ends early.
“It would definitely put us in a tougher spot,” he said. “Even though we’re busy, we still feel like we’re making up for lost time. People are just finally feeling comfortable coming out and we still see a lot of [our old] customers coming in for the first time since the pandemic.”
Few other employee retention programs available
If the ERC ends early, small businesses like Morris’ don’t have many similar alternatives available. State and local small business grant programs are highly competitive and an application is no guarantee that aid will come. For example, California’s Small Business COVID-19 Relief Grant Program reopened for just three weeks in September and is now closed again to new applicants.
Many loan programs are still available through state and local governments and offer favorable terms. But of course that money has to be paid back whereas grants and tax credits are money in the bank.
Arizona is one state that did recently launch a program similar to the ERC. Called the Back to Work Small Business Hiring and Retention Program, it funds up to $10,000 in expenditures for employee hiring and retention efforts. There is a cap of $1,000 per employee and it limits the amount that can be used for other business expenses to 25% of the award.
