Tax Updates

Corona Virus Business Resources

In these unprecedented times, staying informed on daily changes while still trying to operate a business is overwhelming. Visit the Corona Virus Resources page for regular updates including Families First Coronavirus Response Act Q&A from the DOL, SBA loan highlights, and more.

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

Business Exit and Value Growth Opportunities Download

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.

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).
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.
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.

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.

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:

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.
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.

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.

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.

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.

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

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.

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.

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.