Yes, Employers Can Still Claim the Employee Retention Credit Via an Amended Tax Return

According to the IRS, employers can still claim the employee retention credit (ERC) by filing amended employment tax returns, even though the coronavirus (COVID-19) pandemic-era tax credit aimed at helping employers and employees during the health crisis expired last year.

ERC begins. 

The ERC is a provision from the Coronavirus Aid, Relief, and Economic Security Act (CARES; P.L. 116-136) Act that allowed for a tax credit against certain employment taxes for eligible employers that paid qualified wages, including certain health plan expenses, to certain employees. This began on March 12, 2020 and was initially to end at the end of 2020 (see Payroll Guide ¶20,905 ).

ERC amended and extended. 

The ERC was extended until June 30, 2021 by the Consolidated Appropriations Act (CAA;  P.L. 116-260) and further extended through the end of 2021 by the American Rescue Plan Act of 2021 (ARPA;  P.L. 117-2).

Early ERC termination. 

However, the Infrastructure Investment and Jobs Act (Infrastructure Act;  P.L. 117-58) retroactively terminated the ERC for most employers, beginning on October 1, 2021. Recovery startup businesses were the only employers allowed to claim the credit through the end of 2021. A recovery startup business is any employer that began operations after February 15, 2020 subject to certain average annual gross receipts requirements.

Reporting and claiming the ERC. 

Generally, eligible employers claimed the ERC by reporting their total qualified wages and the related health insurance costs for each quarter on their  Forms 941 (Employer's Quarterly Federal Tax Return).

Revised employment tax forms. 

In order to account for COVID-19 tax credits like the ERC, the IRS had to revise Form 941 (and other forms in the 941 series) several times. The IRS also revised  Form 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund).

Using a adjusted return to claim the ERC. 

The current version of the Form 941-X has multiple line numbers for making corrections and amendments regarding the ERC. These adjustments are reported on Form 941-X as follows: 

1.       Line 18a is for the nonrefundable portion of the ERC,

2.       Line 26a is for the refundable portion of the ERC,

3.       Line 30 is for the qualified wages of the ERC,

4.       Line 31a is for qualified health plan expenses for the ERC,

5.       Line 31b is a checkbox indicating if the employer is eligible for the ERC in the third or fourth quarter of 2021 solely because the employer is a recovery startup business, and

6.       Line 33a is for the qualified wages paid from March 13, 2020 through March 31, 2020 for the ERC. 

Worksheets for adjusting the ERC. 

There are also two worksheets in Form 941-X instructions that related to the ERC. Worksheet 2 is the adjusted ERC for wages paid after March 12, 2020 and before July 1, 2021. Worksheet 4 is the adjusted ERC for wages paid after June 30, 2021 and before January 1, 2022 (October 1, 2021 for most employers, except startup recovery businesses).

Period of limitations for amended employment tax returns. 

According to the Form 941-X instructions, employers may correct overreported taxes on a previously filed Form 941 if the Form 941-X is filed within three years of the date Form 941 was filed or two years from the date you paid the tax reported on Form 941, whichever is later.

The instructions also say that employers may correct underreported taxes on a previously filed Form 941 if the Form 941-X is filed three years of the date the Form 941 was filed.

The IRS refers to these time frames as a "period of limitations." And, for purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.

Employers can still claim the ERC. 

Through an IRS media relations correspondence,  Thomson Reuters  has confirmed that employers can still claim the ERC, even if the employer never claimed the credit during the time period the ERC was available.

This is because the window of opportunity to amend employment tax overpayments has not yet expired with relation to the period of time the ERC was available. So, if an employer currently discovers that it was eligible for the ERC when the credit was available, the employer would file a Form 941-X to report the overpayment in employment taxes and ultimately claim the ERC after its termination date.

Qualifying credit tool still available.  Thomson Reuters  developed an Employee Retention Credit Eligiblity Tool that helps employers determine if they qualify for the employment tax credit. The Tool is free and is still active for employers to use and to see if they may qualify for this credit. 

