Employment

Like most business owners, you’ve probably heard about 100% bonus depreciation — and hopefully you’ve been claiming it when appropriate. It’s available for a wide range of qualifying asset purchases and allows you to deduct the entire expense of an eligible asset in the year it’s placed in service.

But there are many important details to keep in mind as you plan your asset purchases for 2021 and beyond. Here are five key points about this powerful tax-saving tool:

1. It’s scheduled to be reduced and eliminated. 

Under current law, 100% bonus depreciation will be gradually reduced and eliminated for property placed in service in 2023 through 2026. Thus, an 80% rate will apply to property placed in service in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Bonus depreciation will be eliminated for 2027 and later years.

For some aircraft (generally, company planes) and for costs of certain property with a long production period, the reduction is scheduled to take place beginning a year later, from 2024 through 2027. Then it will be eliminated beginning in 2028.

Of course, Congress could pass legislation to extend bonus depreciation.

2. It’s available for new and most used property. 

Before a Tax Cuts and Jobs Act (TCJA) provision went into effect in late 2017, used property didn’t qualify for bonus depreciation. It currently qualifies unless the taxpayer is the party that previously used the property or unless the property was acquired in ineligible transactions. (These are, generally, acquisitions that are tax-free or from a related person or entity.)

3. In some situations you should elect to turn it down. 

Taxpayers can elect out of bonus depreciation for one or more classes of property. The election out may be useful for certain businesses. These include sole proprietorships and pass-through entities, such as partnerships, S corporations and, typically, limited liability companies, that want to prevent the “wasting” of depreciation deductions from applying them against lower-bracket income in the year property was placed in service — instead of applying them against anticipated higher-bracket income in future years.

C corporations are currently taxed at a flat rate. But because an increase to the corporate rate has been proposed, it could also make sense for C corporations to elect out of bonus depreciation this year.

4. Certain building improvements are eligible. 

Before the TCJA, bonus depreciation was available for two types of real property:

1. land improvements other than buildings, such as fencing and parking lots; and
2. qualified improvement property (QIP), a broad category of internal improvements made to nonresidential buildings after the buildings have been placed in service.

The TCJA inadvertently eliminated bonus depreciation for QIP. However, 2020’s CARES Act made a retroactive technical correction to the TCJA that makes QIP placed in service after December 31, 2017, eligible for bonus depreciation.

5. 100% bonus depreciation has — temporarily — reduced the importance of Section 179 expensing. 

If you own a smaller business, you’ve likely benefited from Sec. 179 expensing. This is an elective benefit that, subject to dollar limits, allows an immediate deduction of the cost of equipment, machinery, off-the-shelf computer software and certain building improvements.

Sec. 179 has been enhanced by the TCJA, but the availability of 100% bonus depreciation is economically equivalent and has greatly reduced the cases in which Sec. 179 expensing is useful. If bonus depreciation is reduced and eliminated as scheduled, then the importance of Sec. 179 will return for many taxpayers.

Over the last year, many companies have experienced workforce fluctuations and have engaged independent contractors to address staffing needs. In May, the U.S. Department of Labor (DOL) announced that it had withdrawn the previous administration’s independent contractor rule that had been scheduled to go into effect earlier this year. That rule generally would have made it easier to classify certain workers as independent contractors for the purposes of the Fair Labor Standards Act (FLSA), and thus make them ineligible for minimum wage and other FLSA protections.

While worker classification for DOL purposes isn’t necessarily the same for IRS purposes, now is a good time to revisit the federal tax implications of worker classification.

Tax Obligations

The question of whether a worker is an independent contractor or an employee for federal income and employment tax purposes is a complex one. If a worker is an employee, the company must withhold federal income and payroll taxes, and pay the employer’s share of FICA taxes on the wages, plus FUTA tax. And there may be state tax obligations as well.

These obligations don’t apply if a worker is an independent contractor. In that case, the business simply sends the contractor a Form 1099-NEC for the year showing the amount paid (if the amount is $600 or more).

No Uniform Definition

The IRS and courts have generally ruled that individuals are employees if the organization they work for has the right to control and direct them in the jobs they’re performing. Otherwise, the individuals are generally independent contractors, though other factors are considered.

Some employers that have misclassified workers as independent contractors may get some relief from employment tax liabilities under Internal Revenue Code Section 530. In general, this protection applies only if an employer filed all federal returns consistent with its treatment of a worker as a contractor and treated all similarly situated workers as contractors.

The employer must also have a “reasonable basis” for not treating the worker as an employee. For example, a “reasonable basis” exists if a significant segment of the employer’s industry traditionally treats similar workers as contractors. (Note: Sec. 530 doesn’t apply to certain types of technical services workers. And some categories of individuals are subject to special rules because of their occupations or identities.)

Asking for a Determination

Under certain circumstances, you may want to ask the IRS (on Form SS-8) to rule on whether a worker is an independent contractor or employee. However, be aware that the IRS has a history of classifying workers as employees rather than independent contractors.

