Ironically, President Biden’s “Build Back Better” plan could remove a major tax credit designed to help thousands of businesses do just that. And it’s likely that small business owners in the Blue States would feel it the most.
Called Employee Retention Credit (ERC), it grants small and medium-sized businesses up to $ 28,000 per employee for the 2021 tax year to retain workers and grow their businesses. But the $ 1.2 trillion infrastructure bill passed by the Senate in August would retroactively end the program three months earlier, meaning small businesses could not collect the credit for wages paid after the September 30.
According to alliantgroup National Managing Director Dean Zerbe, businesses located in locations that have suffered extended coronavirus-related shutdowns are most likely to be affected by an early ERC sunset.
“Of the thousands of taxpayers that we continue to help claim the credit, we find that the more stringent areas, such as California, New York, Massachusetts, Minnesota and the cities of Chicago and Los Angeles will be the most hard hit if the ERC sees an early twilight, ”said Zerbe, who is also the former senior adviser to the US Senate finance committee. “These are areas in which we continue to see eligible taxpayers claim the ERC, particularly in sectors such as hospitality, manufacturing, construction, real estate services and healthcare.”
Who benefits from the ERC
The ERC is a refundable tax credit for salaries paid since the start of the pandemic. For the 2021 tax year, businesses can claim it on their tax returns and receive up to $ 7,000 per employee each quarter and use the money to hire and retain employees and other business expenses.
The notoriety of this tax credit only recently started to gain momentum, thanks to the fact that it was extended until the end of this year and that eligibility was extended to companies that have also benefited from a salary protection loan. Yet even before all this, the IRS had processed 102,422 tax returns for the 2020 tax year by the end of February, claiming employee retention credits totaling $ 4.5 billion.
Evan Morris, the owner of Calavera Coffee in Hollister, Calif., Said he found out about the tax credit through a friend and applied for it in late summer. Morris has already received a PPP loan and was able to retain employees during the pandemic with these funds and by revamping their business model to include delivery. He plans to use his ERC funds for payroll and additional equipment now that business is picking up.
He’s even considering expanding to a second location if things continue to go well, but that plan could be scaled back if the ERC ends early.
“It would definitely put us in a more difficult position,” he said. “Even though we’re busy, we always feel like we’re making up for lost time. People are finally feeling comfortable going out and we are still seeing a lot of [our old] customers coming for the first time since the pandemic. “
For other employee loyalty programs available
If the ERC ends early, small businesses like Morris don’t have many similar alternatives available. State and local grant programs for small businesses are very competitive and a demand does not guarantee that help will come. For example, California’s Small Business COVID-19 Relief Grant Program reopened for just three weeks in September and is again closed to new applicants.
Many loan programs are still available from state and local governments and offer favorable terms. But of course that money has to be paid back while the grants and tax credits are money in the bank.
Arizona is a state that recently launched a program similar to the ERC. Called the Return-to-Work Small Business Hiring and Retention Program, it funds up to $ 10,000 in expenses for employee hiring and retention efforts. There is a limit of $ 1,000 per employee and it limits the amount that can be used for other business expenses to 25% of the reward.