PPP Application Deadline Extended to May 31

New legislation extends the Paycheck Protection Program (PPP) application deadline from March 31 to May 31. The PPP Extension Act of 2021 also gives the Small Business Administration (SBA) an additional 30 days beyond May 31 to process those loans.

The new deadline applies whether a business is applying for a first-time PPP loan or a second-draw PPP loan.

Changes made to the PPP in the past few months were designed to give businesses more flexibility with PPP funding, including tax exemption for expenses paid for with PPP monies, and eligibility for sole proprietors, independent contractors, and self-employed. The application and reporting have also been streamlined.

Visit the SBA website for details and loan applications.

If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.

Current exemption amounts

For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.

In or out of your estate

Under the estate tax rules, insurance on your life will be included in your taxable estate if:

Your estate is the beneficiary of the insurance proceeds, or
You possessed certain economic ownership rights (called “incidents of ownership”) in the policy at your death (or within three years of your death).

It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.

The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights that, if held by you, will cause the proceeds to be taxed in your estate include:

The right to change beneficiaries,
The right to assign the policy (or revoke an assignment),
The right to pledge the policy as security for a loan,
The right to borrow against the policy’s cash surrender value, and
The right to surrender or cancel the policy.

Be aware that merely having any of the above powers will cause the proceeds to be taxed in your estate even if you never exercise them.

Buy-sell agreements and trusts

Life insurance obtained to fund a buy-sell agreement for a business interest under a “cross-purchase” arrangement won’t be taxed in your estate (unless the estate is the beneficiary).

An irrevocable life insurance trust (ILIT) is another effective vehicle that can be set up to keep life insurance proceeds from being taxed in the insured’s estate. Typically, the policy is transferred to the trust along with assets that can be used to pay future premiums. Alternatively, the trust buys the insurance with funds contributed by the insured. As long as the trust agreement doesn’t give the insured the ownership rights described above, the proceeds won’t be included in the insured’s estate.

The three-year rule

If you’re considering setting up a life insurance trust with a policy you own currently or simply assigning away your ownership rights in such a policy, consult with us to ensure you achieve your goals. Unless you live for at least three years after these steps are taken, the proceeds will be taxed in your estate. (For policies in which you never held incidents of ownership, the three-year rule doesn’t apply.)

The due date for filing 2020 individual income tax returns, and paying any tax due with the 2020 return, is now Monday, May 17. Interest and penalties will also not apply for that period.

The IRS has clarified contribution deadlines and other issues related to the extension:

Contributions to IRAs and Roth IRAs, Health Savings Accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), and Coverdell Education Savings Accounts (Coverdell ESAs) for 2020 are now allowed to be made through May 17, 2021.
Tax on premature distributions from retirement plans will also not be due until May 17, 2021:
Form 5498 – IRA Contributions Information reports your IRA contributions to the IRS. Your IRA trustee or issuer is required to file the form and provide it to participants and beneficiaries by June 30.

Visit Yeo & Yeo’s Tax Resource Center for useful links, tax guides, tax articles on our blog, webinars, podcasts and more. Please contact your Yeo & Yeo tax professional with questions or concerns

Also read:

Michigan Extends 2020 Tax Filing and Payment Deadline from April 15 to May 17

IRS Extends 2020 Individual Tax Filing and Payment Deadline from April 15 to May 17

Yeo & Yeo is pleased to welcome Stephanie Vogel as the firm’s Senior Human Resources Manager. Stephanie will take charge of the firm’s four-person HR team following Kelly Smith’s retirement on March 31 from the Director of Human Resources position.

Smith joined the firm in 2002 and was instrumental in implementing the firm’s automated employee performance appraisal process and paperless personnel files. She was responsible for the firm’s payroll administration system and managed the firm’s healthcare plan, employee benefits and human resource policies and procedures. She received the firm’s prestigious Tom Thompson Award in 2009 and the Spirit of Yeo Award in 2017.

“Kelly has worked tirelessly to ensure our HR systems, policies, practices and benefit programs are among the best in our industry,” said President & CEO Thomas Hollerback. “Under Kelly’s leadership, the firm won numerous awards for many of our HR initiatives, including Michigan’s Best in Wellness for seven consecutive years. She has been a dedicated and hardworking team player with a deep understanding of our values and culture.”

Stephanie Vogel will lead the firm’s HR team as Senior Human Resources Manager. Vogel earned a Master of Science in Administration from Central Michigan University and has more than 17 years of HR experience. She holds the SHRM-SCP credential and is a Certified Benefits Professional (CBP) and Certified Compensation Professional (CCP). In addition to her HR management expertise, Vogel is a big-picture strategist, developing and implementing firm-wide HR programs and policies.

“Yeo & Yeo’s HR processes far surpass those of other HR teams I’ve worked with,” Vogel said. “I am excited to be part of the firm’s family-focused and community-oriented culture, and I can’t wait to continue Kelly’s legacy of developing state-of-the-art processes and benefits programs.”