 Reach out to your FMD Advisor to determine whether you qualify.

Tax advantages of hiring your child at your small business

As a business owner, you should be aware that you can save family income and payroll taxes by putting your child on the payroll.

Here are some considerations. 

Shifting business earnings

You can turn some of your high-taxed income into tax-free or low-taxed income by shifting some business earnings to a child as wages for services performed. In order for your business to deduct the wages as a business expense, the work done by the child must be legitimate and the child’s salary must be reasonable.

For example, suppose you’re a sole proprietor in the 37% tax bracket. You hire your 16-year-old son to help with office work full-time in the summer and part-time in the fall. He earns $10,000 during the year (and doesn’t have other earnings). You can save $3,700 (37% of $10,000) in income taxes at no tax cost to your son, who can use his $12,550 standard deduction for 2021 to shelter his earnings.

Family taxes are cut even if your son’s earnings exceed his standard deduction. That’s because the unsheltered earnings will be taxed to him beginning at a 10% rate, instead of being taxed at your higher rate.

Income tax withholding

Your business likely will have to withhold federal income taxes on your child’s wages. Usually, an employee can claim exempt status if he or she had no federal income tax liability for last year and expects to have none this year.

However, exemption from withholding can’t be claimed if: 1) the employee’s income exceeds $1,100 for 2021 (and includes more than $350 of unearned income), and 2) the employee can be claimed as a dependent on someone else’s return.

Keep in mind that your child probably will get a refund for part or all of the withheld tax when filing a return for the year.

Social Security tax savings  

If your business isn’t incorporated, you can also save some Social Security tax by shifting some of your earnings to your child. That’s because services performed by a child under age 18 while employed by a parent isn’t considered employment for FICA tax purposes.

A similar but more liberal exemption applies for FUTA (unemployment) tax, which exempts earnings paid to a child under age 21 employed by a parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting only of his or her parents.

Note: There’s no FICA or FUTA exemption for employing a child if your business is incorporated or is a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work you’d pay someone else to do.

Retirement benefits

Your business also may be able to provide your child with retirement savings, depending on your plan and how it defines qualifying employees. For example, if you have a SEP plan, a contribution can be made for the child up to 25% of his or her earnings (not to exceed $58,000 for 2021).

Contact us if you have any questions about these rules in your situation. Keep in mind that some of the rules about employing children may change from year to year and may require your income-shifting strategies to change too.

© 2021

IRS Extends 2020 Tax Filing Deadline

The Internal Revenue Service announced Thursday, March 18 in the afternoon that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021.  The State of Michigan has followed suit, but many states have not yet confirmed that they will do the same.

The IRS will be providing more formal guidance in the coming days/weeks.

• The postponement applies to individual taxpayers, including individuals who pay self-employment tax.

• The postponement does not apply to calendar year-end Trust Tax Returns (1041) or C-Corporation Tax Returns (1120). These are still due on April 15, 2021.

• Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.

• The postponement does not apply to 2021 estimated tax payments that are due on April 15, 2021. These payments are still due on April 15.

• In addition, earlier this year, the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021 to file various individual and business tax returns and make tax payments. This extension to May 17 does not affect the June deadline.

• FMD will continue to monitor the various states for further guidance.

Despite this extension, we strongly encourage our individual clients to continue to work closely with their tax advisors and push forward on their tax return preparation and filing.

Launching a small business? Here are some tax considerations

While many businesses have been forced to close due to the COVID-19 pandemic, some entrepreneurs have started new small businesses. Many of these people start out operating as sole proprietors. Here are some tax rules and considerations involved in operating with that entity.

The pass-through deduction

To the extent your business generates qualified business income (QBI), you’re eligible to claim the pass-through or QBI deduction, subject to limitations. For tax years through 2025, the deduction can be up to 20% of a pass-through entity owner’s QBI. You can take the deduction even if you don’t itemize deductions on your tax return and instead claim the standard deduction.

