Uphill climb seen for employment tax credit in omnibus talks

Putting the repealed employee retention tax credit back in place seems like an elusive goal

Rep. Carol Miller, R-W.Va., is a lead sponsor of House bill to renew the employee retention credit.  (Tom Williams/CQ Roll Call file photo)
Rep. Carol Miller, R-W.Va., is a lead sponsor of House bill to renew the employee retention credit. (Tom Williams/CQ Roll Call file photo)
Posted March 7, 2022 at 10:00am

Lawmakers on both sides of the aisle want to restore a pandemic-era tax break for small businesses and nonprofits as part of a massive spending bill taking shape, after Congress stripped the benefit away for the final months of 2021.

But with the fast-moving fiscal 2022 omnibus package likely to pass as soon as next week, putting the repealed employee retention tax credit back in place seems like an elusive goal, at least for now.

“The congressional leadership is looking at including bipartisan tax provisions in the omnibus bill,” Dean Zerbe, a former Republican Senate Finance panel aide, said in an email. “However, at the moment, reinstating the fourth quarter of the employee retention credit is on the outside looking in.”

A pandemic relief measure with sustained bipartisan backing, the employee retention tax credit was originally set to expire at the end of 2021.

But senators hunting for revenue to offset the bipartisan infrastructure law last summer included an early repeal of the tax break, cutting it off for 2021’s final quarter. The Joint Committee on Taxation estimated an $8.2 billion revenue gain for the U.S. Treasury, at the expense of companies and charitable organizations expecting relief.

The tax break, which defrayed the cost of keeping workers on payroll, required employers to show they’d faced hardship due to pandemic restrictions or declines in business. It was distributed as a refundable credit against payroll tax, meaning nonprofits and businesses could receive funds back from the government in excess of what they owed in employment taxes.

Before it lapsed, the employee retention tax credit was worth up to $28,000 per employee, and businesses with up to 500 employees could access it whether or not they'd laid off or furloughed workers, unlike larger employers.

The infrastructure law didn’t ultimately pass the House until weeks into the fourth quarter, meaning a retroactive end to the relief and a need for some businesses that already took advantage of the credit to refund the IRS. That situation combined with worsening pandemic conditions at the end of the year have fueled support to reverse the move.

'Make noise'

Zerbe, now national managing director at tax services firm Alliantgroup, which helps businesses and charities qualify for the credit and is lobbying for its return, said there’s clear bipartisan support for restoring the break. But he said business owners and charities should “make noise” to help make it happen.

Lobbyists and House members pressing to get the aid measure restored have been stepping up their pressure over the last week.

House Ways and Means Committee members Carol Miller, R-W.Va., and Stephanie Murphy, D-Fla. led a letter Thursday asking leadership to “prioritize passage” of their bill to reinstate the employee retention tax credit for the final three months of last year.

The letter, signed by 30 House members, says they’ve been hearing from constituents about negative impacts on their small businesses and nonprofits due to early repeal of the aid, and that many organizations now face a retroactive tax increase.

The House bill’s Senate companion was introduced in February by Sen. Maggie Hassan, D-N.H., a Finance Committee member expected to face a contentious reelection this fall. Inside Elections with Nathan L. Gonzales rates her seat “Tilt Democratic.”

A coalition including dozens of trade groups and nonprofits also wrote a letter to leadership last week, urging them to include the bipartisan bill in the omnibus “to restore the [employee retention tax credit] for the hardest hit American employees.”

More than 1,000 charitable organizations from across the country also included fourth quarter restoration of the employee retention credit — along with some tweaks to make it more generous and a further extension — among requests for Congress to help the sector. They outlined their asks in a mid-February letter updated last week with more signatories.

They’re likely to find a friendly reception from Senate Finance Chair Ron Wyden, D-Ore.

Wyden’s senior tax policy advisor for the committee, Christopher Arneson, said at the Federal Bar Association conference last week that his boss has a particular interest in aiding charities that have played a key role in providing services amid the COVID-19 crisis. Aides including Arneson who appeared on the panel emphasized they spoke for themselves and not on behalf of their employers.

Wyden said last week that appropriators approached him about whether he’d back restoring the retention credit as part of the omnibus, and he told them he'd like to be part of that effort.

“I’ve always thought it was a good program because it showed the symmetry between the relationships of workers and their employers,” he said.

Ways and Means Chairman Richard E. Neal, D-Mass., said he favors restoring the relief and getting that done is a matter of figuring out the best vehicle to move it through Congress.

“I think it’s worked very well, and I think the evidence is pretty compelling to be supportive of it,” he said.

Roadblocks

While there’s growing support to revive the aid, roadblocks remain to doing it now.

Creating a tax title as part of the omnibus opens it up to calls for other tax provisions to be included, though House tax writers are already trying to include a bipartisan retirement bill that would do just that.

The price tag for restoring the aid could be another problem, according to Andrew Grossman, chief tax counsel for Ways and Means Democrats.

“There are members who want this, but of course the [employee retention tax credit] costs money and Congress has a long list of priorities and invariably we have a budget,” Grossman said at the Federal Bar Association conference.

Asked about the cost issue, Wyden said he believed lawmakers leading spending bill talks were “working through some of those questions.”

Grossman also said some lawmakers may have concerns about enacting a retroactive change again in the middle of an unusually fraught tax season when the IRS is struggling to work through a massive backlog of unprocessed tax returns and correspondence.

“It only adds to the difficulty the agency is facing right now,” he said.

'Drop in the bucket'

Neal brushed off that concern. But Jorge Castro of Miller and Chevalier, a former IRS counsel and senior congressional tax counsel, said in an interview that the unusually difficult tax season adds complexity to the issue.

It would likely lead to more paper filings, he said. Paper returns require manual processing and are the very reason for the IRS’s current backlog.

Mike Goscinski of the National Automatic Merchandising Association dismissed those concerns, saying that the price tag for the aid is a “drop in the bucket” to help save small businesses and nonprofits. He said while the IRS is facing a tough tax season, firms are also dealing with a fraught tax filing year and penalty notices for those that received credits before the retroactive repeal.

NAMA is a trade association that represents vending machine operators, pantries, coffee carts and other unattended food services that have been hit hard by work-from-home policies enacted widely during the pandemic. Many workplaces remain shut down even as COVID-19 restrictions are subsiding. The group is leading the coalition of business and nonprofits pushing for restoration of the retention credit.

Goscinski said the urgent need for restoring the aid in the omnibus stems from a “nightmare” tax filing situation for businesses right now, and that many recipients were heavily relying on the relief lasting through last year as they budgeted for 2022.

“It was in our opinion wrongfully stripped away — already into Q4 it was taken away,” he said in an interview. “And now they’re dealing with the unintended consequences of that action on the back end.”