The American Rescue Plan Act of 2021 (ARPA), signed by President Biden on March 11, 2021, extended and significantly modified the payroll tax credits for qualifying sick leave and family leave wages. Below is a summary of the key provisions.

Background: Both COVID-19-related credits were initially provided by the Families First Coronavirus Response Act and first applied to eligible wages paid from April 1, 2020, through December 31, 2020. In December of 2020 the Consolidated Appropriations Act of 2021 extended the credits, with some modifications, to apply to wages paid through March 31, 2021.

Extension of both credits. ARPA further extended both the paid sick leave credit and paid family leave credit to apply to wages paid through September 30, 2021.

Modifications to both credits. Beginning with respect to wages paid on April 1, 2021, ARPA made modifications to the credits. The following are the modifications that affect non-government employers:

The credits are applied against the Medicare portion of payroll taxes instead of the OASDI (Social Security) portion. The Medicare portion taxes against which the credit is applied are those of all employees, not just employees to whom qualifying leave wages are paid. Additionally, the credits continue to be refundable (and thus allowed in excess of the Medicare taxes) and advance refundable (they can be applied against any employment taxes, including income tax withholding, for the quarter in which eligible leave wages are being paid, with any remaining credit refundable at the end of the quarter).
Unlike under the Consolidated Appropriations Act of 2021, ARPA allows employers who voluntarily provide 80 hours of emergency paid sick leave and 12 weeks of emergency family leave beginning after March 31, 2021, to claim the leave tax credits, thereby resetting the leave bank regardless if the employee used leave previously or has exhausted leave.
Reasons for eligible leave are expanded to include obtaining or recovering from COVID-19 immunization.
The credits are increased by both the amount of the OASDI taxes paid and Medicare taxes paid with respect to eligible wages, instead of just the Medicare taxes.
The credits are increased by the amounts of certain collectively bargained pension and apprenticeship program benefits. Under ARPA, the credits continue to be increased by qualified health plan expenses, but under clarified rules.
Rules are provided that coordinate the credits with second draw Payroll Protection Program loans and certain government grants.
The no-double-benefit rule, which disallows claiming both: 1) either of the above credits, and 2) the income tax credit for family or medical leave, is expanded to include similar coordination with certain other income and payroll tax credits.
An employer is ineligible for the credits if, in providing paid leave, the employer discriminates in favor of highly compensated or full-time employees or on the basis of employment tenure.
IRS is allowed an extended limitation-on-assessment period for deficiencies due to claiming either of the credits.

Modification to the paid sick leave credit. Effective beginning with wages paid on April 1, 2021, in determining whether the 10-day limit on eligible wages is complied with, only days after March 31, 2021, are taken into account.

Modifications to the paid family leave credit. Effective beginning with wages paid on April 1, 2021:

The per-employee limit of wages taken into account is raised from $10,000 to $12,000.
Reasons for eligible leave are expanded to include any qualifying reasons for taking paid sick leave.
The two-week waiting period has been eliminated.

Contact your Yeo & Yeo professional if you have questions about the ARPA changes to the credits or how they apply to your business.

Are you considering buying or replacing a vehicle that you’ll use in your business? If you choose a heavy sport utility vehicle (SUV), you may be able to benefit from lucrative tax rules for those vehicles.

Bonus depreciation

Under current law, 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in a calendar year. New and pre-owned heavy SUVs, pickups and vans acquired and put to business use in 2021 are eligible for 100% first-year bonus depreciation. The only requirement is that you must use the vehicle more than 50% for business. If your business usage is between 51% and 99%, you can deduct that percentage of the cost in the first year the vehicle is placed in service. This generous tax break is available for qualifying vehicles that are acquired and placed in service through December 31, 2022.

The 100% first-year bonus depreciation write-off will reduce your federal income tax bill and self-employment tax bill, if applicable. You might get a state tax income deduction, too.

Weight requirement

This option is available only if the manufacturer’s gross vehicle weight rating (GVWR) is above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, usually found on the inside edge of the driver’s side door where the door hinges meet the frame.

Note: These tax benefits are subject to adjustment for non-business use. And if business use of an SUV doesn’t exceed 50% of total use, the SUV won’t be eligible for the expensing election, and would have to be depreciated on a straight-line method over a six-tax-year period.

Detailed, contemporaneous expense records are essential — in case the IRS questions your heavy vehicle’s claimed business-use percentage.

That means you’ll need to keep track of the miles you’re driving for business purposes, compared to the vehicle’s total mileage for the year. Recordkeeping is much simpler today, now that there are apps and mobile technology you can use. Or simply keep a small calendar or mileage log in your car and record details as business trips occur.

If you’re considering buying an eligible vehicle, doing so and placing it in service before the end of this tax year could deliver a big write-off on your 2021 tax return. Before signing a sales contract, consult with us to help evaluate the right tax moves for your business.