Reporting responsibilities

As a sole proprietor, you’ll file Schedule C with your Form 1040. Your business expenses are deductible against gross income. If you have losses, they’ll generally be deductible against your other income, subject to special rules related to hobby losses, passive activity losses and losses in activities in which you weren’t “at risk.”

If you hire employees, you need to get a taxpayer identification number and withhold and pay employment taxes.

Self-employment taxes

For 2021, you pay Social Security on your net self-employment earnings up to $142,800, and Medicare tax on all earnings. An additional 0.9% Medicare tax is imposed on self-employment income in excess of $250,000 on joint returns; $125,000 for married taxpayers filing separate returns; and $200,000 in all other cases. Self-employment tax is imposed in addition to income tax, but you can deduct half of your self-employment tax as an adjustment to income.

Quarterly estimated payments

As a sole proprietor, you generally have to make estimated tax payments. For 2021, these are due on April 15, June 15, September 15 and January 17, 2022.

Home office deductions

If you work from a home office, perform management or administrative tasks there, or store product samples or inventory at home, you may be entitled to deduct an allocable portion of some costs of maintaining your home.

Health insurance expenses

You can deduct 100% of your health insurance costs as a business expense. This means your deduction for medical care insurance won’t be subject to the rule that limits medical expense deductions.

Keeping records 

Retain complete records of your income and expenses so you can claim all the tax breaks to which you’re entitled. Certain expenses, such as automobile, travel, meals, and office-at-home expenses, require special attention because they’re subject to special recordkeeping rules or deductibility limits.

Saving for retirement

Consider establishing a qualified retirement plan. The advantage is that amounts contributed to the plan are deductible at the time of the contribution and aren’t taken into income until they’re withdrawn. A SEP plan requires less paperwork than many qualified plans. A SIMPLE plan is also available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If you don’t establish a retirement plan, you may still be able to contribute to an IRA.

We can help

Contact us if you want additional information about the tax aspects of your new business, or if you have questions about reporting or recordkeeping requirements

© 2021

What are the tax implications of buying or selling a business?

Merger and acquisition activity in many industries slowed during 2020 due to COVID-19. But analysts expect it to improve in 2021 as the country comes out of the pandemic. If you are considering buying or selling another business, it’s important to understand the tax implications.

Two ways to arrange a deal

Under current tax law, a transaction can basically be structured in two ways:

1. Stock (or ownership interest). A buyer can directly purchase a seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes.

The current 21% corporate federal income tax rate makes buying the stock of a C corporation somewhat more attractive. Reasons: The corporation will pay less tax and generate more after-tax income. Plus, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold.

The current law’s reduced individual federal tax rates have also made ownership interests in S corporations, partnerships and LLCs more attractive. Reason: The passed-through income from these entities also is taxed at lower rates on a buyer’s personal tax return. However, current individual rate cuts are scheduled to expire at the end of 2025, and, depending on actions taken in Washington, they could be eliminated earlier.

Keep in mind that President Biden has proposed increasing the tax rate on corporations to 28%. He has also proposed increasing the top individual income tax rate from 37% to 39.6%. With Democrats in control of the White House and Congress, business and individual tax changes are likely in the next year or two.

2. Assets. A buyer can also purchase the assets of a business. This may happen if a buyer only wants specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes.

Preferences of buyers 

For several reasons, buyers usually prefer to buy assets rather than ownership interests. In general, a buyer’s primary goal is to generate enough cash flow from an acquired business to pay any acquisition debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after a transaction closes.

A buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price. Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets.