Consult a CPA before filing Form SS-8 because doing so may alert the IRS that your company has worker classification issues — and inadvertently trigger an employment tax audit. It may be better to ensure you are properly treating a worker as an independent contractor so that the relationship complies with the tax rules.

Latest Tax Developments

With growth in the “gig” economy and other changes to the ways Americans are working, the question of who is an independent contractor and who is an employee will likely continue to evolve. Stay tuned for the latest developments and contact us for any help you may need with worker classification.

Over the course of the COVID-19 pandemic, many businesses have had to shut down or reduce operations, causing widespread furloughs and layoffs. Fortunately, employers that have kept workers on their payrolls may be eligible for a refundable employee retention credit. Three laws have created, extended and enhanced the credit.

The Original Law

The CARES Act created the employee retention credit in March of 2020. The credit originally:

• Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
• Was subject to an overall wage cap of $10,000 per eligible employee, and
• Was available to eligible large and small employers.

The credit covered wages paid from March 13, 2020, through Dec. 31, 2020.

What’s Changed

The Consolidated Appropriations Act (CAA), signed into law in December of 2020, extended the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021. And now the American Rescue Plan Act (ARPA), signed into law on March 11, has extended it again through Dec. 31, 2021.

In addition, for the first two quarters of 2021, the CAA increased the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter. And it increased the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules). Because of the ARPA extension, these higher wage ceilings now apply to all four quarters of 2021.

Substantial Tax Savings

Additional rules and limits apply to the employee retention credit, and these are just some of the changes made to it. But the potential tax savings can be substantial. Contact your tax advisor at Maggart for more information about this tax saving opportunity.

Almost a year ago, the Paycheck Protection Program (PPP) was launched in response to the COVID-19 crisis. If your company took out such a loan, you’re likely curious about the tax consequences — particularly for loans that have been forgiven — and also about the launch of “second-draw” PPP loans.

Forgiveness Criteria

An eligible recipient may have a PPP loan forgiven in an amount equal to the sum of various costs incurred and payments made during the covered period. These include payroll costs, interest (but not principal) payments on any covered mortgage obligation (for mortgages in place before February 15, 2020), payments for any covered rent obligation (for leases that began before February 15, 2020), and covered utility payments (for utilities that were turned on before February 15, 2020). Also eligible are covered operations expenditures, property damage costs, supplier costs and worker protection expenses.

Your covered period would normally have been the 24-week period beginning on the date you took out the loan (ending no later than December 31, 2020, if that was before the expiration of the 24-week period). If you received a PPP loan before June 5, 2020, you could elect a shorter 8-week covered period. If you didn’t elect the 8-week period and instead used the longer 24-week period, you had to maintain payroll levels for the full 24 weeks to be eligible for loan forgiveness. If you didn’t make an election, the 24-week period applies.

An eligible recipient seeking forgiveness of indebtedness on a covered loan must verify that the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered lease obligation or make covered utility payments.

Debt Cancellation & Deductibility

The reduction or cancellation of indebtedness generally results in cancellation of debt income to the debtor. However, the forgiveness of PPP debt is excluded from gross income. Your tax attributes (net operating losses, credits, capital and passive activity loss carryovers, and basis) won’t generally be reduced on account of this exclusion.

The CARES Act was silent on whether expenses paid with the proceeds of PPP loans could be deducted. The IRS took the position that these expenses were not deductible. However, under the Consolidated Appropriations Act (CAA), enacted at the end of 2020, expenses paid from the proceeds of PPP loans are deductible.

“Second-Draw” PPP Loans

Under the CAA, eligible businesses may be able take out so-called “second-draw” PPP loans. These loans are primarily intended for beleaguered small businesses with 300 or fewer employees that have used up, or will soon use up, the proceeds from initial PPP loans. The maximum second-draw loan amount is $2 million, and only one such loan can be taken out.

To qualify for a second-draw loan, a business must demonstrate at least a 25% decline in gross receipts in any quarter of 2020 as compared to the corresponding quarter in 2019. Qualifying businesses can generally borrow up to 2.5 times their average monthly payroll costs for either the one-year period before the date on which the loan is made or calendar year 2019. The application deadline is March 31, 2021.

Any PPP Tax Questions?

A PPP loan may complicate your company’s 2020 income tax filing, but a second draw could provide a much-needed influx of cash. Please contact Maggart with any questions you might have.

For many businesses, retaining employees has been difficult, if not impossible. If your company has been able to keep all or some of its workers, you may qualify for the payroll tax credit created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, known as the Employee Retention Credit.

Assessing Your Qualifications

The Employee Retention Credit provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees. The credit is available to employers whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings during the novel coronavirus (COVID-19) crisis.

The credit is also available to employers that have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. When such an employer’s gross receipts exceed 80% of the comparable quarter in 2019, the employer no longer qualifies for the credit beginning with the next quarter.

The credit is unavailable to employers benefitting from certain Small Business Administration loan programs or to self-employed individuals.

Examining Wages Paid

For employers that had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether an employee is furloughed or has experienced a reduction in hours.