Audit committees face many challenges in 2021. As the economy rebounds from the COVID-19 pandemic, there are new dimensions to the oversight roles and responsibilities of the audit committees. Consider taking these following four steps to fortify your committee’s effectiveness.

1. Focus on fundamentals

Once you’ve wrapped up the financial reporting process for fiscal year 2020, take the time to revisit goals and expectations to develop an agenda for 2021 that directs the audit committee’s attention back to the basics. The committee is responsible for oversight of the following key areas:

Financial reporting,
Disclosures,
Internal controls, and
The company’s audit process.

Each agenda item before the audit committee should ideally relate to one of these areas.

2. Assess the composition of the audit committee

Periodically, it’s appropriate to assess the level of financial expertise that each member of the committee possesses, especially if the composition of the group has recently changed. If the company anticipates significant changes in the regulatory environment, now may be the time to add suitably qualified members to the audit committee. At least one member of the audit committee should possess in-depth financial expertise.

Today, companies are increasingly recognizing the value of adding gender and racial diversity to decision-making bodies, including audit committees. These companies believe diversity is a strength that leads to better-informed decisions and fresh perspectives.

3. Get a handle on operational risk

Your company’s risk profile may have changed during the pandemic. For example, you may have temporarily cut staff or deferred capital investments to preserve cash flow during uncertain times.

However, these crisis-driven decisions may adversely affect the company’s long-term financial performance. The audit committee should consider asking management to review significant operational decisions made in the last year to determine if excess risk was created and whether it’s time to change course.

In addition, operational changes and increased financial pressures on accounting staff may expose the company to increased risk of internal and external fraud. And remote working arrangements could lead to cyberattacks and theft of intellectual property. Proactively assessing these issues can dramatically reduce the probability of losses occurring.

4. Consider exposure to financial difficulties across the supply chain

The pandemic also may have affected certain suppliers and customers, especially those located in states with COVID-19-restrictions on business operations. The audit committee should evaluate whether management has identified the company’s material relationships and the potential financial and operational impact if any of those businesses close or file for bankruptcy.

Full speed ahead

By taking proactive measures, your audit committee can help improve your company’s performance as the economy returns to full capacity. Contact us to help position your company to minimize risks and maximize value-added opportunities in 2021 and beyond.

Information in this article has been updated as of April 28, 2021.

The SBA will release the grant application on Friday, April 30, starting at 9:00 a.m. The SBA will begin accepting applications on Monday, May 3, at noon. Visit restaurants.sba.gov to apply.

The American Rescue Plan created the Restaurant Revitalization Fund (RRF) to provide $28.6 billion in relief for small and mid-sized restaurants. The Fund grants will be distributed by the Small Business Administration (SBA).

Restaurants, bars and other food service businesses that receive grants through the relief package would not need to pay them back as long as they use the funds for essential operating expenses. Such expenses include payroll, mortgages, rent, utilities, and personal protection equipment.

Other entities eligible for support from the RRF include food stands, food trucks, food carts, caterers, saloons, inns, taverns, lounges, brewpubs, tasting rooms, taprooms, and licensed beverage alcohol producers where the public may taste, sample, or purchase products.

Grants will be equal to pandemic-related revenue losses of up to $10 million per entity or $5 million per physical location. The grants are calculated by subtracting 2020 revenue (and any PPP monies received) from 2019 revenue. Entities are limited to 20 locations.

Grant timeline

The SBA will release the grant application on Friday, April 30. The SBA will begin accepting applications on Monday, May 3.

All eligible applicants should submit applications as soon as the portal opens. During the first 21 days of grants, the SBA will prioritize applications from women-, veteran- and minority-owned establishments. After the 21 days, eligible applications will be funded on a first-come-first-served basis.

As part of the program, $5 billion in funding will also be reserved for the smallest independent restaurants, which before COVID-19 earned $500,000 or less in a year.

Restaurant relief grants could be used for a variety of expenses, including:

Payroll costs
Principal and interest on a mortgage
Rent payments, including rent on a lease agreement (not including prepayments)
Utilities
Maintenance, including new outdoor seating construction
Supplies including PPE and cleaning materials
Food and beverage inventory
Covered supplier costs
Operational expenses
Paid sick leave

The covered period for what expenses can be paid by the grant must be incurred between February 15, 2020, to December 31, 2021.

Restaurant and bar owners can prepare now

Register for an account in advance at restaurants.sba.gov starting Friday, April 30, at 9 a.m. EDT. According to the SBA, if you are working with Square or Toast, you do not need to register beforehand on the application portal.

To assist you in the application process, refer to the following SBA resources:

It was previously reported that businesses planning to apply for the RRF grant would need to sign up for a Data Universal Numbering System (DUNS) number and register with the U.S. Federal Government’s System for Award Management (SAM). On March 30, 2021, the SBA confirmed that RRF grant program applicants will not need to register for a DUNS number or register on SAM.gov. This is a change from early March when it was expected that applications would require this process.

