Summary:
In In re Granite City Mechanical, Inc., the Bankruptcy Court for the Western District of North Carolina (Judge Laura T. Beyer) held that the United States may offset unpaid Employee Retention Tax Credits (ERTCs) against a debtor’s outstanding COVID-19 EIDL loan owed to the SBA.
The debtor sought turnover of approximately $91,926.51 in pending ERTC refunds, arguing that the CARES Act insulated those credits from offset and that SBA lacked mutuality or had waived its rights. The Court rejected those arguments, denied the turnover motion, and granted relief from the automatic stay to allow the offset.
Key holdings:
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ERTCs are “overpayments” under 26 U.S.C. § 3134(b)(3) and are therefore subject to offset under 26 U.S.C. § 6402(d).
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Mutuality exists because the United States is treated as a single creditor for setoff purposes, even when different federal agencies are involved.
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The SBA’s claim was prepetition, and default existed under the modified EIDL note.
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There was no waiver of offset rights.
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Any ERTC checks already issued but not cashed must be returned to the IRS.
The Court aligned itself with other bankruptcy courts nationally that have allowed ERTC offsets against SBA EIDL debt.
Commentary:
This is one of those decisions where the result may be disappointing to debtors, but the legal analysis is hard to argue with—and harder to ignore going forward.
For the last few years, ERTCs have felt like "found money": a retroactive lifeline for businesses battered by COVID, often arriving years after the worst had passed. But this opinion is a reminder that the federal government never forgets which pocket the money comes from.
Judge Beyer’s opinion is methodical and unsentimental. Once ERTCs are defined—by Congress itself—as tax “overpayments,” the rest of the analysis almost writes itself. Section 6402(d) doesn’t say some overpayments may be offset. It says any overpayment shall be reduced by debts owed to other federal agencies. That statutory language is not subtle, and the Court rightly refused to engage in linguistic gymnastics to pretend otherwise.
Two practical takeaways stand out.
First, for debtors with SBA EIDL loans, ERTCs are not safe harbor funds. If your client owes SBA money—and most do—those credits are functionally earmarked for repayment whether you like it or not. From a planning standpoint, that means ERTCs should be treated less like incoming cash and more like a contingent government recapture.
Second, the mutuality argument was always a long shot. Courts have consistently treated the United States as one creditor for setoff purposes, and this case follows that well-worn path. If anything, Granite City confirms that trying to slice the federal government into agency-specific silos is an argument better suited for a law review article than a bankruptcy courtroom.
What’s perhaps most important is what this case signals for Chapter 11 and Subchapter V debtors going forward. If ERTCs are part of the reorganization calculus, practitioners must assume that SBA will assert offset rights early and aggressively—and that courts will likely permit it.
In short:
ERTCs may help businesses survive COVID—but they won’t help them outrun the SBA.
And as this decision makes clear, when Congress writes “shall,” bankruptcy courts in North Carolina are inclined to read it exactly that way.
To read a copy of the transcript, please see:
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