OBBB Impacts on Employer Tax Credits

The OBBB, signed into law on July 4, made changes to several employer tax credits.

Employee retention credit (ERC)

The American Rescue Plan Act of 2021 (ARPA) extended the statute of limitations for the IRS to assess tax with respect to ERCs claimed for the third and fourth quarters of 2021. The OBBB further extends the statute of limitations until the later of April 15, 2028, or six years from the date the claim for credit was filed. The OBBB also prohibits the IRS from paying ERC refunds claimed for the third and fourth quarters of 2021 after Jan. 31, 2024. However, this provision is effective only for “credits and refunds allowed or made after the date of the enactment of” the OBBB. Accordingly, if an employer filed an ERC claim after Jan. 31, 2024, and that claim already has been paid, this prohibition would not be effective with respect to the taxpayer.

Crowe observation

While the statute of limitations for the IRS to assess tax on ERC claims for Q2 2020 through Q2 2021 generally has expired, changes under the OBBB significantly extend the time for the IRS to evaluate Q3 and Q4 2021 claims. The IRS may take more time to review these claims due to the extended statute of limitations, and, as a result, taxpayers could be waiting years to receive a refund.

The OBBB also creates new rules for ERC promoters, requiring them to comply with certain due diligence requirements related to a taxpayer’s ERC eligibility for Q3 and Q4 2021 claims. Additionally, the OBBB amends Section 6676 to apply the 20% penalty for erroneous refunds to employment taxes.

Paid family leave credit

Section 45S was enacted as part of the Tax Cuts and Jobs Act of 2017 to provide a temporary tax credit (through 2025 taxable years) for employers who provide paid family and medical leave to their employees. The credit ranges from 12.5% to 25% of certain wages paid to a qualifying employee while the employee is on family and medical leave. To qualify for the credit, an employer must have a written policy that provides all qualifying employees with at least two weeks of paid family and medical leave at a rate of at least 50% of the employee’s normal wages. A qualifying employee includes an employee who was employed by the employer for at least one year and, in the preceding year, did not have compensation in excess of 60% of the threshold for a highly compensated employee ($93,000 in 2024).

The OBBB makes the credit permanent and:

• Allows employers to calculate the credit based on the amount of insurance premiums paid for family and medical leave policies
• Includes an aggregation rule and modifies the definition of a qualifying employee to include an employee who has been employed for at least six months (if elected by the employer), but to exclude an employee who is not customarily employed for at least 20 hours per week
• Provides that leave that is paid for or mandated by state or local government counts toward meeting the credit eligibility requirements under Section 45S; however, this leave does not count toward calculating the amount of the credit

Crowe observation

The change for state-mandated leave is welcome because under prior rules an employer who was required by any state or local law to provide paid family and medical leave often was prohibited from claiming the credit.

Employer provided childcare credit

Section 45F offers employers a tax credit of up to $150,000 per year to offset 25% of qualified childcare facility expenditures and 10% of qualified childcare resource and referral expenditures. For amounts paid or incurred after Dec. 31, 2025, the OBBB increases the maximum credit from $150,000 to $500,000 (indexed for inflation) and increases the percentage of qualified childcare facility expenditures from 25% to 40%. For eligible small businesses, the maximum credit is increased to $600,000 and the percentage of qualified childcare facility expenditures is increased to 50%.

Looking ahead

Employers need to understand and adapt to the changes contained in the OBBB. While changes to the employer provided childcare credit and paid family leave credit generally are taxpayer-favorable, the changes to the ERC might leave some taxpayers quite unhappy – especially those taxpayers that timely filed a Q3 or Q4 2021 ERC claim after Jan. 31, 2024, but before April 15, 2025, under then-existing law, and now may be denied a refund.