You should work with your accountant to prepare documentation that clearly shows your gross revenue loss in 2020 compared to 2019.

Contact your Yeo & Yeo professional if you have questions or need assistance.

Last week, the Internal Revenue Service announced that the due date for filing 2020 individual federal income tax returns and paying any tax due with the 2020 return is now Monday, May 17.

To align with this decision for federal taxes, the Michigan Department of Treasury extended the state tax filing deadline to May 17, 2021. First-quarter estimates for tax year 2021 remain due on April 15. The extension does not apply to fiduciary returns or corporate returns, or city income taxes.

The extended filing and payment due date to May 17 is automatic. Taxpayers do not need to file any additional forms or contact the Michigan Department of Treasury to qualify.

Also read: IRS Extends 2020 Individual Tax Filing and Payment Deadline from April 15 to May 17

During the COVID-19 pandemic, many employees and their families have lost group health plan coverage because of layoffs or reduced hours. If your business has had to take such steps, and it’s required to offer continuing health care coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA), the recently passed American Rescue Plan Act (ARPA) includes some critical provisions that you should be aware of.

100% subsidy

Under the ARPA, assistance-eligible individuals (AEIs) may receive a 100% subsidy for COBRA premiums during the period beginning April 1, 2021, and ending on September 30, 2021.

An AEI is a COBRA qualified beneficiary — in other words, an employee, former employee, covered spouse or covered dependent — who’s eligible for and elects COBRA coverage because of a qualifying event of involuntary termination of employment or reduction of hours. For purposes of the law, the subsidy is available for AEIs for the period beginning April 1, 2021, and ending September 30, 2021.

Extended election period

Individuals without a COBRA election in effect on April 1, 2021, but who would be an AEI if they did, are eligible for the subsidy. Those who elected but discontinued COBRA coverage before April 1, 2021, are also eligible if they’d otherwise be an AEI and are still within their maximum period of coverage.

Individuals meeting these criteria may make a COBRA election during the period beginning on April 1, 2021, and ending 60 days after they’re provided required notification of the extended election period. Coverage elected during the extended period will commence with the first period of coverage beginning on or after April 1, 2021, and may not extend beyond the AEI’s original maximum period of coverage.

Duration of coverage

As explained, the subsidy is available for any period of coverage in effect between April 1, 2021, and September 30, 2021. However, eligibility may end earlier if the qualified beneficiary’s maximum period of coverage ends before September 30, 2021. Eligibility may also end if the qualified beneficiary becomes eligible for coverage under Medicare or another group health plan other than coverage consisting of only excepted benefits or coverage under a Health Flexible Spending Arrangement or Qualified Small Employer Health Reimbursement Arrangement.

Other provisions

The ARPA’s COBRA provisions go beyond the subsidy. For example, they stipulate that group health plan sponsors may voluntarily allow AEIs to elect to enroll in different coverage under certain circumstances. In addition, group health plans must issue notices to AEIs regarding the:

Availability of the subsidy and option to enroll in different coverage (if offered),
Extended election period, and
Expiration of the subsidy.

The U.S. Department of Labor is expected to issue model notices addressing all three points.

Further explanation

The COVID-19 crisis has emphasized the importance of health care coverage. Our firm can further explain the ARPA’s COBRA provisions and help you manage the financial risks of offering health care benefits to your employees.

The new American Rescue Plan Act (ARPA) provides eligible families with an enhanced child and dependent care credit for 2021. This is the credit available for expenses a taxpayer pays for the care of qualifying children under the age of 13 so that the taxpayer can be gainfully employed.

Note that a credit reduces your tax bill dollar for dollar.

Who qualifies?

For care to qualify for the credit, the expenses must be “employment-related.” In other words, they must enable you and your spouse to work. In addition, they must be for the care of your child, stepchild, foster child, brother, sister or step-sibling (or a descendant of any of these), who’s under 13, lives in your home for over half the year, and doesn’t provide over half of his or her own support for the year. The expenses can also be for the care of your spouse or dependent who’s handicapped and lives with you for over half the year.

The typical expenses that qualify for the credit are payments to a day care center, nanny or nursery school. Sleep-away camp doesn’t qualify. The cost of kindergarten or higher grades doesn’t qualify because it’s an education expense. However, the cost of before and after school programs may qualify.

To claim the credit, married couples must file a joint return. You must also provide the caregiver’s name, address and Social Security number (or tax ID number for a day care center or nursery school). You also must include on the return the Social Security number(s) of the children receiving the care.

The 2021 credit is refundable as long as either you or your spouse has a principal residence in the U.S. for more than half of the tax year.

What are the limits?

