Tax Updates

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Tax Alert: Inflation Reduction Act Provisions That Impact You!

August 31, 2022

In light of the recently enacted Inflation Reduction Act of 2022, S&G wants to make sure all clients are aware of several new component tax credits that may be useful when planning year-end expenditures and estimated tax. The following sections highlight some particularly interesting aspects for both individuals and small business owners alike but please don’t hesitate to contact one of our team members with questions about how they impact you directly!

Nonbusiness Energy Property Credit

Before the enactment of the Act, the credit for specified nonbusiness energy property expenditures (i.e., new windows) made by individual taxpayers expired in January 1, 2022. However, now taxpayers are able to take the credit for energy-efficient property placed in service through January 1, 2033. The Act also increases the credit for a tax year from 10% to 30% of the amount paid or incurred for qualified energy efficiency improvements, including residential energy property, installed during that year. In addition, the $500 lifetime credit limit has been eliminated and replaced with annual caps depending on the type of property. For example, installing a new heat pump will be eligible for a 30% credit up to $2,000 per year.

Residential Clean-Energy Credit

Prior to the Act, you were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes in years before 2024. However, the Act has extended that credit to be valid through 2034 while expanding it to include qualified battery storage technology expenditures and increasing the rate from 26% to 30%.

New Credits for Clean Vehicles

While the maximum credit per new vehicle is still $7,500 the Act imposes new eligibility restrictions. Firstly, as of 2023 there is a new income eligibility requirement for taxpayers, which provides that these credits are only applicable if your modified adjusted gross income in the year of purchase (OR the preceding year, whichever is less) does not exceed $300,000 if married filing jointly, $225,000 for heads of household, or $75,000 for single filers and married filing separately. Secondly, the Act establishes that no credit is allowed for vehicles above a certain MSRP (vans/trucks/SUVs are limited to $80,000 and all others are limited to $55,000).

Unlike in prior years, qualified buyers who acquire and place in service a previously owned clean vehicle after 2022 are allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price. The maximum price per vehicle is $25,000 and no credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return, $112,500 for a head of household, or $75,000 for others.

Finally, there is a new qualified commercial clean-vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. This tax credit is 15% of a qualifying vehicle’s cost (30% if the vehicle does not have an internal combustion engine) but is limited to the incremental cost of the vehicle compared to its traditional counterpart. The credit for light-duty vehicles is limited to $7,500, while heavy-duty vehicles can qualify for tax credits of up to $40,000.

The computation of these credits is not straight forward so please contact S&G if you believe you are eligible!

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Refunds For All (Most)!

Attention all Massachusetts taxpayers: if you had an income tax liability in 2021 and file your return timely (by October 17, 2022) than you are entitled to a refund! Yes, you read that correctly. In a rare twist of fate, the Commonwealth, often dubbed “taxachusetts,” will be returning taxes that it collected in excess of its annual revenue cap in accordance with an obscure law dating back to 1986. However, rather than bore you with all the legislative history behind this statutory wrinkle and why it was triggered let’s just focus on how it will impact you!

To qualify, you must have filed a 2021 return on or before October 17, 2022, however, this includes both resident AND nonresident filings. The refund eligible taxpayers can expect to receive is roughly 13% of their 2021 Massachusetts personal income tax liability, although this is a preliminary figure provided by the state and could change slightly. The finalized amount to be returned to taxpayers, along with additional details, will be announced after the October 17^th extended filing deadline.

It is important to note that your calculated “liability” may be different from whether or not you actually owed money when you filed since withholdings and/or quarterly estimates could have been applied to offset it. In fact, even those that already received a refund for the 2021 year could  receive  the additional refund … and the best part is that this will NOT be treated as taxable income for Massachusetts purposes in 2022.

For the vast majority of Massachusetts filers that are subject to receive this refund, no action is needed as the Commonwealth will automatically remit the payment. The Department of Revenue plans to begin distribution of these refunds in November so keep an eye on the mail and/or your bank account. In the meantime, if you have any questions about this or want to estimate the benefit you may be receiving please contact S&G today!

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IRS False Starts and Lingering Backlog

The IRS has developed a new Schedule K-3, a nineteen-page form, as an attachment to a partnership or S-corporation return for the 2021 tax year. This schedule expands, in great detail, upon any foreign activity that the pass-through entity may have. The idea is to provide much more detail to owners of pass-through entities so that those owners can provide more comprehensive information on foreign activities on their tax returns. However, the form is so detailed, and requires entities to provide the form to its owner even if the entity itself had no foreign activity, that there was pushback from taxpayers, tax preparers, and members of Congress. So, the IRS backed off a little bit, for now.

Certain entities will be excused from preparing this schedule for 2021:

• In 2021, the direct partners in a domestic partnership are not foreign partnerships, corporations, individuals, estates or trusts.
• In 2021, a domestic partnership or S-corporation has no foreign activity, including foreign taxes paid, or ownership of assets that generate foreign source income.
• In 2020, a domestic partnership or S-corporation did not report any foreign activity or foreign taxes paid, and no partners or shareholders requested such information from the company.
• The domestic partnership or S-corporation has no knowledge that the owners are requesting such information for 2021.

Most companies should be able to meet these requirements and thus avoid the requirement to prepare this schedule.

However, if a company is later notified by an owner that they need the information included on the Schedule K-3, the company must provide that information. Should this occur before the company files its 2021 tax return, the entity does not meet the above requirements and must include the Schedule K-3 with its return.

This is a temporary reprieve for 2021. We can look forward to the requirement to prepare this new schedule in future years.

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In other IRS News…

The IRS has a backlog of 6 million 2020 individual income tax returns, many of which have requested refunds! There are also millions of backed up amended returns, business returns and payroll tax returns. Officials cannot provide a timeframe for getting caught up; they just request that taxpayers do not file a second return or contact the IRS.

The service is also failing to timely respond to written correspondence, including mailings where taxpayers have submitted documents in response to IRS requests. This has not stopped the IRS from sending out notices, which has caused confusion among taxpayers. Taxpayer groups and members of Congress have been pressuring the IRS to ease up a bit and the agency is now temporarily halting more than a dozen automated collection notices as it works through its backlog of unprocessed returns. These letters cover balance due notices, intent to levy and unfiled tax returns.

The IRS had been toying with the idea of requiring facial recognition in order for taxpayers to access their on-line accounts. After intense pushback by taxpayers and members of Congress, the IRS has tabled that idea also.

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Startups and Entrepreneurs Should Consider the ‘Qualified Small Business Stock’ Tax Break

To encourage and support entrepreneurship, the federal government provides a Qualified Small Business Stock (“QSBS”) tax break to taxpayers who invest in the stock of a small business. Simply put, if you have invested in a qualified small business corporation, and you sell the stock for a gain, some or all of that gain could be exempt from federal income tax.

From a tax management perspective, prior conventional thinking was to form a Limited Liability Corporation (“LLC”) to minimize one’s yearly tax burdens, as LLC’s have historically possessed significant lower overall tax rates. However, due to recent tax reform, start-ups and entrepreneurs looking to invest/sell in the short-term should consider forming a domestic C-Corporation to not only benefit from the recently reduced current corporate tax rates, but to also attain the preferential QSBS tax exclusion.

Who is Eligible for the QSBS Tax Break?

