This is the fifth post in a series NTU is publishing on the American Rescue Plan (ARP), the $1.9-trillion COVID relief bill supported by President Biden and House and Senate Democrats. The series seeks to examine what’s next for Congress and taxpayers regarding many aspects of this significant legislation. Here are the others, on Child Tax Credit expansion, state taxation of unemployment, premium tax credit expansion, and direct payments.
There are dozens of provisions and hundreds of pages in the American Rescue Plan (ARP), President Biden’s COVID relief bill that just became law. Though there are many provisions of the bill NTU has warned may be wasteful, the $10-billion expansion of a relatively new tax credit could help brand new businesses retain their workers through a challenging time.
The legislation expands the employee retention tax credit (ERTC), a payroll tax credit first created by the CARES Act in March to help businesses keep their workers employed through the COVID crisis. The ERTC, already significantly expanded under the bipartisan December relief bill, gets a further boost in ARP by making eligible 1) newly created, small, start-up businesses and 2) “severely distressed” businesses that have lost more than 90 percent of their gross receipts revenue during COVID shutdowns. The Joint Committee on Taxation (JCT) estimates that this expansion, which lasts just through December 2021, will cost around $10 billion in foregone revenue over the next two fiscal years.
Both changes were bipartisan and were championed by Sen. Maggie Hassan (D-NH). She was joined in the startup business effort by Sen. Mike Braun (R-IN), and in the “severely distressed” business effort by Sens. Jerry Moran (R-KS), Catherine Cortez Masto (D-NV), and Kevin Cramer (R-ND).
The changes are helpful in part because the two types of businesses cited above have less or no access to ERTC than other businesses under current law. As Sen. Hassan’s office explains:
- For small start-up businesses: Many businesses that launched since the COVID-19 pandemic began have been unable or less able to access the federal government’s various small businesses support programs like the ERTC and the Paycheck Protection Program (PPP). ARP would expand ERTC to businesses that began on or after February 15, 2020 and had annual gross receipts of $1,000,000 or less. These businesses would be able to receive payroll tax credits of up to $50,000 per quarter.
- For “severely distressed” businesses: “The program is currently limited to 70 percent of eligible wages and health expenses for workers who are furloughed and paid but not working,” (emphasis ours) for certain businesses with more than 500 employees, which means some severely impacted businesses with lots of employees (such as “live entertainment and performing arts industries”) cannot access the full benefit of the credit (unlike businesses with fewer than 500 employees). The ARP lets businesses with a more than a 90-percent drop in gross receipts from the prior year access the credit for the wages of all employees, not just those who are not working.
Of the two major programs to support small businesses during the pandemic, ERTC and PPP, NTU believes ERTC carries some advantages as a simpler program than PPP that cuts out financial institutions as intermediaries for relief. ERTC also must be used to offset wages and employees’ health care expenses, which is more directly tied to employee retention than PPP (where there are many eligible expenses and where there are also fraud and abuse concerns).