When calculating the credit, several limits apply. First, qualifying expenses are limited to the income you or your spouse earn from work, self-employment, or certain disability and retirement benefits — using the figure for whichever of you earns less. Under this limitation, if one of you has no earned income, you aren’t entitled to any credit. However, in some cases, if one spouse has no actual earned income and that spouse is a full-time student or disabled, the spouse is considered to have monthly income of $250 (for one qualifying individual) or $500 (for two or more qualifying individuals).

For 2021, the first $8,000 of care expenses generally qualifies for the credit if you have one qualifying individual, or $16,000 if you have two or more. (These amounts have increased significantly from $3,000 and $6,000, respectively.) However, if your employer has a dependent care assistance program under which you receive benefits excluded from gross income, the qualifying expense limits ($8,000 or $16,000) are reduced by the excludable amounts you receive.

How much is the credit worth?

If your AGI is $125,000 or less, the maximum credit amount is $4,000 for taxpayers with one qualifying individual and $8,000 for taxpayers with two or more qualifying individuals. The credit phases out under a complicated formula. For taxpayers with an AGI greater than $440,000, it’s phased out completely.

These are the essential elements of the enhanced child and dependent care credit in 2021 under the new law. Contact us if you have questions.

Are you thinking about launching a business with some partners and wondering what type of entity to form? An S corporation may be the most suitable form of business for your new venture. Here’s an explanation of the reasons why.

The biggest advantage of an S corporation over a partnership is that as S corporation shareholders, you won’t be personally liable for corporate debts. In order to receive this protection, it’s important that the corporation be adequately financed, that the existence of the corporation as a separate entity be maintained and that various formalities required by your state be observed (for example, filing articles of incorporation, adopting by-laws, electing a board of directors and holding organizational meetings).

Anticipating losses

If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, each of you can deduct your percentage share of these losses on your personal tax returns to the extent of your basis in the stock and in any loans you make to the entity. Losses that can’t be deducted because they exceed your basis are carried forward and can be deducted by you when there’s sufficient basis.

Once the S corporation begins to earn profits, the income will be taxed directly to you whether or not it’s distributed. It will be reported on your individual tax return and be aggregated with income from other sources. To the extent the income is passed through to you as qualified business income, you’ll be eligible to take the 20% pass-through deduction, subject to various limitations. Your share of the S corporation’s income won’t be subject to self-employment tax, but your wages will be subject to Social Security and Medicare taxes.

Are you planning to provide fringe benefits such as health and life insurance? If so, you should be aware that the costs of providing such benefits to a more than 2% shareholder are deductible by the entity but are taxable to the recipient.

Be careful with S status

Also be aware that the S corporation could inadvertently lose its S status if you or your partners transfers stock to an ineligible shareholder such as another corporation, a partnership or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation — once at the corporate level and again when distributed to you. In order to protect you against this risk, it’s a good idea for each of you to sign an agreement promising not to make any transfers that would jeopardize the S election.

Consult with us before finalizing your choice of entity. We can answer any questions you have and assist in launching your new venture.

The Employee Retention Credit (ERC), which was created to encourage employers to keep their workforces intact during the COVID-19 pandemic, has been with us for a year. But questions about it remain for many employers. With the new American Rescue Plan Act (ARPA) extending the credit and expanding eligibility — and the credit worth as much as $28,000 per employee for 2021 — employers should brush up on the details.

Credit history

The CARES Act, which was enacted in March of 2020, generally made the ERC available to employers whose:

Operations were fully or partially suspended due to a COVID-19-related government shutdown order, or
Gross receipts dropped more than 50% compared to the same quarter in the previous year (until gross receipts exceed 80% of gross receipts in the earlier quarter).

The credit originally equaled 50% of “qualified wages” — including health care benefits — up to $10,000 per eligible employee from March 13, 2020, through December 31, 2020. As a result, the maximum benefit for 2020 is $5,000 per employee.

The Consolidated Appropriations Act (CAA), which was enacted in December of 2020, extended the credit for eligible employers that continue to pay wages during COVID-19 closures or recorded reduced revenue through June 30, 2021. That wasn’t the only change the law made to the ERC, though.

The CAA increased the amount of the credit to 70% of qualified wages, beginning January 1, 2021, and raised the limit on per-employee qualified wages from $10,000 per year to $10,000 per quarter. In other words, you can obtain a credit as high as $7,000 per quarter per employee.

The CAA also expanded eligibility by reducing the requisite year-over-year gross receipt reduction from 50% to only 20%. And it raised the threshold for determining whether a business is a “large employer” — and therefore subject to a stricter standard when computing the qualified wage base — from 100 to 500 employees.

Under the CARES Act, Paycheck Protection Program (PPP) loan borrowers weren’t allowed to claim ERCs. The CAA also provided that employers that receive PPP loans still qualify for the ERC for qualified wages not paid with forgiven PPP funds. (This provides an incentive for PPP borrowers to maximize the nonpayroll costs for which they claim loan forgiveness.)