The operating entity must be a domestic C-Corporation. Generally, individual investors in that corporation, as well as any pass-through shareholder in which income flows through to an individual tax return will qualify for the QSBS exclusion. Eligible pass-through entities include partnerships, S-Corporations, and certain trusts. C-Corporation shareholders in the operating C-Corporation cannot qualify for the QSBS tax break.

Qualifications to Receive QSBS Tax Benefit

Acquisition at Original Issuance

• The investor must have obtained the stock at original issuance from the company or acquired it in a certain nontaxable transfer such as a gift or inheritance of the originally issued stock. Do note that you are not limited to the corporations initial stock offering, any subsequent stock issuances will still qualify for the tax benefit as long as the corporation is still considered a ‘small business’ and the shares acquired are originally issued shares. Shares acquired indirectly through a third party do not qualify as small business stock, and therefore, the exclusion will not apply.
• For qualifying QSBS acquired after September 27, 2010, the tax rule allows you to exclude 100% of the gain. However, this was not always the case. If you acquired stock between August 11, 1993 and February 16, 2009, you can exclude 50% of the gain. And if you acquired stock between February 17, 2009 and September 27, 2010, you can exclude 75% of the gain.

Holding Period

• You must have owned the stock for at least five years. If stock is transferred by gift or inheritance, the transferee is treated as having acquired the stock in the same manner as the transferor.
• During your holding period the corporation must have used at least 80% of its assets (by value) in an active trade or business.

Business Qualifications of the Corporation

• To meet the ‘small business’ requirement, the issuing corporation’s gross assets must not have been more than $50-million before or immediately preceding the issuance of the stock.
• The QSBS exclusion does not apply to certain personal service corporations and certain other excluded activities (particularly those trades involving the performance of services in health, law, engineering, architecture, accounting, performing arts, consulting, athletics, financial services, and actuarial sciences).
• There could be additional state tax benefits. For example, corporations incorporated on or after January 1, 2011, and domiciled in Massachusetts, could qualify for a favorable 3% tax rate instead of the standard 5% tax rate, assuming other parameters are met. Various other states also have their own parameters for tax saving opportunities.

Limitation on Exclusion of QSBS
The exclusion limitations are based on a per taxpayer, per issuing corporation basis. The limit is the greater of the following:

• $10 million ($5 million if married and filing separate) per person per company. This means if you have already taking the exclusion on a prior return that counts toward your $10 million.
  — OR —
• 10 times your original stock basis. This excludes all purchases after your initial purchase of the stock.

Tax Planning

Historically, previously high C-Corporation tax rates had restricted the use of the QSBS, where the additional year-to-year tax burdens significantly outweighed the exclusion benefit. Given the tax changes four years ago, corporate tax rates were reduced significantly providing greater tax savings potential.

Entities currently structured as something other than a C-Corporation could potentially change their entity type to obtain the QSBS exclusion benefits, especially recently established companies that have yet to build significant internal value relative to their overall potential. With this restructuring opportunity, there are numerous other potential landmines which would require an in-depth analysis to determine if a conversion would provide an overall tax benefit. The concern with any restructuring is that gain could be accelerated, which could eliminate the benefits of the QSBS exclusion.

Planning for the QSBS qualification could provide significant tax savings, please contact us if you are interested in learning how this might provide tax savings benefits for you.

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Massachusetts State Tax Update (6/30/2021)

The Proposed Fair Share Amendment Advances to the Ballot

On June 9, 2021, the Massachusetts state legislature passed the Fair Share Amendment, which would impose a 4% surcharge on household income in excess of $1 million. Unlike a statutory enactment, such a change to the state constitution requires one final hurdle prior to becoming law… the ballot in November of 2022. Likewise, should this amendment pass, it would be immune to the more traditional or ordinary statutory repeal process, something opponents of the Fair Share initiative have highlighted as a concern.

Furthermore, it is worth noting that similar proposals have been pursued in the past, most recently in 2018, and although that was unsuccessful it was due primarily to procedural pitfalls rather than lacking the public support. Aside from the overwhelming passage of this iteration in both legislative chambers, the early indication from the public points to continued strong support and thus a high probability that the increase will go into effect for tax year 2023.

The Fair Share Amendment does not make any substantive changes to the Commonwealth’s tax code, either in applicability, structure, or the underlying calculation, meaning that the nature of the income from a W2 wage or K-1 pass-through profits from a partnership or S-Corporation is irrelevant. For business owners in particular, this is an important distinction since they, not the entity itself, will pay the associated income tax and depending on what other streams of income those individuals have in aggregate will dictate the overall impact of this new tax. In other words, the applicability of the 4% surcharge will not directly hinge on the amount of business profit but instead on the total amount of income of each shareholder. Obviously, this is also something to consider for future sales, business transition and exit planning, since any major event or sale is more likely to expose taxpayers to the upper threshold triggering the surcharge.

One final implication of this new rule is one that has lingered in the background since the 2017 Tax Cuts and Jobs Act, and that is the limit on the deductibility of state and local taxes (SALT). Despite the increased state tax burden for some under the proposed amendment they would not reap any additional federal benefit as had been the case historically. As a result, some opponents of the Fair Share Amendment as proposed warn that Massachusetts could have many high earners flee the state, particularly in a time where the ability to work remotely has become more widely accepted.

Ultimately, given the realistic chance this provision will become law (and the difficulty in any subsequent repeal), if your household income is even approaching the $1 million threshold and/or if you are contemplating plans to sell your business or else re-locate in the near future, it is absolutely worth consulting with us now to understand all the options available as well as any offsetting ramifications.

Supreme Court Rejects New Hampshire’s Challenge to Massachusetts

The U.S. Supreme Court rejected a New Hampshire challenge to Massachusetts’ practice of taxing people who once worked in that state but started telecommuting from elsewhere during the pandemic. Issued on Monday June 28, 2021, the order effectively declined to address the issue of payroll sourcing of remote employees, an area that has become extremely contentious between neighboring states throughout the country.

Originally, Massachusetts had adopted a rule in April 2020 in response to the surging pandemic that would maintain a level of status quo such that employees who were told to stay home temporarily would still be considered to work in-state despite living in elsewhere, most notably of course in Connecticut as well as other New England states. New Hampshire quickly objected to this position and filed legal action against Massachusetts asserting that thousands of New Hampshire residents would be negatively, and unfairly, impacted by paying out-of-state income tax for work performed fully within their borders.

This case perhaps garnered the most attention nationwide as it was among the first of dispute of its kind in light of the circumstances, however, for S&G clients in particular we received countless questions as to whether historically out-of-state commuters would still need to file a Massachusetts non-resident return as well as from business owners wondering how to report wages and file/remit payroll taxes. While the Court did not address the question on the merits and thereby give us a substantive answer, for now we at least have a resolution that the current treatment will be procedurally allowed.

As always, S&G will continue to monitor both situations. In the meantime, if you have particular questions about how either of these two State Tax Updates may affect you or your business we advise you to contact us directly.

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Click here to download the PowerPoint from our Business Exit and Value Growth Opportunities Webinar (4/28/21)

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Nexus – Do You Have State Tax Liability Exposure?
Hot Topics and Discussion Points

We have summarized some of the hot topics and discussion points relating to multistate nexus considerations that all business owners should be aware of. If you have any questions or would like further clarification, please let us know, as we would be more than happy to help you out. One of our expertise’s, is running State Nexus Studies.

