The IRS has issued guidance on a web page on the agency’s site related to the early termination of the employee retention credit for employers other than a recovery startup business.[1] The IRS posting explains:

The Infrastructure Investment and Jobs Act amends section 3134 of the Internal Revenue Code to limit the availability of the employee retention credit in the fourth quarter of 2021 to taxpayers that are recovery startup businesses, as defined in section 3134(c)(5). Therefore, taxpayers that are not recovery startup businesses are not eligible for the employee retention credit for wages paid after September 30, 2021.[2]

This termination after the quarter began creates a number of issues for taxpayers who had presumed they would qualify for this credit for the fourth quarter of 2021, especially if the employer had a more than 20% decrease in gross receipts in the third quarter of 2021 compared to the third quarter of 2019.

The IRS first gives guidance that amounts primarily to “we’ll get back to you later” for employers who have already reduced their payroll tax deposits for the fourth quarter who now find their deposits made to date are inadequate for their fourth quarter liabilities:

Some taxpayers that are no longer eligible to claim the employee retention credit for wages paid after September 30, 2021 may have already reduced their employment tax deposits in anticipation of claiming the employee retention credit for the fourth quarter of 2021. These taxpayers should monitor guidance issued by the IRS to learn if they must take any action regarding these amounts.[3]

Some employers may have already submitted Form 7200 to request advance payment of the excess of their expected employer retention credit over their payroll tax liabilities to date. If that request is for a recovery startup business, then, unless otherwise flawed, the claim would be one that is valid under the revised law. But if the employer is not a recovery startup business, then the request would not be valid.

The IRS indicates they are going to attempt to identify the Forms 7200 that should no longer be processed and those that should go forward for processing:

Some taxpayers may have already submitted Form 7200 to request an advance payment of the employee retention credit for the fourth quarter of 2021. If the Form 7200 hasn’t been processed, the IRS will use the taxpayer’s indication of whether it is a recovery startup business (Form 7200, Part 1, line H) as part of its determination regarding whether the Form 7200 claiming the employee retention credit in the fourth quarter of 2021 should be accepted or rejected.[4]

For those employers who have already received an advance payment in the fourth quarter but will not be able to claim the credit, the IRS warns that such employers will still need to take these advance payments into account when preparing their fourth quarter Form 941 and will need to watch for additional IRS guidance about actions to take regarding these balances.

If an advance payment of the employee retention credit for the fourth quarter of 2021 was already sent to a taxpayer that is no longer eligible to claim the employee retention credit for the fourth quarter of 2021 because it is not a recovery startup business, the taxpayer will still include that advance payment on the appropriate line of its employment tax return (for example, Form 941, Part 1, line 13h) for the quarter. In this case, the taxpayer may have a balance due when it files that employment tax return. Taxpayers should continue to monitor guidance issued by the IRS to learn if they should take any additional action regarding these amounts.[5]

[1] “Early Termination of the Employee Retention Credit for Most Employers”, IRS Website, November 24, 2021, https://www.irs.gov/forms-pubs/early-termination-of-the-employee-retention-credit-for-most-employers (retrieved November 26, 2021)

[2] “Early Termination of the Employee Retention Credit for Most Employers”, IRS Website, November 24, 2021

[3] “Early Termination of the Employee Retention Credit for Most Employers”, IRS Website, November 24, 2021

[4] “Early Termination of the Employee Retention Credit for Most Employers”, IRS Website, November 24, 2021

[5] “Early Termination of the Employee Retention Credit for Most Employers”, IRS Website, November 24, 2021