ARPA changes

The ARPA extends the ERC through the end of 2021. It also makes some changes that apply solely to the third and fourth quarters of the year. For example, the credit will be applied against an employer’s share of Medicare taxes, rather than Social Security taxes; excess credits continue to be refundable.

The new law expands the pool of employers who can take advantage of the credit by establishing a third path — beyond the suspension of operations or decline in gross receipts — to eligibility. Now, so-called “recovery startup businesses” may also qualify for the ERC.

A recovery startup business generally is an employer that:

Began operating after February 15, 2020, and
Has average annual gross receipts of less than or equal to $1 million.

While these employers can claim the credit without suspended operations or reduced receipts, it’s limited to $50,000 total per quarter.

The ARPA also targets extra relief at “severely financially distressed employers,” meaning those with less than 10% of gross receipts for 2021 when compared to the same period in 2019. Such employers can count as qualified wages any wages paid to an employee during any calendar quarter — regardless of employer size. Otherwise, the ARPA continues to distinguish between large employers and small employers for purposes of determining qualified wages.

For large employers that averaged more than 500 full-time employees during 2019 (or 2020 if the employer didn’t exist in 2019), qualified wages are those paid to an employee who isn’t providing services because of the circumstances that made the employer eligible for the ERC. For smaller employers, qualified wages include wages paid — regardless of whether the employee was working — during the period of suspended operations or the calendar quarter in which the gross receipts test was satisfied.

Qualified wages can’t include wages used to compute other credits, loan forgiveness or certain grants received from the Small Business Administration. This applies to all eligible employers.

Note that the ARPA extends the statute of limitations for the IRS to evaluate ERC claims. The IRS will have five years, as opposed to the typical three years, from the date the original return for the calendar quarter for which the credit is computed is deemed filed.

IRS guidance on “partial suspension of operations”

In early March 2021, prior to passage of the ARPA, the IRS issued additional guidance on the ERC. Among other things, it provides some help for determining whether operations were partially suspended because of a COVID-19-related government order.

The IRS has previously stated that “more than a nominal portion” of operations had to be suspended. In Notice 2021-20, it explained that this criterion is met when:

Gross receipts from the suspended operations are 10% or more of total gross receipts,
Hours of service performed by employees in the suspended operations are 10% or more of total hours of service, or
Modifications to operations result in a reduction of 10% or more of the employer’s ability to provide goods or services.

The notice provides additional guidance, but it’s applicable only for the ERC in 2020.

A complicated calculation

The precise amount of your ERC will vary depending on the period, your number of employees and other factors. We can help ensure that you properly calculate your credit and don’t leave money on the table.

The IRS has announced that the federal income tax filing deadline for individuals for the 2020 tax year is extended from April 15, 2021, until Monday, May 17, 2021. The IRS extended the deadline to provide relief to taxpayers facing challenges as a result of the pandemic and because it’s grappling with a rising backlog of 24 million unprocessed returns. As part of its announcement, the IRS stated it would soon be issuing additional guidance about the deadline extension.

Extended deadline details

Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. Individual taxpayers will automatically avoid interest and penalties on the taxes paid by May 17.

Individual taxpayers don’t need to file any forms to qualify for this automatic federal tax filing and payment relief. If you need additional time to file beyond the May 17 deadline, you can request a filing extension until October 15 by filing Form 4868. Filing Form 4868 gives you until October 15 to file your 2020 tax return but doesn’t grant you an extension of time to pay taxes due. You should pay the federal income tax due by May 17, 2021, to avoid interest and penalties.

Estimated payment deadline not extended

This relief doesn’t apply to estimated tax payments that are due on April 15, 2021. These payments are still due on that date. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. In general, estimated tax payments are made quarterly to the IRS if your income isn’t subject to income tax withholding. This includes self-employment income, interest, dividends, prize winnings, alimony and rental income. Many taxpayers automatically have taxes withheld from their paychecks and sent to the IRS by their employers.

State tax returns not included

Be aware that the federal tax filing deadline postponement to May 17, 2021, applies to only individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021. It doesn’t apply to state tax payments or deposits or payments of any other type of federal tax. Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and aren’t always the same as the federal filing deadline. Check with your tax advisor or your state tax authority for more information.

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

File as soon as possible

Be aware that this extended deadline is optional. If you’re ready to file, contact us for an appointment to prepare your return. You’ll want to file as soon as possible — especially if you’re due a refund.

Yesterday, the Internal Revenue Service announced that the due date for filing 2020 individual income tax returns, and paying any tax due with the 2020 return, is now Monday, May 17.

At the time of this release, the extended due date applies only to the filing of federal individual income tax returns and payment of any associated 2020 federal tax due. First quarter estimates for 2021 are still due on April 15. No guidance has yet been issued on whether things such as IRA and HSA contributions will have a due date of April 15 or May 17. We recommend that absent specific IRS guidance, clients plan that these contributions are due on April 15.