1. What is Nexus/Why It’s Important?
   • “Nexus” refers to a state’s ability to compel businesses to file tax returns based on their having a sufficient connection with that jurisdiction. However, each state can have varying rules on what rises to the level.
   • For businesses that are rapidly growing, navigating the compliance landscape can be tricky, particularly among several jurisdictions and rapidly changing rules. Thus, this fluid regulatory framework and the constant flux that small businesses are faced with in their day-to-day operations often times results in neglecting certain filing obligations. Unfortunately, even unintentional or unforeseen missteps can create tax exposure as well as related penalties. This is compounded more so for those businesses in the northeast where crossing state lines is a common occurrence.
   • In addition, for those planning exit strategies they should be aware of potential tax exposure that could become an obstacle in the sale process as potential buyers will almost certainly uncover these issues upon due diligence. The ramifications: potential delays in the due diligence process and closing; purchase offers could be adjusted down; higher amounts potentially might have to be put in escrow to cover the potential tax liability (although there is no statute of limitations).
2. Recent Developments
   • To complicate things further, there have been significant developments in the “nexus” interpretation over the past few years, most notably the adoption of nexus without any physical presence (called “economic nexus”) which was a response to the evolution of eCommerce where operations are not necessarily within a fixed geographical location.
   • States are becoming increasingly aggressive in trying to assert nexus as a means to raising revenue and will likely continue given the economic struggles during the pandemic.
   • There have been certain special Covid-19 provisions relating specifically to nexus and remote employees which are still being adjudicated and will undoubtedly have tangible impacts on business owners’ filing obligations.
3. Nexus studies/voluntary disclosures/limitations periods
   • S&G can perform a nexus study to determine whether a business has any outstanding filing obligations and how to become compliant. This is important because there is no statute of limitations for unfiled returns so sticking your head in the sand could result in a decade’s worth of unfiled returns, exposing you to taxes and accumulated interest and penalties.
   • In the event that S&G does uncover some exposure, we can negotiate a ‘voluntary disclosure agreement’ with states on your behalf anonymously through a process they have established as a means of bringing businesses into compliance while reducing the liability owed.

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American Rescue Plan Act (ARPA) Signed into Law
Government Puts Money into Individual and Business’ Pockets

On March 11, 2021, President Biden signed the latest stimulus package into law. This act, known as the American Rescue Plan Act (ARPA), targets some of the most heavily COVID-19 impacted aspects of our economy, including both individual and business tax provisions:

Individual-
Additional 2021 Stimulus Payments – Provides individual stimulus payments of $1,400 per eligible recipient. Unlike the prior 2020 stimulus payments, college-aged and adult dependents are included as eligible recipients under this latest round. Do note however that payments will continue to be phased out for taxpayers with adjusted gross income in excess of $75,000 for single taxpayers and $150,000 for married filing jointly.

Tax-free Unemployment Benefits – A retroactive change was made to unemployment income received during 2020. The first $10,200, per recipient, of unemployment income received during that year will now be tax free for those with adjusted gross income less than $150,000. That threshold is the same regardless of filing status like single or married. In determining this limitation, taxpayers can exclude jobless benefits from their computation of adjusted gross income. Taxpayers who filed their 2020 returns prior to this date should wait on IRS guidance regarding potentially amending their returns, as the IRS is looking into updating their systems to automatically calculate any refunds due.

Increased Child and Dependent Care Tax Credits – The 2021 credit increases from $2,000 to $3,000 per eligible recipient, mainly for qualified children from ages 6 to 17, while also providing an amplified $3,600 credit for a child under 6. These credits also begin phasing out for taxpayers with adjusted gross income in excess of $75,000 for single taxpayers and$150,000 for married filing jointly.

A separate child and dependent care tax credit also receives a one-year boost in 2021, which could max out around $8,000, which is nearly 4-times higher than the 2020 version. Taxpayers with dependent children, under the age of 13, who have dependent care expenses should consider this credit.

Paid Sick and Family Leave Credits – Self-employed individuals can continue to claim the paid sick and family leave credits but the bill also increases the number of days to be included as qualified family leave equivalent amounts from 50 to 60 for periods between April 1, 2021 and September 30, 2021. Paid sick leave equivalent days are continued for 2021, allowing self-employed individuals to claim the credits in both 2020 and 2021.

For all other taxpayers, the act extends and enhances the existing paid sick and family leave credits. First, extending them through September 30, 2021 while also increasing the maximum benefit to $12,000 per employee.

Business-
Extension of the Employee Retention Credit – The act expanded and extended the timeframe for the 2021 version of the ERC. To qualify, a business must either be fully or partially suspended by governmental orders, or the business has a decline in gross receipts by more than 20% when compared to the same quarter in 2019. Originally slated to expire at the end of June, the credit will extend through the end of 2021, being computed as a 70% credit off maximum wages of $10,000 per employee each quarter. For more information on the ERC, please see related postings on our website.

Two additional business groups were also added as part of the act:

• Recovery Startup Businesses – Defined as a business that started after February 15, 2020, has average taxable income of less than $1-million, and that does not otherwise have an eligible quarter in the last six months of 2021. For these businesses, the new ERC will be limited to $50,000 per quarter.
• Severely Financially Distressed Employer – Defined as a business with less than 10% of gross receipts in a quarter when compared to the same quarter in 2019. These businesses can ignore the 500 full-time-equivalent limitation rules.

Excess Business Loss Limitation Extended – Unfortunately, the act also extends the unfavorable excess-business-loss-limitations for non-corporate taxpayers by one year through 2026. These rules limit losses to $250,000 ($500,000 for those married filing jointly). For example, if a single taxpayer has $1-million of income from interest and dividend, and if their total business losses exceed their total business income by $400,000, this individual could only deduct $250,000 of the net business loss against their other income. Therefore, this taxpayer would pay tax on the $750,000 of income, while they would be allowed to carryforward the $150,000 excess business loss to future years.

Shuttered Venue Operators / Restaurant Recovery Plan – Additional aid was provided for these two COVID-19 effected industries within the ARPA act. Payroll Protection Program requirements were eased and grant money was made available.

Please do not hesitate to reach out to S&G for assistance with clarification on any of the aforementioned guidance, including claiming the applicable credits. We highly recommend that you make it a habit to log into our website on a weekly basis, as legislation is continually evolving, and S&G will be providing continued updates.

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Employee Retention Credit (ERC) – Robust Tax Incentive Credits

Retroactive Application of the Employee Retention Credit

With the passage of recent tax reform, Congress made the application of the Employee Retention Credit (ERC) retroactive to include recipients of Payroll Protection Program (PPP) loans in 2020. Prior to this date, the law only allowed taxpayers to claim either the PPP or ERC. Current law allows taxpayers to amend previously filed 2020 payroll tax returns to claim the ERC credit. Please note that businesses cannot utilize the same wages under both the PPP and ERC programs. For example, if a company had $150,000 in wages during 2020 and then utilized $100,000 of those wages to substantiate their PPP loan forgiveness, they could only claim $50,000 of qualified ERC wages.

What is the Employee Retention Credit?

