Taxes

Can Your Business Benefit from the Enhanced Employee Retention Credit?

Business, Employment, Taxes / By

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.

ARPA Provides More Than Just Direct Payments to Taxpayers

Business, Employment, Personal Finance, Taxes / By

On March 11, another round of COVID-19 relief legislation was signed into law. The American Rescue Plan Act (ARPA) includes funding for individuals, businesses, and state and local governments, but also some significant tax-related provisions.

ARPA extends and expands some tax provisions in the CARES Act and the Consolidated Appropriations Act (CAA) and also includes some new tax-related provisions.

A Quick Look

Here’s a quick look at some of the tax provisions that may affect you:

Individuals

  • Recovery rebates of up to $1,400 for singles and heads of households and $2,800 for married couples filing jointly — plus $1,400 per qualifying dependent (including adult dependents) — subject to adjusted gross income (AGI) phaseouts starting at $75,000 for singles, $112,500 for heads of households and $150,000 for joint filers and ending at $80,000, $120,000 and $160,000, respectively
  • Increased Child credit, including advance payments of part of the credit later this year
  • Expanded child and dependent care tax credit
  • Tax-free treatment of forgiven student loan debt
  • Exclusion from gross income of the first $10,200 in unemployment benefits received

Businesses & Other Employers

  • Extended and expanded tax credits for retaining employees, through Dec. 31, 2021
  • Extended and modified payroll tax credits for paid sick and family leave, through Sept. 30, 2021
  • Extended excess business loss limitation, through Dec. 31, 2026
  • Expansion of the Section 162(m) limits on the tax deduction public companies can take for executive compensation to cover the CEO, the CFO and the five next highest paid employees, beginning in 2027

How Will You Benefit?

This is just a brief overview of the tax-related provisions of ARPA. Additional rules and limits apply. Contact your tax advisor at Maggart for more details on these provisions and how you might benefit.

How the Consolidated Appropriations Act Affects Education Funding

College Savings, Personal Finance, Taxes / By

The Consolidated Appropriations Act (CAA), signed into law late last year, contains a multitude of provisions that may affect individuals. For example, if you’re planning to fund a college education or in the midst of paying for one, the CAA covers two important areas:

1. Student Loans 

The CARES Act temporarily halted collections on defaulted loans, suspended loan payments and reduced the interest rate to zero through September 30, 2020. Subsequent executive branch actions extended this relief through January 31, 2021. The CAA leaves in place that expiration date.

Also under the CARES Act, employers can provide up to $5,250 annually toward employee student loan payments on a tax-free basis before January 1, 2021. The payment can be made to the employee or the lender. The CAA extends the exclusion through 2025. The longer term may make employers more willing to offer this benefit.

2. Tax Credits 

Qualified taxpayers generally can claim an education tax break with the American Opportunity credit and the Lifetime Learning credit. Previously, though, the two credits were subject to different income phaseout rules, with the American Opportunity credit available at a greater modified adjusted gross income (MAGI) than the Lifetime Learning credit. In addition, before the new law, there was a higher education expense deduction for qualified tuition and related expenses that taxpayers could opt to claim instead of the credits.

The CAA applies the higher American Opportunity credit phaseouts to the Lifetime Learning credit, effective for tax years beginning after December 31, 2020. The credits will phase out beginning at MAGIs of $80,000 for single filers and ending at $90,000. For joint filers, they will begin to phase out at MAGIs of $160,000 and disappear at $180,000. The new law also eliminates the higher education expense deduction for 2021 and beyond.

The Details of Claiming the Home Office Deduction

Employment, Personal Finance, Taxes / By

Many people have found themselves working from home during the COVID-19 pandemic. If you’re one of them, you might wonder, “Can I claim the home office deduction on my 2020 tax return?”

The short answer is: Only if you’re self-employed. Employees can no longer claim home office expenses, and even self-employed taxpayers must follow strict rules to claim a deduction.

Copious Write-offs

If you qualify, you can deduct the “direct expenses” of the home office. This includes the costs of painting or repairing the home office and depreciation deductions for furniture and fixtures used there. You can also deduct the “indirect” expenses of maintaining the office. This includes the allocable share of utility costs, depreciation and insurance for your home, as well as the allocable share of mortgage interest, real estate taxes and casualty losses.

Alternatively, you can use the simplified method for claiming the deduction — $5 per square foot for up to 300 square feet. Although you won’t be able to depreciate the portion of your home that’s used as an office, you can claim mortgage interest, property taxes and casualty losses as an itemized deduction to the extent otherwise allowable, without needing to apportion them between personal and business use of the home.