Additionally, certain other entities and filings that generally have a due date of April 15, such as calendar year-end C Corporations, trusts, gift tax returns, FBAR reporting, etc., have not been granted an extension of time to file. If the IRS issues further guidance that changes the due date for filings other than individual income tax returns, Yeo & Yeo will make you aware of the changes as quickly as possible. Absent further guidance, clients should plan to file or extend all other types of tax returns by April 15.

To allow your Yeo & Yeo tax professional adequate time to complete your return before the deadline, we ask that you provide your information as quickly as possible and no later than April 1.
If Yeo & Yeo does not receive your tax documents by April 15, your tax return will be extended.

We will share any changes in tax filing deadlines for State or other returns as they become available.

Visit Yeo & Yeo’s Tax Resource Center for useful links, tax guides, tax articles on our blog, webinars, podcasts and more. Please contact your Yeo & Yeo tax professional with questions or concerns.

Also read:

2020 IRA, HSA, MSA and ESA Contributions Extended

Michigan Extends 2020 Tax Filing and Payment Deadline from April 15 to May 17

Many businesses have retained employees during the COVID-19 pandemic and enjoyed tax relief with the help of the employee retention credit (ERC). The recent signing of the American Rescue Plan Act (ARPA) brings good news: the ERC has been extended yet again.

The original credit

As originally introduced under last year’s CARES Act, the ERC was a refundable tax credit against certain employment taxes equal to 50% of qualified wages, up to $10,000, that an eligible employer paid to employees after March 12, 2020, and before January 1, 2021. An employer could qualify for the ERC if, in 2020, there was a:

Full or partial suspension of operations during any calendar quarter because of governmental orders limiting commerce, travel or group meetings because of COVID-19, or
Significant decline in gross receipts (less than 50% for the same calendar quarter in 2019).

The definition of “qualified wages” depends on staff size. If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those paid to employees who aren’t providing services because operations were suspended or due to the decline in gross receipts. Qualified wages may include certain health care costs and are capped at $10,000 per employee. These employers could count wages only up to the amount that the employee would’ve been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, also including health care costs and capped at $10,000 per employee, paid to any employee during the period operations were suspended or the period of the decline in gross receipts — regardless of whether employees are providing services.

Expansion and extensions

Under the Consolidated Appropriations Act (CAA), signed into law at the end of 2020, the ERC was extended through June 30, 2021. The CAA also expanded the ERC rate of credit from 50% to 70% of qualified wages. The law further expanded eligibility by:

Reducing the required year-over-year gross receipts decline from 50% to 20%,
Providing a safe harbor that allows employers to use previous quarter gross receipts to determine eligibility,
Increasing the limit on creditable wages from $10,000 in total to $10,000 per calendar quarter (that is, $10,000 for first quarter 2021 and $10,000 for second quarter 2021), and
Raising the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees (meaning wages qualify for the credit even if the employee is working).

Most recently, the ARPA further extended the ERC from June 30, 2021, until December 31, 2021. The 70% of qualified wages is also extended for this period, as is the allowance for up to $10,000 in qualified wages for any calendar quarter. This means an employer could potentially have up to $40,000 in qualified wages per employee through 2021.

Valuable break

We can help you determine whether your business qualifies for the ERC and, if so, how much the credit may reduce your tax bill.

The American Rescue Plan Act, signed into law on March 11, provides a variety of tax and financial relief to help mitigate the effects of the COVID-19 pandemic. Among the many initiatives are direct payments that will be made to eligible individuals. And parents under certain income thresholds will also receive additional payments in the coming months through a greatly revised Child Tax Credit.

Here are some answers to questions about these payments.

What are the two types of payments?

Under the new law, eligible individuals will receive advance direct payments of a tax credit. The law calls these payments “recovery rebates.” The law also includes advance Child Tax Credit payments to eligible parents later this year.

How much are the recovery rebates?

An eligible individual is allowed a 2021 income tax credit, which will generally be paid in advance through direct bank deposit or a paper check. The full amount is $1,400 ($2,800 for eligible married joint filers) plus $1,400 for each dependent.

Who is eligible?

There are several requirements but the most important is income on your most recently filed tax return. Full payments are available to those with adjusted gross incomes (AGIs) of less than $75,000 ($150,000 for married joint filers and $112,500 for heads of households). Your AGI can be found on page 1 of Form 1040.

The credit phases out and is no longer available to taxpayers with AGIs of more than $80,000 ($160,000 for married joint filers and $120,000 for heads of households).

Who isn’t eligible?

Among those who aren’t eligible are nonresident aliens, individuals who are the dependents of other taxpayers, estates and trusts.

How has the Child Tax Credit changed?

Before the new law, the Child Tax Credit was $2,000 per “qualifying child.” Under the new law, the credit is increased to $3,000 per child ($3,600 for children under age 6 as of the end of the year). But the increased 2021 credit amounts are phased out at modified AGIs of over $75,000 for singles ($150,000 for joint filers and $112,500 for heads of households).