The ERC is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. In 2020 the ERC is applicable for qualified wages paid after March 12, 2020, and before January 1, 2021, however the maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000. Expanding on the prior example where the business had $50,000 in available ERC wages, if there were five employees each making $10,000, the company could claim a $25,000 ERC credit (5-employees * $10,000 employee limit * 50%). If the company only had one employee who was paid the full $50,000 in qualified ERC wages, they would be limited to only a $5,000 ERC credit ($10,000 employee limit* 50%).

There is good news to report on the 2021 ERC version, as the limits have been increased. The ERC is computed similarly but the amount of the credit for 2021 is now 70% of qualifying wages paid up to $10,000 per quarter/per employee throughout all four quarters of 2021. Keeping with the one employee example above, the company is eligible for a maximum $7,000 credit for a total of $28,000, in comparison to the 2020 ERC where the company was limited to $5,000 for the year.

In 2021 the credit limit changes depending on the size of the company:

• For employers with more than 500 employees, this credit is only available for wages paid to employees that were paid not to work. An exclusion exists for “severely financially distressed employers,” defined as those experiencing a gross receipts reduction of more than 90% as compared to the same quarter in 2019, who will be able to ignore this limitation regardless of the size of the employer and number of employees.
• For employers with 500 or less employees, all wages qualify for the credit without regard to whether the employee worked. In 2020 the size for the different qualifications was over/under 100 employees.

Are you eligible for the credit?

Eligible employers for the purposes of the Employee Retention Credit are employers that carried on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

1. Fully or partially suspended operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. See IRS FAQ’s for additional guidance. 
2. Experience a significant decline in gross receipts during the calendar quarter, which for the 2020 credit is defined as 50% or greater decline in gross receipts compared to the same calendar quarter in 2019. For 2021, the decline in gross receipts is reduced from 50% to 20% as compared to the same calendar quarter in 2019. See IRS FAQ’s for additional guidance. 

Note: If you do not meet one of these two criteria, you are illegible for the credit in 2020 and/or 2021. The new law also made the ERC available to businesses that started after February 15, 2020 with the following classification: “recovery start-up business”. They must meet certain criteria to qualify (mainly average annual gross receipts less than $1,000,000). The credit is capped at $50,000 per quarter.

How to claim the credit?

Eligible Employers can claim the ERC with their payroll tax filing, Form 941. Given the retroactive applicability to 2020, taxpayers may amend their previously filed 941 Forms to take the credit. For 2021 employers will claim the 2021 ERC with their quarterly payroll tax filing, Form 941. If the employer’s employment tax obligations are less than the computed ERC, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. We recommend that you discuss this with your payroll provider.

Is there anything else I should know?

If you received or anticipate receiving PPP forgiveness, and you believe that you might qualify for the ERC as an Eligible Employer due to one of the aforementioned factors, we are here, ready to help, please give us a call.

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EIDL Emergency Advances Are Tax-Free

The Payroll Protection Program (PPP) has garnered significant attention over the past year, however, a lesser known Economic Injury Disaster Loan (EIDL) program has also been available to businesses in all 50 states. It provides economic relief to small businesses and nonprofit organizations that are currently experiencing a temporary loss of revenue. As part of the EIDL program, Congress also established a new advance payment program that gave EIDL applicants loan advances of $1,000 per employee, up to $10,000. Although they’re called “advances,” these payments are actually grants – they need not be paid back. Most importantly, the new Consolidated Appropriations Act (CAA) stimulus law provides that the EIDL advances are not taxable income and otherwise deductible business expenses paid with EIDL advances are tax-deductible. Take note that just the EIDL advance payment is forgivable, the corresponding EIDL loan will continue to exist that requires payback.

State Uncertainty
All income, from whatever source derived, is taxable income unless the tax law provides an exception. Since a government grant is income, it is taxable unless otherwise provided by law. There is significant uncertainty regarding the timing and potential application of any federal or state exceptions related to existing grant programs brought about by the COVID-19 pandemic. Resolution to the taxability of these program, outside of the PPP and EIDL advance programs, likely won’t be concluded until after the tax filing deadline. Some states have already issued guidance on their grant program, unfortunately Massachusetts has not been one of them.

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Small Business Expanded Tax Benefits

Small businesses enjoy several tax advantages that may allow them to reduce their tax burdens. Recent tax reform has provided two specific benefits for self-employed individuals.

Revised formula for calculating PPP loans
Self-employed, Schedule C, business owners now can use either gross income or net income on Paycheck Protection Program (PPP) loan applications which are being accepted until March 31, 2021. This will help business owners who were previously excluded from PPP due to little or no net income.

• Gross income can be from either 2019 or 2020 and is capped at $100,000 for calculating the loan. If you have employees, their compensation is also part of the calculation.
• Note that if your gross income is greater than $150,000, you could be subject to SBA review if you choose to use the gross income method.
• Second time borrowers must still demonstrate a 25% reduction in gross receipts in order to qualify.
• Borrowers with approved loans cannot increase their loans using the new rule.

New COVID-19 Sick & Family Leave Tax Credit
The Families First Coronavirus Response Act (FFCRA) provides both companies and self-employed individuals with refundable tax credits for either the cost of paid sick and family leave for employees or for self-employed taxpayer’s lost time relative to COVID-19. Eligible self-employed individuals are entitled to claim qualified sick and family leave equivalent credits on Form 7202 for leave taken between April 1, 2020 and December 31, 2020.

To be an eligible self-employed person, both of the following must be true:

• You regularly carried on a trade or business; and,
• You would have been:
  • Eligible to receive qualified sick leave wages under the Emergency Paid Sick Leave Act if you had been an employee of an employer, other than yourself; and/or,
  • Eligible to receive qualified family leave wages under the Emergency Family and Medical Leave Expansion Act if you had been an employee of an employer, other than yourself.

Taxpayers must maintain appropriate documentation establishing their eligibility for the credits as an eligible self-employed individual; including, but not limited to, the date or dates for which leave is requested, a statement of the COVID-19 related reason the individual is requesting leave and written support for such reason, and a statement that the individual is unable to work, including by means of telework, for such reason.

The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the taxable year that the self-employed individual can’t perform services for which that individual would be entitled to paid family leave, multiplied by the lesser of two amounts: 1) $200 or 2) 67 percent of the average daily self-employment income of the individual for the taxable year.

The qualified sick leave equivalent amount is equal to the number of days (up to 10) during the taxable year that the individual cannot perform services in any trade or business for sick, isolation, or COVID-19 symptom reasons, multiplied by the lesser of $511 or 100 percent of the average daily self-employment income of the individual for the taxable year.

Please contact us with any questions, we are here to assist you.

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Future Tax Outlook

President Biden has made no secret of his desire to raise additional tax revenue, while assuring voters that those earning less than $400,000 annually would not experience an increase in their tax bills. These anticipated tax law changes will be enacted in due time, however due to the world-wide pandemic combined with other priorities, Biden’s tax reforms are unlikely to be enacted retroactively to 2021. More likely these tax reforms will effect taxpayers 2022 tax year filings.