Deduction Tests

You can deduct your expenses if you meet any of these three tests:

  1. Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and regularly, as your principal place of business. Your home office is your principal place of business if it satisfies one of two tests. You satisfy the “management or administrative activities test” if you use your home office for administrative or management activities of your business, and you meet certain other requirements. You meet the “relative importance test” if your home office is the most important place where you conduct business, compared with all the other locations where you conduct that business.
  2. Meeting place. You’re entitled to home office deductions if you use your home office, exclusively and regularly, to meet or deal with patients, clients, or customers. The patients, clients, or customers must physically come to the office.
  3. Separate structure. You’re entitled to home office deductions for a home office, used exclusively and regularly for business, that’s located in a separate unattached structure on the same property as your home. For example, this could be in an unattached garage, artist’s studio, or workshop.

You may also be able to deduct the expenses of certain storage space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use to store inventory or product samples.

Limitations Apply

The amount of home office deductions for self-employed taxpayers is subject to various limitations. Proper planning is key to claiming the maximum deduction for your home office expenses. Contact us if you’d like to discuss your situation.

Why the New Child Tax Credit Is so Valuable

Personal Finance, Taxes / By

If you’re a parent, or soon will be, you’re no doubt aware of how expensive it is to pay for food, clothes, activities and education. Fortunately, the federal child tax credit is available to help many taxpayers with children under the age of 17, and there’s a dependent credit for those who are eligible with older children.

An Expanded Tax Break

Before the Tax Cuts and Jobs Act (TCJA) kicked in, the child tax credit was $1,000 per qualifying child. But it was reduced for eligible married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000 ($75,000 for unmarried taxpayers).

Starting with the 2018 tax year, and applying through the 2025 tax year, the TCJA doubled the child tax credit to $2,000 per qualifying child under 17. It also created a $500 credit per dependent who isn’t a qualifying child under 17. There’s no age limit for the $500 credit, but IRS tests for dependency must be met.

The TCJA also substantially increased the thresholds at which the credit begins to phase out. Starting with the 2018 tax year, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of a $1,000) by which their AGI exceeds $400,000. The threshold is $200,000 for other taxpayers. So, many taxpayers who were once ineligible for the credit because their AGI was too high are now eligible to claim it.

SSN Requirement

In order to claim the child tax credit for a qualifying child, you must include the child’s Social Security number (SSN) on your tax return. Under previous law, you could instead use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).

If a qualifying child doesn’t have an SSN, you won’t be able to claim the $2,000 credit. However, you can claim the $500 dependent credit for that child using an ITIN or an ATIN. The SSN requirement doesn’t apply for non-qualifying-child dependents but, if there’s no SSN, you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.

Don’t Miss Out on the Child Tax Credits

The changes made by the TCJA generally increase the value of these credits and widen their availability to more taxpayers. Please contact Maggart for further information or ask about it when we prepare your tax return.

What 2020 Borrowers Need to Know About PPP Loans in 2021

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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.

6 Key Tax Q&As for 2021

Personal Finance, Retirement, Taxes / By

Right now, you may be more concerned about your 2020 tax bill than you are about how to handle your personal finances in the new year. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2021.

Not all tax figures are adjusted for inflation and, even if they are, they may be unchanged or change only slightly each year because of low inflation. In addition, some tax amounts can only change with new tax legislation. Here are six commonly asked (and answered) Q&As about 2021 tax-related figures:

1. How much can I contribute to an IRA for 2021? 

If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2020.)

2. I have a 401(k) plan through my job. How much can I contribute to it? 

For 2021, you can contribute up to $19,500 to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. (These amounts are also the same as they were for 2020.)

3. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? 

In 2021, the threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees is increasing to $2,300 from $2,200 for 2020.

4. How much do I have to earn in 2021 before I can stop paying Social Security tax on my salary? 

The Social Security tax wage base is $142,800 for 2021, up from $137,700 for 2020. That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

5. What’s the standard deduction for 2021? 

The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by significantly increasing the standard deduction and reducing or eliminating various itemized deductions. For 2021, the standard deduction amount is $25,100 for married couples filing jointly (up from $24,800 for 2020). For single filers, the amount is $12,550 (up from $12,400) and, for heads of households, it’s $18,800 (up from $18,650).

So, if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t benefit from itemizing for 2021.

6. How much can I give to one person without triggering a gift tax return in 2021? 

The gift tax annual exclusion for 2021 is $15,000, unchanged from last year. This amount is only adjusted in $1,000 increments, so it typically increases only every few years.