A qualifying child before the new law was defined as an under-age-17 child, whom the taxpayer could claim as a dependent. The $2,000 Child Tax Credit was phased out for taxpayers with modified AGIs of over $400,000 for joint filers, and $200,000 for other filers.

Under the new law, for 2021, the definition of a qualifying child for purposes of the Child Tax Credit includes one who hasn’t turned 18 by the end of this year. So 17-year-olds qualify for the credit for 2021 only.

How are parents going to receive direct payments of the Child Tax Credit this year?

Unlike in the past, you don’t have to wait to file your tax return to fully benefit from the credit. The new law directs the IRS to establish a program to make monthly advance payments equal to 50% of eligible taxpayers’ 2021 Child Tax Credits. These payments will be made from July through December 2021.

What if my income is above the amounts listed above?

Taxpayers who aren’t eligible to claim an increased Child Tax Credit, because their incomes are too high, may be able to claim a regular credit of up to $2,000 on their 2021 tax returns, subject to the existing phaseout rules.

Much more

There are other rules and requirements involving these payments. This article only describes the basics. Stay tuned for additional details about other tax breaks in the new law.

The Taxpayer First Act required certain exempt organizations to file information and tax returns electronically for tax years beginning after July 1, 2019. The IRS continued to accept Form 990-T, Exempt Organization Business Income Tax Return, for 2019 tax years on paper until they could convert the form to an electronic format.

As of the beginning of March 2021, software has been made available to file Form 990-T electronically. Effective in 2021, any 2020 Form 990-T with a due date on or after April 15, 2021, must be filed electronically and not on paper. A limited exception applies for 2020 Form 990-T returns submitted on paper postmarked on or before March 15, 2021.

If your nonprofit organization files its own 990-T, information about software providers supporting the electronic filing of Form 990-T can be found on the IRS’s Exempt Organizations Modernized e-File (MeF) Providers page.

If Yeo & Yeo prepares your organization’s Form 990-T, we will e-file the form according to this recent IRS mandate unless we submitted a paper return before March 15.

For assistance with preparing and filing any Form 990, contact a member of Yeo & Yeo’s Nonprofit Services Group or your local Yeo & Yeo office.

President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.

Here are some of the tax highlights of the ARPA.

The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.

Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).

Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.

Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).

This provision is effective for tax years beginning after December 31, 2020.

Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.

Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.

Much more

These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.

The U.S. Department of Labor (DOL) recently issued EBSA Disaster Relief Notice 2021-01, which is of interest to employers. It clarifies the duration of certain COVID-19-related deadline extensions that apply to health care benefits plans.

Extensions to continue

The DOL and IRS issued guidance last year specifying that the COVID-19 outbreak period — defined as beginning March 1, 2020, and ending 60 days after the announced end of the COVID-19 national emergency — should be disregarded when calculating various deadlines under COBRA, ERISA and HIPAA’s special enrollment provisions.

The original emergency declaration would have expired on March 1, 2021, but it was recently extended. Although the agencies defined the outbreak period solely by reference to the COVID-19 national emergency, they relied on statutes allowing them to specify disregarded periods for a maximum of one year. Therefore, questions arose as to whether the outbreak period was required to end on February 28, 2021, one year after it began.

Notice 2021-01answers those questions by providing that the extensions have continued past February 28 and will be measured on a case-by-case basis. Specifically, applicable deadlines for individuals and plans that fall within the outbreak period will be extended (that is, the disregarded period will last) until the earlier of:

One year from the date the plan or individual was first eligible for outbreak period relief, or
The end of the outbreak period.

Once the disregarded period has ended, the timeframes that were previously disregarded will resume. Thus, the outbreak period will continue until 60 days after the end of the COVID-19 national emergency, but the maximum disregarded period for calculating relevant deadlines for any individual or plan cannot exceed one year.

Communication is necessary

The DOL advises plan sponsors to consider sending notices to participants regarding the end of the relief period, which may include reissuing or amending previous disclosures that are no longer accurate. Sponsors are also advised to notify participants who are losing coverage of other coverage options, such as through the recently announced COVID-19 special enrollment period in Health Insurance Marketplaces (commonly known as “Exchanges”).

Notice 2021-01 acknowledges that the COVID-19 pandemic and other circumstances may disrupt normal plan operations. The DOL reassures fiduciaries acting in good faith and with reasonable diligence that enforcement will emphasize compliance assistance and other relief. The notice further states that the IRS and U.S. Department of Health and Human Services concur with the guidance and its application to laws under their jurisdiction.

Challenges ahead

Plan sponsors and administrators will likely welcome this clarification but may be disappointed in its timing and in how it interprets the one-year limitation. Determinations of the disregarded period that depend on individual circumstances could create significant administrative challenges.

In addition to making case-by-case determinations, plan sponsors and administrators must quickly develop a strategy for communicating these complex rules to participants. Contact us for further information and updates.