Key elements in Biden’s plan include:

• Increasing the top Ordinary Individual Income Tax Rate back to 39.6%.
• Individuals earning more than $1 million would see an increase in the current favorable Capital Gains & Dividends rates from 20% to 39.6%.
• Adding an additional 12.4% Social Security tax on employees’ earnings over $400,000 in wages.
• Taxpayers with income over $400,000 could see a percent limitation on total Itemized Deductions.
• Itemized Deductions could also be capped at a rate of 28%. Meaning a $100 deduction would receive a benefit of $28, while $100 of income would be taxed at 39.6%.
• The recently reduced Corporate Income Tax Rate would be increased from its current 21% to 28%.
• Biden would look to expand the Earned Income Tax Credit while creating an additional $8,000 tax credit for childcare.

Please stay connected as S&G will continually be providing updates over the coming months.

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Addressing Massachusetts Tax on Forgiven PPP Income

As you know from our earlier emails to you regarding this matter, Massachusetts has not agreed to follow the Federal law regarding the non-taxability of PPP loan forgiveness. However, lobbying to do so continues. In the meantime, Massachusetts has recently clarified their stance on when the income is reported.

The Massachusetts Department of Revenue has interpreted the PPP loan forgiveness as being TAXABLE in the tax year when formal acknowledgement of loan forgiveness is received from the U.S. government. Unless our state legislators act, many PPP recipients will encounter Massachusetts taxability issues. If a business’s loan was not forgiven in 2020, they will report income in 2021 to the extent forgiven. However, as a result of lost 2020 revenue, the business could be faced with operating losses due to the use of the PPP funds to pay expenses. Massachusetts doesn’t allow operating loss carryovers, so businesses in essence won’t get the benefit of the expense deductions, but they will have to report the income.

Thus, the continuing lobbying is essential to have Massachusetts recognize and do something about this situation. In that regard, the Massachusetts Society of CPA’s sent the below messaging to all its members:

We believe the intent of the PPP loan program is to ensure our small businesses remain operational and people remain working. We understand that with March 15 quickly approaching the window to provide the most impactful relief is closing. We continue to convey that enacting the bill as soon as possible is critical.

If you agree, please reach out to your legislator to ask for their support regarding this matter. For your reference, below is a pdf containing a draft sample letter. Further for your convenience we have attached a link to determine your local State Legislator(s). 

The March 15th filing deadline quickly approaches. With the need to assess the tax consequences due to loan forgiveness, coupled with the uncertainty of state taxability, Massachusetts is quickly running out of time to pass essential legislation.

MA PPP Sample Letter

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Self-Employed Individuals: New COVID-19 Sick & Family Leave Tax Credit

The Families First Coronavirus Response Act (FFCRA) provides both companies and self-employed individuals with a refundable tax credits for either the cost of paid sick and family leave for employees or for self-employed’s lost time relative to COVID-19.

Eligible self-employed individuals are entitled to claim qualified sick and family leave equivalent credits on Form 7202 for leave taken between April 1, 2020 and December 31, 2020.

To be an eligible self-employed person, both of the following must be true:

• You regularly carried on a trade or business; and,
• You would have been:
  • Eligible to receive qualified sick leave wages under the Emergency Paid Sick Leave Act if you had been an employee of an employer, other than yourself; and/or,
  • o Eligible to receive qualified family leave wages under the Emergency Family and Medical Leave Expansion Act if you had been an employee of an employer, other than yourself.

Taxpayers must maintain appropriate documentation establishing their eligibility for the credits as an eligible self-employed individual; including, but not limited to, the date or dates for which leave is requested, a statement of the COVID-19 related reason the individual is requesting leave and written support for such reason, and a statement that the individual is unable to work, including by means of telework, for such reason.

The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the taxable year that the self-employed individual can’t perform services for which that individual would be entitled to paid family leave, multiplied by the lesser of two amounts: 1) $200 or 2) 67 percent of the average daily self-employment income of the individual for the taxable year.

The qualified sick leave equivalent amount is equal to the number of days (up to 10) during the taxable year that the individual cannot perform services in any trade or business for sick, isolation, or COVID-19 symptom reasons, multiplied by the lesser of $511 or 100 percent of the average daily self-employment income of the individual for the taxable year.

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PPP Loans – State Tax Uncertainty – Need for Tax Return Extensions

IF YOU RECEIVED A PAYCHECK PROTECTION PROGRAM (PPP) LOAN, YOUR RETURN MAY NEED A TAX FILING EXTENSION.

Following the enactment of the Consolidated Appropriations Act of 2021, the Internal Revenue Service revised its position such that the forgiveness of a PPP Loan does not create taxable income and expenses covered by the PPP Loan are fully deductible. 

End of story…not quite. The different states across the country have been very slow in deciding how they will handle the deductibility of expenses and/or the forgiveness of income. Some states, like New York, have passed legislation or issued guidance mirroring the federal level treatment. Other states, like Rhode Island, have issued no specific guidance. And many states, Massachusetts included, have said either the forgiveness is taxable or the associated expenses are not deductible, BUT, there is legislation slowly moving through state houses across the country to align the state’s tax position with that of the Internal Revenue Service. 

With the uncertainty of when and what the states are going to do, if you have a PPP loan, we want to advise you that your return will probably require an extension of time to file, otherwise if we file with how the state laws currently stand, we may end up having to file amended returns later if legislation is enacted to align the state’s tax position with that of the Internal Revenue Service

As one panelist from the AM&AA Conference concluded in his Thursday, February 11, 2021, presentation on this state level issue that our Managing Partner attended, “We could wind up with every business return (in the country) going on extension as a result.” 

As always, if you have any specific questions you would like to discuss with us, please do not hesitate to contact us directly.

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Additional Tax Saving Ideas (12/2020)

• Enacted on March 27, 2020, the CARES Act established two retroactive provisions that can provide immediate cash flow relief to business owners. The first is the temporary removal of the limitation on net operating losses (NOLs). Under the Tax Reform of 2017 these losses had been limited to 80% of current year taxable income with the balance being carried forward, however, Taxpayers can now utilize their losses to completely offset taxable income. In addition, Taxpayers can now carryback losses originating in 2018 through 2020 back five years. This means you could offset 2015 income with current losses and because tax rates were higher prior to the 2017 Tax Cuts and Jobs Act, the carryback benefit is likely more advantageous than carrying the loss forward. The CARES Act also corrected a drafting error related to Qualified Improvement Property (QIP) made by a taxpayer to an interior portion of an existing building that is nonresidential real property. Under the Tax Reform of 2017 the statutory language did not explicitly provide for 100% first year bonus depreciation for such improvements, but now they are included in the definition of 15-year property, so taxpayers that made such qualified improvements in the past two years can now claim an immediate tax refund for the amount of bonus depreciation they missed.

• In terms of payroll tax relief, the major highlights are the Employee Retention Credit and the Paid Leave Credit. The Employee Retention Credit is a refundable tax credit equal to 50% of wages paid by an eligible employer whose business has been financially impacted by COVID-19, up to $10,000. The Paid Leave Credit reimburses employers for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. Please note that various stipulations exist related to the Employee Retention Credit, most notably that the credit is not available if Payroll Protection Program (“PPP”) funding was received.

• If you are self-employed you might separately qualify for a payroll tax deferral. This deferral would allow payroll taxes to be paid over the next two years. Consult your payroll provider for maximizing these credits/deferrals in 2020.