These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact our team at Maggart.

How COVID-19 Legislation May Affect Your Taxes

Business, Employment, Personal Finance, Taxes / By

The Consolidated Appropriations Act (CAA), signed into law Dec. 27, 2020, provides extensive relief in response to the COVID-19 pandemic, such as another round of “recovery rebate” payments to individuals and an expansion of the Paycheck Protection Program (PPP) for businesses and other employers. The legislation includes some tax relief as well.

A Brief Overview

Here’s a brief overview of some of the tax-related provisions that may affect you or your business:

Individuals:

  • Permanent reduction of adjusted gross income (AGI) floor to 7.5% for medical expense deductions
  • Extended nonitemizer deduction for up to $300 of cash donations ($600 for married couples filing jointly) to qualified charities through 2021
  • Extended 100% of AGI deduction limit for cash donations to qualified charities through 2021
  • Extended exclusion for certain employer payments of student loans through 2025

Businesses & Other Employers:

  • Clarification of tax treatment for PPP loans, certain loan forgiveness and other financial assistance under COVID-19 legislation
  • Extended payroll tax credits for paid leave required under the Families First Coronavirus Response Act (FFCRA) through March 2021
  • Extended and expanded tax credits for retaining employees under the Coronavirus Aid, Relief and Economic Security (CARES) Act through June 2021
  • 100% business meals deduction for food and beverages provided by restaurants in 2021 and 2022
  • Extended Work Opportunity credit through 2025
  • Extended New Markets credit through 2025
  • Extended family medical leave credit through 2025

More Details

This is just a brief look at some of the most significant tax-related provisions in this 5,500+ page legislation. Contact Maggart for more details on how the CAA may affect you.

Handle Mutual Funds Carefully at Year End

Money, Personal Finance, Retirement, Taxes / By

As we approach the end of the year, now is a good time to review any mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips.

Avoid Surprises

Unlike with stocks, you can’t avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors. If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, determine how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer Beware

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution, so you’ll owe taxes on the gain without actually achieving an economic benefit.

Seller Beware, Too

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until next year — unless you think you’ll be subject to a higher rate next year. In that scenario, you’d likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it’s possible to select shares for sale that have higher cost bases and longer holding periods (known as the specific identification method), thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think Beyond Taxes

Investment decisions shouldn’t be driven by tax considerations alone. You also need to know your risk tolerance and keep an eye on your overall financial goals. Nonetheless, taxes are still an important factor. Contact Maggart to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

The Tax Impact of Business Property Remediation

Business, Taxes / By

If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be tax-deductible as ordinary and necessary business expenses. Unfortunately, every type of environmental cleanup expense cannot be currently deducted — some cleanup costs must be capitalized (spread over multiple years for tax purposes).

To lower your current year tax bill as much as possible, you’ll want to claim as many immediate income tax benefits as allowed for the expenses you incur. So, it’s a good idea to explore the tax impact of business property remediation before you embark on the project. If you’ve already done cleanup during 2020, review the costs closely before filing your 2020 tax return.

Deduct vs. Capitalize

Generally, cleanup costs are currently deductible to the extent they cover “incidental repairs” — for example, encapsulating exposed asbestos insulation. Other deductible expenses may include the actual cleanup costs, as well as expenses for environmental studies, surveys and investigations, fees for consulting and environmental engineering, legal and professional fees, and environmental “audit” and monitoring costs.

You may also be able to currently claim tax deductions for cleaning up contamination that your business caused on your own property (for example, removing soil contaminated by dumping wastes from your own manufacturing processes and replacing it with clean soil) — if you acquired that property in an uncontaminated state.

On the other hand, remediation costs generally must be capitalized if the remediation:

  • Adds significantly to the value of the cleaned-up property,
  • Prolongs the useful life of the property, or
  • Adapts the property to a new or different use.

In addition, you’ll likely need to capitalize the costs if the remediation makes up for depreciation, amortization or depletion that’s been claimed for tax purposes, or if it creates a separate capital asset that’s useful beyond the current tax year.

However, parts of these types of remediation costs may qualify for a current deduction. It depends on the facts and circumstances of your situation. For instance, in one case, the IRS required a taxpayer to capitalize the costs of surveying for contamination various sites that proved to be contaminated, but the agency allowed a current deduction for the costs of surveying the sites that proved to be uncontaminated.

Complex Treatment

Along with federal tax deductions, state or local tax incentives may be available for cleaning up contaminated property. The tax treatment for the expenses can be complex. If you have environmental cleanup expenses, Maggart can help plan your efforts to maximize the deductions available.