The IRS has issued guidance on the Employee Retention Credit (IRS Notice 2021-20).
In short, the current rules require that employers looking to claim the ERTC must amend the applicable 2020 quarterly payroll tax filings (Form 941) and must also reduce the deduction claimed for their staff salaries on their 2020 practice tax return by the amount of the credit. You can read all 102 pages of this IRS Notice at: https://www.irs.gov/pub/irs-drop/n-21-20.pdf.
Here are some highlights:
- No deduction allowed for wages included in ERTC Calculation as follows: a similar deduction disallowance applies under section 2301(e) of the CARES Act with regard to the employee retention credit, such that an employer’s deduction for qualified wages, including qualified health plan expenses, is reduced by the amount of the employee retention credit.
- Family members don’t count as follows: wages paid to related individuals may not be taken into account for determining qualified wages for the employee retention credit.
- No Credit for Schedule C Income as follows: Self-employed individuals are not eligible for the employee retention credit with respect to their own self-employment earnings. However, a self-employed 21 individual who employs other individuals in the self-employed individual’s trade or business and who otherwise meets the requirements to be an eligible employer may be eligible for the employee retention credit with respect to qualified wages the self-employed individual pays to the employees.
The IRS Notice (on page 87) details how to file for the ERTC for wages paid in 2020 as follows:
An eligible employer that received a PPP loan and did not claim the employee retention credit may file a Form 941-X for the relevant calendar quarters in which the employer paid qualified wages…[employers] should not use a subsequent Form 941 to claim an employee retention credit for qualified wages paid in the second quarter of 2020.
Please note that calculating the ERTC goes hand in hand with filing for the PPP Loan forgiveness. The rules seem to imply that you can re-figure the allowable payroll costs for the ERTC calculation even if you offset 100% of the PPP Loan with payroll costs for the forgiveness calculation. See examples starting on page 73 of the IRS notice at: https://www.irs.gov/pub/irs-drop/n-21-20.pdf.
Lastly, unlike other subsidies offered during the past 12 months including the PPP Loans and HHS Provider Relief Funds that provided relatively short windows to apply for those subsidies, practice owners eligible for the ERTC have 3 years to file an amended payroll tax form – 941-X. Our plan is to help our clients file for the ERTC this spring. Waiting until then will not risk your losing out on this valuable payroll tax credit offered by the federal government. You might also reach out to your payroll service to see when they will be ready to help their clients with the revised ERTC rules.
The SBA announced on 2/22/21 at: https://www.sba.gov/article/2021/feb/22/sba-prioritizes-smallest-small-businesses-paycheck-protection-program:
- The SBA will Allow sole proprietors, independent contractors, and self-employed individuals to receive more financial support by revising the PPP’s funding formula for these categories of applicants
Since first being introduced last March, the PPP formula required that sole proprietors, independent contractors, and self-employed individuals base their PPP loan calculation on their net income as reflected on the Schedule C filed as part of their personal tax returns. Anyone earning $100k or more generally qualifies for the maximum PPP loan of $20,833.
The new formula is based on gross Schedule C revenue instead of net income. Any business earning less than $100k that has expenses, therefore, should be able to get a higher PPP loan with this formula.
According to an article written by the American Institute of CPAs on 3/3/21 available at: https://www.journalofaccountancy.com/news/2021/mar/ppp-borrowers-can-use-gross-income-sba-rules.html:
The new IFR allows a Schedule C filer who has yet to be approved for a PPP first- or second-draw loan in the current, $284.5 billion phase of the program to elect to calculate the owner compensation share of its payroll costs based on either net profit (as reported on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C). If a Schedule C filer has employees, the borrower may elect to calculate the owner compensation share of its payroll costs based on either net profit or gross income minus expenses reported on lines 14 (employee benefit programs), 19 (pension and profit-sharing plans), and 26 (wages (less employment credits)) of Schedule C. If a Schedule C filer has no employees, the borrower may simply choose to calculate its loan amount based on either net profit or gross income.
And according to an article written by the American Institute of CPAs on 3/5/21 available at: https://www.journalofaccountancy.com/news/2021/mar/aicpa-calls-on-sba-to-change-unfair-ppp-guidance-deadline.html, there are some pitfalls with the new rules, including:
- The new formula only applies to new PPP loans. Loan already approved can’t be increased.
- “The March 31 deadline for PPP applications to be pushed back, in part because the changes mandated by the new IFR are significant enough that lenders won’t be able to implement them into their PPP portals for at least a week”.
Please reach out to your bank or PPP1 lender for more info.
Is a 1031 exchange (like-kind exchange) something you’ve been pondering with regard to your rental real estate investment? A significant tax benefit from transacting a 1031 exchange results in deferring taxes on the gain from the sale until a later year – when the taxpayer ultimately sells the replacement rental property or properties in a future year. In addition to the significant tax benefit there are a few other advantages of selling your rental property through a 1031 exchange:
- Diversification: Restructuring your investments. Examples of diversification include by geographic regions, residential rental for commercial rental, single family rental for multi-family rental, single family rental for two single family rentals.