• Another important reminder for the self-employed is the home office expenses deduction. Unfortunately, employees, even those required to work from home during the pandemic, cannot deduct home office expenses. However, if you are self-employed and your home office is your principal place of business, used regularly and exclusively for conducting business, you could deduct a variety of costs related to that space, such as utilities or repair/maintenance costs.

• If you have a traditional IRA, a partial or full conversion to a Roth IRA can allow you to turn tax-deferred future growth into tax-free growth. It also can provide estate planning advantages, by allowing your entire balance to grow tax-free for the benefit of your heirs. It is important to note that the converted amount is taxable in the year of conversion so this strategy might not be ideal for those individuals looking to minimize cash outflows in light of the current economic situation. However, the possibility of vast legislative changes under a new administration that will likely increase tax rates from the historically low levels currently in effect means that such a conversion would be more beneficial sooner rather than later. To the extent that your income from other sources is down, driving you into a lower tax bracket and you have the ability to pay the associated taxes, this strategy could be a timely opportunity to take advantage of future tax-free growth.

• The CARES Act also suspended the Required Minimum Distributions (RMDs) for 2020 therefor those who didn’t need the cash could opt to defer, if you already budgeted to pay tax on your RMD, rolling that distribution to a Roth IRA could be an option. As explained above once in the Roth IRA, future growth will be tax free.

• Building on the previous retirement planning discussion, the SECURE Act enacted December 20, 2019 removed the age limitation for IRA deductible contributions such that, those over the age of 70½ with earned income may want to consider putting additional funds away for retirement with the added benefit of reducing their 2020 tax.

Although we have listed several tax saving opportunities due to new legislation, overall tax planning needs to take into consideration many different opportunities that are available, while coordinating tax savings strategies to maximize the savings between both the current and upcoming year. As always, we are here to answer any tax planning questions you may have.

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Webinar: Highlights of the 2.3T Spending Bill – Includes $900B Stimulus Package with new PPP Funding 1/11/21

The webinar video will be available shortly.

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Highlights of the 2.3T Spending Bill – Includes $900B Stimulus Package with new PPP Funding 1/11/21

New PPP Loans and Updates on 1st Round PPP Loans

The U.S. Small Business Administration (SBA), in consultation with the Treasury Department, announced that the Paycheck Protection Program (PPP) will re-open the week of January 11th for new borrowers and certain existing PPP borrowers. 

To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11 and Second Draw PPP Loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter. Applications will be accepted until March 31, 2021 or until funds run out.

Key PPP Updates:

• Certain existing PPP borrowers are now eligible to apply for a Second Draw PPP Loan: 
• Must have spent entire First Draw PPP loan before receiving Second Draw disbursement.
• Must demonstrate a reduction in gross receipts of at least 25% comparing a quarter in 2020 to same quarter in 2019.
• No more than 300 employees.
• PPP borrowers can set their PPP loan’s covered period to be any length between 8 and 24 weeks to best meet their business needs.
• PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures.
• The Program’s eligibility is expanded to include 501(c)(6)s, housing cooperatives and direct marketing organizations, among other types of organizations.
• The PPP provides greater flexibility for seasonal employees.
• Certain existing PPP borrowers can request to modify their First Draw PPP Loan amount.
• If Borrowers have not yet applied for forgiveness, they may reapply for a First Draw Loan if they returned all or some of it, or request a modification to their First Draw Loan if they did not accept the full amount to which they were eligible.

Eligibility for a Second Draw PPP Loan:

• Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses.
• Has no more than 300 employees.
• Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

Key Tax Considerations

• PPP-funded expenses are now deductible (overrides previous IRS statements).
• EIDL advances are deemed non-taxable income, similar to forgiven PPP loans.
• Employer FFCRA Credits for paid sick/leave wages extended through 3/31/21.
• Employer Retention Credits (ERC) are extended and increased through 6/30/21.
• However, cannot “double dip” and use PPP funds for payroll at the same time that you are claiming FFCRA Credits or ERC.

January 20, 2021 Webinar 10:00 a.m. – 11:00 p.m. Please attend our webinar where we will cover key issues including:

• PPP Eligibility for First Time Borrowers versus Second Time Borrowers.
• Calculating PPP Loan Amounts.
• Maximizing Forgiveness and Expanded Eligible Costs (worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations).
• Beneficial Tax Changes: PPP-funded expenses are now deductible, EIDL advances are non-taxable, EIDL advances no longer impact PPP forgiveness.
• Other Employer Credits and Deferrals that can reduce or delay cash outflows for payroll liabilities.

Key SBA Links:

SBA issued multiple updates related to the new law in January, including:

Summary of First Draw rules: https://home.treasury.gov/system/files/136/Top-line-Overview-of-First-Draw-PPP.pdf

First Time Borrower Application Form: https://home.treasury.gov/system/files/136/PPP-Borrower-Application-Form.pdf

Summary of Second Draw https://home.treasury.gov/system/files/136/Top-line-Overview-of-Second-Draw-PPP.pdf

Second Time Borrower Application Form: https://home.treasury.gov/system/files/136/PPP-Second-Draw-Borrower-Application-Form.pdf

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PPP Related Expenses Deductibility Update 11/18/20

As many of us are in the midst of tax planning, the overriding hot topic concerns the handling of expense deductibility related to PPP loans. Although the loan forgiveness was expressly stated by Congress not to be included as taxable income, the Treasury/IRS in its April guidance cited a particular section in the Internal Revue Code and stated that the expenses paid from such proceeds are non-deductible. The Treasury has stated that it will not reverse its position until Congress passes a law ruling otherwise.

This was reinforced in the IRS’s release of Rev. Rul. 2020-27 on November 18, stating “A taxpayer that received a covered loan guaranteed under the PPP and paid or incurred certain otherwise deductible expenses listed in section 1106(b) of the CARES Act may not deduct those expenses in the taxable year in which the expenses were paid or incurred if, at the end of such taxable year, the taxpayer reasonably expects to receive forgiveness of the covered loan on the basis of the expenses it paid or accrued during the covered period, even if the taxpayer has not submitted an application for forgiveness of the covered loan by the end of such taxable year.”

As always, we continue to monitor news from Washington and will advise you if Congress acts to override the IRS ruling.

PPP Update for Borrowers with Loans of $2 Million or More

The SBA has developed two questionnaires, one for for-profit businesses and one for non-profit borrowers, that will go to PPP borrowers with loans, together with their affiliates, totaling $2 million or more. These questionnaires are part of the SBA’s review of the program, including review of good-faith certifications and economic need of loan recipients meeting the $2 million threshold.

For-profit: https://arbcpa.com/wp-content/uploads/2020/10/SBA Form 3509 PPP Loan Neces.pdf
Non-profit: https://arbcpa.com/wp-content/uploads/2020/10/SBA Form 3510 PPP Loan Neces.pdf

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PPP Loan Forgiveness Update Effective 10/8/20

On October 8, 2020 the SBA and Treasury issued a new ruling that greatly simplifies forgiveness for borrowers with total PPP loans of $50,000 or less. Note that this ruling is NOT applicable to borrowers that together with their affiliates received loans totaling $2 million or greater. The new ruling details the following:

• A borrower of a PPP loan or $50K or less can use a new form 3508S to apply for forgiveness.
• Eligible borrowers are exempt from reductions in forgiveness amount based on reductions in FTE or reductions in salary/wages that would otherwise apply.
• On the 3508S, the borrower simply inputs the total allowable payroll and non-payroll costs, not to exceed the PPP loan amount; no other calculations are needed.
• The borrower must still make the usual certifications and submit backup documentation such as third-party payroll reports, tax forms, statements, invoices, etc.

