Employee Retention Tax Credit, Paid Leave Tax Credit & More
The $1.9 trillion COVID-relief bill passed by Congress contains positive and negative tax provisions for the construction industry. On the positive side, the legislation builds on the expansion of the Employee Retention Tax Credit (ERTC) that was included in the end of year COVID-relief legislation, by extending the expanded credit through the end of 2021. This expanded credit provides employers with a tax credit equal to 70 percent of an employee’s wages, up to $10,000 per employee per quarter (or $7,000). The end of year relief package allowed employers to claim this credit through the end of June 2021, and ARPA extended this provision through December. Additionally, the provision was modified to apply the credit against Medicare payroll taxes (as opposed to Social Security) so that it would comply with the restrictive Senate budget reconciliation rules.
Additionally, while the requirement for employers to provide emergency paid leave that expired on December 31, 2020, was not extended, the bill does, however, temporarily extend tax credits to employers who provide eligible employees with Emergency Paid Sick Leave or Emergency Family Medical Leave through September 30, 2021.
On the negative side, the legislation extends the “loss limitation rule” for pass-through businesses by a year. The Tax Cuts and Jobs Act (TCJA) limited the amount that a pass-through business could claim in net operating losses to $500,000 per year. This provision was scheduled to expire in 2025 (along with a host of other expiring provisions), and the COVID relief bill extends this provision through 2026.
Perhaps most concerning, the COVID-relief bill contains a provision that restricts any state that receives State and Local Fiscal Recovery Funds from enacting any “change in law, regulation, or administrative interpretation” that would result “either directly or indirectly” (emphasis added) in a reduction of net tax revenue to the state during the “covered period.” Under the legislation, the “covered period” began on March 3, 2021, and will run through the end of 2024.
This provision was slipped into the legislation at the last minute, and the ramifications could be profound. Any state that elects to receive a portion of the $219.8 billion in relief contained in the bill is essentially handcuffed from enacting any tax relief (via legislative/regulatory action or otherwise) to their residents for almost the next 4 years. For example, AGC fought very hard at the end of 2020 to ensure that business expenses associated with Paycheck Protection Program (PPP) loan forgiveness were fully tax deductible. Some states have had to pass legislation to ensure that this change conforms with their state tax code. It is unclear if this new restriction would prohibit a state from passing conforming legislation (which would result in a reduction in revenue) without also passing a corresponding tax increase.
It is also possible that some states might view this constraint as too restrictive, and thus refuse the aid, leaving billions of dollars either unspent or redistributed to other states. It is also unclear if this would survive a legal challenge in light of the Supreme Court’s decision that Congress could not compel states to expand Medicaid under the Affordable Care Act.