For employers with more than 100 employees in 2019, only wages paid to employees who are furloughed or face reduced hours because of the employer’s closure or reduced gross receipts are eligible for the credit. No credit is available for wages paid to an employee for any period for which the employer is allowed a Work Opportunity Tax Credit with respect to the employee.

In the context of the credit, the term “wages” includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. Wages don’t include amounts considered for required paid sick leave or required paid family leave under the Families First Coronavirus Response Act. In addition, wages applicable to this credit aren’t taken into account for the employer credit toward paid family and medical leave.

Claiming Advance Payments & Refunds

The IRS can advance payments to eligible employers. If the amount of the credit for any calendar quarter exceeds applicable payroll taxes, the employer may be able to claim a refund of the excess on its federal employment tax return.

In anticipation of receiving the credits, employers can fund qualified wages by 1) accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or 2) requesting an advance of the credit from the IRS on Form 7200, “Advance Payment of Employer Credits Due to COVID-19.” The IRS may waive applicable penalties for employers who don’t deposit applicable payroll taxes in anticipation of receiving the credit.

Obtaining Relief

The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021. Contact Maggart for help determining whether you qualify and, if so, how to claim this tax break.

To help reduce layoffs during the coronavirus (COVID-19) pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act created a new federal income tax credit for employers that keep workers on their payrolls. The credit equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. It’s subject to an overall wage cap of $10,000 per eligible employee. Here are answers to some FAQs about the retention credit.

What Employers Are Eligible?

Eligible employer status for the retention credit is determined on a 2020 calendar quarter basis. The credit is available to employers, including nonprofits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel or group meetings due to COVID-19.

The retention credit can also be claimed by employers that have experienced a greater-than-50% decline in gross receipts for a 2020 calendar quarter compared to the corresponding 2019 calendar quarter. However, the credit is disallowed for quarters following the first calendar 2020 quarter during which gross receipts exceed 80% of gross receipts for the corresponding 2019 calendar quarter.

To illustrate: Suppose a company’s 2020 gross receipts are as follows compared to 2019:

• First quarter: 86%
• Second quarter: 43%
• Third quarter: 92%

The company had a greater-than-50% decline in gross receipts for the second quarter of 2020. So, it’s an eligible employer for purposes of the retention credit for the second and third quarters of 2020. For the fourth quarter of 2020, it’s ineligible because its gross receipts for the third quarter of 2020 exceeded 80% of gross receipts for the third quarter of 2019.

What Wages Are Eligible?

The retention credit is available to cover eligible wages paid from March 13, 2020, through December 31, 2020. For an eligible employer that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible for the credit (subject to the overall $10,000 per-employee wage cap), regardless of whether employees are furloughed due to COVID-19.

For an employer that had more than 100 full-time employees in 2019, only wages of employees who are furloughed or given reduced hours due to the employer’s closure or reduced gross receipts are eligible for the retention credit (subject to the overall $10,000 per-employee wage cap, including qualified health plan expenses allocable to those wages).

The amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee. The $10,000 cap includes allocable health plan expenses. For example, a company pays an employee $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The credit for wages paid to the employee in the second quarter is $4,000 (50% x $8,000). The credit for wages paid to the employee in the third quarter is limited to $1,000 (50% x $2,000) due to the $10,000 wage cap. Any additional wages paid to the employee are ineligible for the credit due to the $10,000 cap.

What Other Rules & Restrictions Apply?

The retention credit is not allowed for:

• Emergency sick leave wages or emergency family leave wages that small employers (generally those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA), because they’re covered by federal payroll tax credits granted by the FFCRA,
• Wages taken into account for purposes of claiming the pre-existing Work Opportunity Tax Credit, and
• Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave.

In addition, the retention credit isn’t available to small employers that receive a potentially forgivable Small Business Administration (SBA) guaranteed Small Business Interruption Loan under the CARES Act’s Paycheck Protection Program.

How Is the Credit Claimed?

Technically, an eligible employer’s allowable retention credit for a calendar quarter is offset against the employer’s liability for the Social Security tax component of federal payroll taxes. That component equals 6.2% of the first $137,700 of an employee’s 2020 wages.

But the credit is “refundable.” That means an employer can collect the full amount of the credit even if it exceeds its federal payroll tax liability.

The allowable credit can be used to offset all of an employer’s federal payroll tax deposit liability, apparently including federal income tax, Social Security tax and Medicare tax withheld from employee paychecks. If an employer’s tax deposit liability isn’t enough to absorb the credit, the employer can apply for an advance payment of the credit from the IRS.

Can You Benefit?

If your business has suffered financially during the COVID-19 pandemic, the CARES Act’s 50% employee retention credit might help you keep workers on the payroll during the crisis. Keep in mind that additional guidance could be released on the credit or more legislation could be signed into law extending or expanding the credit. Our team at Maggart can apprise you of any updates, help you determine whether you’re eligible and explore other tax-saving and financial assistance opportunities that may be available to you during this challenging time.