As we enter tax planning season, we are still awaiting guidance on other major questions, including the need to maintain FTE if you apply for forgiveness before the end of your loan covered period. There is also the ongoing dispute between the IRS, which stated in April that PPP expenses associated with tax-free income are nondeductible, while Congress has said that was not their intent in the CARES Act.

We are available to assist you with your 2020 projected taxable income and to advise on your loan forgiveness timing as updated guidance becomes available, as you have 10 months to apply for forgiveness once your loan period ends. At the moment, it is likely that there will be two approaches: deduct PPP expenses in 2020 because forgiveness will not be granted until 2021 (and report taxable income in 2021 for amounts forgiven), OR forego deducting PPP expenses in 2020 because you anticipate full forgiveness in 2021. Either way, until further clarification is issued, your planning needs to consider the impact of the potential non-deductible expenses.

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Webinar: PPP – A Roadmap & Strategies to Maximize Use

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Governor Baker Phase-In Plan for Massachusetts Businesses

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Helpful Links for the Paycheck Protection Program

The PPP-Forgiveness-Application can be found at: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf

For Paycheck-Protection-Program-Frequently-Asked-Questions visit: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

You can find the US Treasury PPP Loan website at: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses

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Webinar: Maximize Loan Forgiveness – How to Track & Spend Your PPP Money

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CARES Act – Paycheck Protection Program Update 4/1/20

• Lenders received initial loan application instructions from the SBA late yesterday and received the application form.
• Secretary Mnuchin stated that he expected to have the program up and running by April 3rd.
• The PPP Act provided that any unspent loan proceeds on the allowable expenses that were defined by the new law would have to be paid back within a maximum of 10 years with a maximum rate of interest of 4%. In yesterday’s guidance to the banks they set the payback period to 2 years and a rate of interest of .5%. (We assume a short time period was selected to ensure that the money is used as intended by the new law.)
• The CARES Act is separate from the Small Business Administration (SBA) Direct Disaster Relief Loan which is maxed out at $2M. Applicants can not apply to both programs.

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Coronavirus Aid, Relief and Economic Security Act (CARES Act)

Paycheck Protection Program – Small Business Loan Guarantees

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SBA Economic Injury Disaster Loans For Coronavirus Related Economic
Disruptions Webinar Highlights
March 23, 2020

The following are certain highlights of the Covid 19 Virus SBA Loan Assistance Program. Some of which were comments made by Ili Spahiu, the SBA representative conducting the webinar:

• Up to $2M can be borrowed based on not being able to get needed credit elsewhere, current need and repayment ability
• 30 year loan at 3.75% interest (2.75 for non-profits)
• No payments for first 12 months
• Does not go through banks, it’s a direct loan from the Government
• No fees to apply or borrow
• There is no place on the Loan Application to put in a requested loan amount (the SBA will determine that based on financial information submitted)
• Approval of loans still needs to be based on historic cash flow (not the more recent since the crisis hit) to demonstrate ability to pay
• Credit Score of 600 and above
• Credit Scores below 600 will still be considered, but on a case by case basis
• Loans over $25,000 need personal guarantee
• All owners of 20% or more must guarantee loan
• Loan will be secured by real estate if available (2nd lien position)
• If no real estate available, will take pledge of other available assets
• Recommended to use the Electronic Loan Application for faster processing
• Infrastructure was not built for the amount of claims being received so can be very slow
• It is encouraged that you keep trying to get yourself in the process que and try later at night
• Application must match the business name and address exactly as the Federal Income Tax Return filing. Biggest reason for applications being bounced
• When you register, you’ll be asked to set up a password. This will allow you to go back into your file, as needed, to complete the application as you pull together the financial information that’s required.
• Upon final submittal of the application, you’ll get a case number that you can then refer too
• Current loan process time is 4 weeks and is projected to get longer
• If your funding need can’t wait 4 weeks or more, look into getting a bridge loan which you can then pay back from the SBA proceeds

Note: that late Wednesday night, March 25 2020, the Senate passed the Keeping American Workers Paid and Employment Act. The House will vote on it Friday. If it passes as is, there is another Business Relief Loan Program of up to $10M for qualifying businesses. Business owners will have to decide which loan provisions are more favorable to them and choose one to apply to. The law specifically prohibits applying to both. Once the law is passed and signed by the President we will update our resource materials accordingly.

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DOL’s Family First Coronavirus Response Act Q&A

As provided under new legislation, the U.S. Department of Labor will be issuing implementing regulations. Additionally, as warranted, the Department will continue to provide compliance assistance to employers and employees on their responsibilities and rights under the FFCRA.

DEFINITIONS

“Paid sick leave” – means paid leave under the Emergency Paid Sick Leave Act.

“Expanded family and medical leave” – means paid leave under the Emergency Family and Medical Leave Expansion Act.

QUESTIONS & ANSWERS
1.  What is the effective date of the Families First Coronavirus Response Act (FFCRA), which includes the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act?

The FFCRA’s paid leave provisions are effective on April 1, 2020, and apply to leave taken between April 1, 2020, and December 31, 2020.

2.  As an employer, how do I know if my business is under the 500-employee threshold and therefore must provide paid sick leave or expanded family and medical leave?

You have fewer than 500 employees if, at the time your employee’s leave is to be taken, you employ fewer than 500 full-time and part-time employees within the United States, which includes any State of the United States, the District of Columbia, or any Territory or possession of the United States. In making this determination, you should include employees on leave; temporary employees who are jointly employed by you and another employer (regardless of whether the jointly-employed employees are maintained on only your or another employer’s payroll); and day laborers supplied by a temporary agency (regardless of whether you are the temporary agency or the client firm if there is a continuing employment relationship). Workers who are independent contractors under the Fair Labor Standards Act (FLSA), rather than employees, are not considered employees for purposes of the 500-employee threshold.

Typically, a corporation (including its separate establishments or divisions) is considered to be a single employer and its employees must each be counted towards the 500-employee threshold. Where a corporation has an ownership interest in another corporation, the two corporations are separate employers unless they are joint employers under the FLSA with respect to certain employees. If two entities are found to be joint employers, all of their common employees must be counted in determining whether paid sick leave must be provided under the Emergency Paid Sick Leave Act and expanded family and medical leave must be provided under the Emergency Family and Medical Leave Expansion Act.

In general, two or more entities are separate employers unless they meet the integrated employer test under the Family and Medical Leave Act of 1993 (FMLA). If two entities are an integrated employer under the FMLA, then employees of all entities making up the integrated employer will be counted in determining employer coverage for purposes of expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act.

3.  If I am a private sector employer and have 500 or more employees, do the Acts apply to me?

No. Private sector employers are only required to comply with the Acts if they have fewer than 500 employees.[1]

4.  If providing child care-related paid sick leave and expanded family and medical leave at my business with fewer than 50 employees would jeopardize the viability of my business as a going concern, how do I take advantage of the small business exemption?

To elect this small business exemption, you should document why your business with fewer than 50 employees meets the criteria set forth by the Department, which will be addressed in more detail in forthcoming regulations.

