The One Big Beautiful Bill Act (enacted on July 4, 2025) introduces significant legislative changes affecting the Employee Retention Credit (ERC). The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit or ERTC, is a refundable tax credit available to certain eligible businesses and tax-exempt organizations that had employees and were impacted by the COVID-19 pandemic.

However, the OBBBA changes only apply to ERC claims under IRC Section 3134, which are claims relating to Q3 and Q4 of 2021. As a result, the OBBBA’s changes don’t apply to ERC claims for wages paid or incurred from March 13, 2020, through June 30, 2021.

Outlined below are the major changes and their anticipated impact:

Disallowance of Late-Filed ERC Claims for Q3 & Q4 2021

• ERC credit or refund claims filed after January 31, 2024, for Q3 and Q4 of 2021 may be disallowed. In most cases, the IRS hasn’t yet processed ERC claims that were filed after Jan 31, 2024.
• The disallowance provision applies only to credits or refunds made after the enactment of the OBBBA Act.
  • If an ERC claim for Q3 or Q4 2021 was filed after Jan 31, 2024, but already paid before enactment, the disallowance does not apply to that claim.
  • This creates a disparity: two similarly situated taxpayers may face different outcomes, solely depending on whether the IRS processed the claim before or after the OBBBA enactment.
  • The retroactive nature of the provision, paired with IRS processing delays and moratorium, may unfairly impact taxpayers who were legitimately eligible at the time of filing.
  • Limiting the suspension to Q3 and Q4 of 2021 is a mitigating factor, as it reduces the number of affected employers compared to earlier quarters.

Extended IRS Statute of Limitations

• The Act extends the time the IRS has to audit or assess taxes related to ERC claims for Q3 and Q4 of 2021. The new statute of limitations is now six years after the later of:
  • The date the original payroll tax return was filed (or treated as filed) for the relevant quarter, or
  • The date the ERC claim was filed.

Reinstatement of Wage Deduction for Disallowed Claims

• If the IRS later disallows an ERC claim, you may amend your income tax return to deduct the wages that were initially disqualified (as ERC-claimed wages are not deductible under existing rules).
• This helps prevent permanent disallowance of tax benefits due to denied ERCs.

New Due Diligence Requirements for ERC Promoters

• Professionals who advise or assist with ERC claims for Q3 or Q4 of 2021 must meet enhanced due diligence standards, similar to rules for the Earned Income and Child Tax Credits.
• ERC promoters are service providers (excluding certified professional employer organizations) that help or advise regarding an ERC document, who:
  • Collect a fee based on the amount of the ERC refund and have gross receipts from ERC assistance or advice in excess of 20% of their gross receipts for a specified year.
  • Have gross receipts from ERC assistance or advice exceeding 50% of their gross receipts for a specified year.
  • Have gross receipts from ERC assistance or advice exceeding 20% of their gross receipts for a specified year, and such gross receipts exceed $500,000.
• ERC promoters who fail to satisfy the diligence requirement are subject to a penalty of $1,000 per instance.

The Penalty for Erroneous Refunds Is Expanded to Apply to Payroll Tax Returns

• The penalty for erroneous refunds is expanded to apply to payroll tax returns.
• IRC Section 6676 imposes a 20% penalty on taxpayers who receive an “excessive” refund due to an erroneous claim. The OBBBA expands this penalty so that it now also applies to payroll tax returns, in addition to income tax returns.

While the OBBBA aims to curb abuse and tighten ERC compliance, the changes may unintentionally penalize compliant businesses affected by IRS backlogs. Employers with pending or disallowed ERC claims should reassess their tax position and consider available remedies, such as amended returns for wage deductions.

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