Preferences of sellers

In general, sellers prefer stock sales for tax and nontax reasons. One of their objectives is to minimize the tax bill from a sale. That can usually be achieved by selling their ownership interests in a business (corporate stock or partnership or LLC interests) as opposed to selling assets

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Obtain professional advice

Be aware that other issues, such as employee benefits, can also cause tax issues in M&A transactions. Buying or selling a business may be the largest transaction you’ll ever make, so it’s important to seek professional assistance. After a transaction is complete, it may be too late to get the best tax results. Contact us about how to proceed. 

© 2021

Relaxed limit on business interest deductions

To provide tax relief to businesses suffering during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily relaxes the limitation on deductions for business interest expense. Here’s the story.

TCJA created new limitation

Before the Tax Cuts and Jobs Act (TCJA), some corporations were subject to the so-called “earnings stripping” rules. Those rules attempted to limit deductions by U.S. corporations for interest paid to related foreign entities that weren’t subject to U.S. income tax. Other taxpayers could generally fully deduct business interest expense (subject to other tax-law restrictions, such as the passive loss rules and the at-risk rules).

The TCJA shifted the business interest deduction playing field. For tax years beginning in 2018 and beyond, it limited a taxpayer’s deduction for business interest expense for the year to the sum of:

·      Business interest income,

·      30% of adjusted taxable income (ATI), and

·      Floor plan financing interest expense paid by certain vehicle dealers.

Business interest expense is defined as interest on debt that's properly allocable to a trade or business. However, the term trade or business doesn't include the following excepted activities:

·      Performing services as an employee,

·      Electing real property businesses,

·      Electing farming businesses, and

·      Selling electrical energy, water, sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline, if the rates are established by a specified governing body.

Interest expense that’s disallowed under the limitation rules is carried forward to future tax years indefinitely and treated as business interest expense incurred in the carry-forward year.

Small business exception

Many businesses are exempt from the interest expense limitation rules under what we’ll call the small business exception. Under this exception, a taxpayer (other than a tax shelter) is exempt from the limitation if the taxpayer’s average annual gross receipts are $25 million or less for the three-tax-year period ending with the preceding tax year. Businesses that have fluctuating annual gross receipts may qualify for the small business exception for some years but not for others — depending on the average annual receipts amount for the preceding three-tax-year period.

For example, if your business has three good years, it may be subject to the interest expense limitation rules for the following year. But if your business has a bad year, it may qualify for the small business exception for the following year. If average annual receipts are typically over the $25 million threshold, but not by much, judicious planning may allow you to qualify for the small business exception for at least some years.

Special rules for partnerships and S corporations

The interest expense deduction limitation rules get more complicated for businesses operating as partnerships, limited liability companies (LLCs) treated as partnerships for tax purposes and S corporations.

Basically, the limitation is calculated at both the entity level and at the owner level. Special rules prevent double counting of income when calculating an owner's ATI for purposes of applying the limitation rules at the owner level.

IRS proposed regs set forth the special rules for applying the business interest expense limitation to partnerships and S corporations and their owners. The rules are complex and present significant compliance challenges.

Favorable CARES Act changes

The CARES Act generally allows businesses, unless they elect otherwise, to increase the interest expense deduction limitation to 50% of ATI for tax years beginning in 2019 or 2020. Businesses can also elect to use 2019 ATI to calculate the 2020 ATI limitation, which can allow for a larger deduction if 2020 ATI is less, which may be the case for many businesses.

For partnerships (including LLCs treated as partnerships for tax purposes), the 30% of ATI limitation remains in place for tax years beginning in 2019 but is 50% for 2020. Disallowed partnership business interest expense from a partnership’s 2019 tax year is allocated to partners and carried over to their 2020 tax years.

Unless a partner elects otherwise, 50% of carried-over partnership business interest expense from 2019 is deductible in the partner’s 2020 tax year without regard to the business interest expense limitation rules. The remaining 50% is subject to the normal limitation rules, calculated at the partner level, for carried-over partnership business interest expense. Like other businesses, partnerships can elect to use 2019 ATI to calculate the 2020 ATI limitation.

Help is available

As you can see, the business interest expense limitation rules are complicated. The temporarily relaxed limitations can allow affected businesses to reduce their federal tax liabilities for 2019 and 2020. However, for partnerships and partners, limitation rules are relaxed only for 2020. Your tax advisor can help your business take advantage of the relaxed rules for business interest expense deductions and benefit from other tax relief measures made available by the CARES Act.

© 2020

Even if no money changes hands, bartering is a taxable transaction

Even if no money changes hands, bartering is a taxable transaction

During the COVID-19 pandemic, many small businesses are strapped for cash. They may find it beneficial to barter for goods and services instead of paying cash for them. If your business gets involved in bartering, remember that the fair market value of goods that you receive in bartering is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties.

For example, if a computer consultant agrees to exchange services with an advertising agency, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there is contrary evidence.

In addition, if services are exchanged for property, income is realized. For example, if a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. Another example: If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. 

Joining a club

Many businesses join barter clubs that facilitate barter exchanges. In general, these clubs use a system of “credit units” that are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members.

Bartering is generally taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,000 credit units one year, and that each unit is redeemable for $1 in goods and services. In that year, you’ll have $2,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed once on that income.

If you join a barter club, you’ll be asked to provide your Social Security number or employer identification number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club will withhold tax from your bartering income at a 24% rate.

Forms to file

By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS.

Many benefits

By bartering, you can trade away excess inventory or provide services during slow times, all while hanging onto your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties. Contact us if you need assistance or would like more information.

© 2020

Businesses: Get ready for the new Form 1099-NEC

Businesses: Get ready for the new Form 1099-NEC

There’s a new IRS form for business taxpayers that pay or receive nonemployee compensation.

Beginning with tax year 2020, payers must complete Form 1099-NEC, Nonemployee Compensation, to report any payment of $600 or more to a payee.

Why the new form?

Prior to 2020, Form 1099-MISC was filed to report payments totaling at least $600 in a calendar year for services performed in a trade or business by someone who isn’t treated as an employee. These payments are referred to as nonemployee compensation (NEC) and the payment amount was reported in box 7.

Form 1099-NEC was reintroduced to alleviate the confusion caused by separate deadlines for Form 1099-MISC that report NEC in box 7 and all other Form 1099-MISC for paper filers and electronic filers. The IRS announced in July 2019 that, for 2020 and thereafter, it will reintroduce the previously retired Form 1099-NEC, which was last used in the 1980s.

What businesses will file?

Payers of nonemployee compensation will now use Form 1099-NEC to report those payments.

Generally, payers must file Form 1099-NEC by January 31. For 2020 tax returns, the due date will be February 1, 2021, because January 31, 2021, is on a Sunday. There’s no automatic 30-day extension to file Form 1099-NEC. However, an extension to file may be available under certain hardship conditions.

Can a business get an extension?

Form 8809 is used to file for an extension for all types of Forms 1099, as well as for other forms. The IRS recently released a draft of Form 8809. The instructions note that there are no automatic extension requests for Form 1099-NEC. Instead, the IRS will grant only one 30-day extension, and only for certain reasons.

Requests must be submitted on paper. Line 7 lists reasons for requesting an extension. The reasons that an extension to file a Form 1099-NEC (and also a Form W-2, Wage and Tax Statement) will be granted are:

• The filer suffered a catastrophic event in a federally declared disaster area that made the filer unable to resume operations or made necessary records unavailable.

• A filer’s operation was affected by the death, serious illness or unavoidable absence of the individual responsible for filing information returns.

• The operation of the filer was affected by fire, casualty or natural disaster.

• The filer was “in the first year of establishment.”

• The filer didn’t receive data on a payee statement such as Schedule K-1, Form 1042-S, or the statement of sick pay required under IRS regulations in time to prepare an accurate information return.

Need help?

If you have questions about filing Form 1099-NEC or any tax forms, contact us. We can assist you in staying in compliance with all rules.

© 2020