You should not send any materials to the Department of Labor when seeking a small business exemption for paid sick leave and expanded family and medical leave.

5.  How do I count hours worked by a part-time employee for purposes of paid sick leave or expanded family and medical leave?

A part-time employee is entitled to leave for his or her average number of work hours in a two-week period. Therefore, you calculate hours of leave based on the number of hours the employee is normally scheduled to work. If the normal hours scheduled are unknown, or if the part-time employee’s schedule varies, you may use a six-month average to calculate the average daily hours. Such a part-time employee may take paid sick leave for this number of hours per day for up to a two-week period, and may take expanded family and medical leave for the same number of hours per day up to ten weeks after that.

If this calculation cannot be made because the employee has not been employed for at least six months, use the number of hours that you and your employee agreed that the employee would work upon hiring. And if there is no such agreement, you may calculate the appropriate number of hours of leave based on the average hours per day the employee was scheduled to work over the entire term of his or her employment.

6.  When calculating pay due to employees, must overtime hours be included?

Yes. The Emergency Family and Medical Leave Expansion Act requires you to pay an employee for hours the employee would have been normally scheduled to work even if that is more than 40 hours in a week.

However, the Emergency Paid Sick Leave Act requires that paid sick leave be paid only up to 80 hours over a two-week period. For example, an employee who is scheduled to work 50 hours a week may take 50 hours of paid sick leave in the first week and 30 hours of paid sick leave in the second week. In any event, the total number of hours paid under the Emergency Paid Sick Leave Act is capped at 80.

If the employee’s schedule varies from week to week, please see the answer to Question 5, because the calculation of hours for a full-time employee with a varying schedule is the same as that for a part-time employee.

Please keep in mind the daily and aggregate caps placed on any pay for paid sick leave and expanded family and medical leave as described in the answer to Question 7.

Please note that pay does not need to include a premium for overtime hours under either the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act.

7.  As an employee, how much will I be paid while taking paid sick leave or expanded family and medical leave under the FFCRA?

It depends on your normal schedule as well as why you are taking leave.

If you are taking paid sick leave because you are unable to work or telework due to a need for leave because you (1) are subject to a Federal, State, or local quarantine or isolation order related to COVID-19; (2) have been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or (3) are experiencing symptoms of COVID-19 and are seeking medical diagnosis, you will receive for each applicable hour the greater of:
◦ your regular rate of pay,
◦ the federal minimum wage in effect under the FLSA, or
◦ the applicable State or local minimum wage.

In these circumstances, you are entitled to a maximum of $511 per day, or $5,110 total over the entire paid sick leave period.

If you are taking paid sick leave because you are: (1) caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19 or an individual who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; (2) caring for your child whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 related reasons; or (3) experiencing any other substantially-similar condition that may arise, as specified by the Secretary of Health and Human Services, you are entitled to compensation at 2/3 of the greater of the amounts above.

Under these circumstances, you are subject to a maximum of $200 per day, or $2,000 over the entire two week period.

If you are taking expanded family and medical leave, you may take paid sick leave for the first ten days of that leave period, or you may substitute any accrued vacation leave, personal leave, or medical or sick leave you have under your employer’s policy. For the following ten weeks, you will be paid for your leave at an amount no less than 2/3 of your regular rate of pay for the hours you would be normally scheduled to work. The regular rate of pay used to calculate this amount must be at or above the federal minimum wage, or the applicable state or local minimum wage. However, you will not receive more than $200 per day or $12,000 for the twelve weeks that include both paid sick leave and expanded family and medical leave when you are on leave to care for your child whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 related reasons.

To calculate the number of hours for which you are entitled to paid leave, please see the answers to Questions 5-6 that are provided in this guidance.

8.  What is my regular rate of pay for purposes of the FFCRA?

For purposes of the FFCRA, the regular rate of pay used to calculate your paid leave is the average of your regular rate over a period of up to six months prior to the date on which you take leave.[2] If you have not worked for your current employer for six months, the regular rate used to calculate your paid leave is the average of your regular rate of pay for each week you have worked for your current employer.

If you are paid with commissions, tips, or piece rates, these wages will be incorporated into the above calculation.

You can also compute this amount for each employee by adding all compensation that is part of the regular rate over the above period and divide that sum by all hours actually worked in the same period.

9.  May I take 80 hours of paid sick leave for my self-quarantine and then another amount of paid sick leave for another reason provided under the Emergency Paid Sick Leave Act?

No. You may take up to two weeks—or ten days—(80 hours for a full-time employee, or for a part-time employee, the number of hours equal to the average number of hours that the employee works over a typical two-week period) of paid sick leave for any combination of qualifying reasons. However, the total number of hours for which you receive paid sick leave is capped at 80 hours under the Emergency Paid Sick Leave Act.

10.  If I am home with my child because his or her school or place of care is closed, or child care provider is unavailable, do I get paid sick leave, expanded family and medical leave, or both—how do they interact?

You may be eligible for both types of leave, but only for a total of twelve weeks of paid leave. You may take both paid sick leave and expanded family and medical leave to care for your child whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 related reasons. The Emergency Paid Sick Leave Act provides for an initial two weeks of paid leave. This period thus covers the first ten workdays of expanded family and medical leave, which are otherwise unpaid under the Emergency and Family Medical Leave Expansion Act unless the you elect to use existing vacation, personal, or medical or sick leave under your employer’s policy. After the first ten workdays have elapsed, you will receive 2/3 of your regular rate of pay for the hours you would have been scheduled to work in the subsequent ten weeks under the Emergency and Family Medical Leave Expansion Act.

Please note that you can only receive the additional ten weeks of expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act for leave to care for your child whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 related reasons.

11.  Can my employer deny me paid sick leave if my employer gave me paid leave for a reason identified in the Emergency Paid Sick Leave Act prior to the Act going into effect?

No. The Emergency Paid Sick Leave Act imposes a new leave requirement on employers that is effective beginning on April 1, 2020.

12.  Is all leave under the FMLA now paid leave?

No. The only type of family and medical leave that is paid leave is expanded family and medical leave under the Emergency Family and Medical Leave Expansion Act when such leave exceeds ten days. This includes only leave taken because the employee must care for a child whose school or place of care is closed, or child care provider is unavailable, due to COVID-19 related reasons.

13.  Are the paid sick leave and expanded family and medical leave requirements retroactive?

No.

14.  How do I know whether I have “been employed for at least 30 calendar days by the employer” for purposes of expanded family and medical leave?

You are considered to have been employed by your employer for at least 30 calendar days if your employer had you on its payroll for the 30 calendar days immediately prior to the day your leave would begin. For example, if you want to take leave on April 1, 2020, you would need to have been on your employer’s payroll as of March 2, 2020.

If you have been working for a company as a temporary employee, and the company subsequently hires you on a full-time basis, you may count any days you previously worked as a temporary employee toward this 30-day eligibility period.

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Summary Key Provisions – Keeping American Workers Paid and Employment Act

Note: Late Wednesday night, March 25 2020, the Senate passed the Keeping American Workers Paid and Employment Act. The summary of key provisions is based on provisions that the Senate passed. The House approved and the President signed it into law Friday. Upon review we will be updating our resource materials accordingly.