- Leverage: Re-investment without loss of capital (that would result from capital gain tax paid on an investment sale) into a higher valued property or multiple properties with the investment potential for higher returns on the investment.
There is a strict timeline which must be met when entering into a section 1031 exchange. First the replacement property must be identified within 45 days of the sale date of the original property. Second, the purchase of replacement property must occur within 180 days of the sale date of the original property. Also, the entire transaction, sale of the original property and purchase of the replacement property, must be transacted through a qualified Intermediary – an independent third party that facilitates the transactions by holding the original property sale funds and then transfers the funds to the replacement property seller to complete the 1031 exchange with the purchase of the replacement property.
A few final items to note. Only business properties qualify. 1031 exchanges do not apply to the sale of your personal residence and purchase or a replacement residence. And generally, you will need to purchase a replacement property of equal or greater value than the property being sold. Cashing out will result in a portion of the transaction being a taxable capital gain to the seller.
With so many workers relocating their offices to their homes as a result of the pandemic, a common question for many taxpayers is “Do I qualify to claim my home office as a tax deduction?”
The answer is – it depends.
Unfortunately, for salaried employees (workers who are paid via a W-2), the Tax Cuts and Jobs Act of 2017 took this deduction away from this category of workers. That being said, W2 employees working from home might check with their employers to see if they will reimburse them for costs associated with maintaining a home office as allowed under Section 139. We posted info on this valuable employee benefit available only during a time of crisis at:
However, independent contractors and self-employed individuals will qualify to claim this deduction on their tax return. To qualify for the home office tax deduction, a taxpayer must have a segregated workspace in their house used regularly and exclusively for work purposes.
Taxpayers have two options for claiming the deduction. The first method allocates a percentage of actual home expenses (mortgage payments, homeowners’ insurance, utilities, repairs and maintenance) as a home office expense. For those less diligent in keeping records, the “simplified method” allows taxpayers to use a standard $5 per square foot, capped at 300 square feet of allowed office space, to determine the deduction for a home office.
More info on the home office deduction is available at: https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
One of the recurring notifications our office saw this past year was unemployment fraud.
There were numerous reported cases of scammers attempting to collect the unemployment benefits being offered by the government. Such scammers were filing false claims using stolen personal information. If this happened to you, be on the lookout for a form 1099-G issued by the state unemployment agency and reporting benefits paid out to you that were actually never paid to you. Taxpayers will need to contact their issuing state agency to report the error and to have a corrected 1099-G issued noting $0 of unemployment benefits paid to them.
If this issue is not corrected, the IRS will be looking for this inaccurate amount of reported income to be included as taxable income on the taxpayer’s 2020 income tax return and will issue a tax notice for unreported income to the taxpayer if not resolved prior to filing taxes.
Just checked the IRS website to read about the updated Employee Retention Tax Credit (ERTC) rules at: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act, and was greeted by this message:
Note that the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, amended and extended the employee retention credit (and the availability of certain advance payments of the tax credits) under section 2301 of the CARES Act. These FAQs do not currently reflect the changes made by the Taxpayer Certainty and Disaster Tax Relief Act of 2020; however, please continue to check back on this page for any updates related to the change in law.
That’s a problem. The IRS has had more than two full months since the rules were revised back in December to provide guidance on how to coordinate the PPP loan forgiveness with the calculation of the ERTC. To further complicate matters, the instructions for the 1120S clearly states:
[The ERTC] reduces the amounts reported [for officer and staff wages] on lines 7 and 8 by the nonrefundable and refundable portions of the new CARES Act employee retention credit claimed on the corporation’s employment tax return(s).
This implies that practice owners planning to file for the ERTC need to:
- File for PPP Loan forgiveness to figure out the wages for Q2 and Q3 2020 available for the ERTC
- Figure out the ERTC Credit, and submit the amended 2020 payroll tax forms to claim the credit
- Adjust the deduction for salaries and wages by the amount of the credit claimed
- File the practice’s 2020 tax return with the correct deduction for salaries and wages
- File the owner’s 2020 personal tax returns showing higher practice income for reduced wages
Yes, it’s a mess. We were hoping that the IRS would provide guidance allowing the credit to be claimed in 2021 even though the credit will be for wages paid in 2020. We were also hoping that that amount of the ERTC could reduce the deduction for 2021 salaries and wages instead of 2020 wages.
Until more guidance is issued, we’ll continue to finish up the business tax returns for our clients, and then at some point, finalize their personal tax returns too. If we file tax returns that later need to be revised, that’s fine. Remember, you always have three years from the return’s due date (or filing date for returns on extension) to submit amended tax returns.
One more wrinkle. There is a chance the government will announce this week that the filing deadline will be extended to 6/15/21. Stay tuned.
SBA offers several different relief options to help businesses, nonprofits, and faith-based organizations recover from the impacts of COVID-19.
In order to reach the smallest businesses, SBA will offer Paycheck Protection Program loans to businesses with fewer than 20 employees and sole proprietors only from Wednesday, February 24 through Wednesday, March 10, 2021. President Biden has also announced additional program changes to make access to PPP loans more equitable.
Please visit their website for more details at: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources