Over the past year, many government stimulus programs were enacted to help businesses and individuals combat the financial impact of the COVID-19 pandemic. Restaurants have been one of the hardest hit industry segments and should explore any and all avenues possible to subsidize efforts to keep the doors open and employees on the payroll. One of the subsidies enacted within the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March 2020 was the Employee Retention Credit (ERC). It was overshadowed by the Paycheck Protection Program (PPP) because the law at the time stated if your company received a PPP loan, it was not eligible to also claim the ERC. Therefore, many companies disregarded the ERC as the PPP loan was a more advantageous program. In December 2020 this dynamic changed. Under the Consolidated Appropriations Act, taxpayers are now able to receive a PPP loan and claim the ERC. What’s more, this change was made retroactive to all of 2020. This change of law, along with an easing of the eligibility requirements, opens the door for many restaurants to claim this valuable credit.  How is the credit determined in 2020? The credit is equal to 50% of qualified wages determined on an employee-by-employee basis and must be calculated separately for each quarter the company is eligible during 2020. The maximum wages allowed in 2020 for all quarters for each employee is $10,000, thus allowing for a maximum credit of $5,000 per employee. Eligible wages generally include payroll and employer paid health plan expenses. A company may not, however, claim the credit on wages that were paid using a PPP loan that was forgiven or wages that were used to determine other payroll tax credits such as WOTC and FFCRA credits. There are many detailed considerations and calculations, including interplay with PPP funds, which need to be made. Restaurants should consult with their tax advisor for assistance to maximize their ERC.
I got a PPP loan, how much will my credit be? As can be seen in the example, the credit available to restaurants can be a meaningful portion of total payroll for the year in addition to the PPP loan that was received. This is because of two traits common among many restaurants during 2020:  Government orders forced most restaurants to limit in-store dining throughout the majority of the year. In many cases, the restaurant business would therefore qualify for the ERC as being “partially suspended” for the duration of the order [1]. Since PPP loans were designed to cover only 2.5 months of wages, there are sufficient wages remaining to also claim the ERC.  Many restaurant employees earn less than $10,000 per year. Therefore, a high percentage of the business total payroll costs qualify for the credit.  What are the eligibility requirements? To qualify, businesses must meet one or more of certain eligibility requirements, including a substantial decline in gross receipts and being suspended by a government order due to COVID-19. While generally obtainable to restaurants, these requirements must be reviewed thoroughly with an advisor to ensure the business is eligible.  How do I claim the credit? The credit is a payroll tax credit and is claimed on Form 941. Because all Forms 941 have been filed for 2020, eligible companies will need to adjust their quarterly payroll reports using Form 941-X to claim the credit.   What’s the impact on my income taxes? You do not need to claim the credit received as taxable income. However, the business must reduce the wage deduction on their income tax return by the amount of the credit received. If your income tax returns have already been filed, an amendment would be necessary.   Is this credit available in 2021? Yes! In fact, the credit is even higher in 2021. Businesses may claim a credit equal to 70% of qualified wages and the wage limits resets each quarter. The result is a maximum of $7,000 per employee per quarter for all of 2021. So, an employer could claim $7,000 per quarter or up to $28,000 per employee if they are eligible for all four quarters in 2021.  Once an afterthought, the ERC is now a valuable benefit to many restaurant owners. Although it requires detailed record keeping and careful calculation, the reward can help sustain your operations. Contact Baker Tilly’s Employee Retention Credit advisors for further guidance.
Resources: [1] Eligibility requirements should be reviewed thoroughly.  Safe harbor tests on gross receipts and other metrics may also apply.

One of the subsidies enacted within the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March 2020 was the Employee Retention Credit (ERC). Read this article to see how the credit is determined for your restaurant and if you qualify for it in 2021.

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The American Rescue Plan Act of 2021 (the Act) passed the U.S. Senate and the House of Representatives and is on its way to being signed into law by President Biden. Of the $1.9 trillion spending bill, $28.6 billion is designated for the Restaurant Revitalization Fund, which is based on the Real Economic Support That Acknowledges Unique Restaurant Assistance Needed To Survive (RESTAURANTS) Act of 2020, will provide relief for small and midsize restaurants. 
 
With the passage of this new legislation, restaurant operators need to understand their eligibility and the benefits provided to them. Similar to the Paycheck Protection Program (PPP) loans, the borrower is required to make a good faith certification that the uncertainty of the current economic conditions makes the grant necessary to support their ongoing operations. Additionally, the business cannot apply for a Shuttered Venue Operators Grant. The eligible businesses that can apply for a grant include: Restaurants Food stands/trucks/carts Caterers Bars/taverns or similar drinking establishments Brewpubs/tasting or tap rooms To qualify for funding, restaurants must not be part of an affiliated restaurant or restaurant group with more than 20 locations. Public companies also are not eligible. Food and drink entities with 20 locations or fewer will qualify for grants equal to the difference between their 2020 and 2019 revenue, with alternative calculations for entities not in business all of 2019 or 2020. The amount of pandemic-related revenue loss is reduced by any amounts received under the PPP loan program. The Act will provide up to $10 million in relief per entity and affiliated businesses (limited to $5 million per physical location). Grants received under this program are exempt from federal income tax, and expenses paid with the funds are deductible. The first 21 days of the grant period will prioritize providing funding to entities owned and controlled by women, veterans and socially and economically disadvantaged small businesses. 

The list of eligible expenses is long, allowing every restaurant to determine their biggest need and seek the appropriate funding. The types of eligible expenses include: Payroll, including paid sick leave  Mortgage principal and interest (but not prepayment of the mortgage) Rent and utilities Maintenance, including construction to accommodate outdoor seating Supplies including protective equipment and cleaning supplies Food and beverages  Covered supplier costs and operational expenses Other costs determined by the administrator to be essential Baker Tilly professionals can help you take advantage of timely and important tax credits for the restaurant industry. 


The fifth federal COVID-19 relief bill is moving on to be signed by the president. The massive bill includes extensions to the employee retention credit, unemployment benefits, PPP qualification parameters among other programs, and it establishes a revitalization fund for restaurants. Read this article to learn more about how the Restaurant Revitalization Fund impacts restaurants. 

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Preparing your restaurant for the American Rescue Plan Act of 2021

The Paycheck Protection Program (PPP), a centerpiece of the Coronavirus Aid, Relief and Economic Security (CARES) Act, as amended by the Economic Aid Act, and subject to future amendments, has been a primary source of aid to not-for-profit (NFP) organizations throughout the United States. Eligible NFPs could obtain a loan for 2.5 times payroll costs, up to $10 million, without the need for collateral, and could have the loan forgiven if the proceeds were spent on eligible costs.  Understandably, many NFPs rushed to apply as soon as the loan was available, under the approach that even if the loan was not forgiven, the low 1% interest rate would provide a much-needed source of liquidity. Furthermore, many organizations have applied for a second round of funding under the second Paycheck Protection Program (PPP2), as part of the Consolidated Appropriations Act (CAA). For purposes of this blog post concerning double dipping, PPP and PPP2 will be considered one and the same. Since the release of the original PPP guidance, NFPs with other sources of funding are learning best practices to ensure they are not including costs already paid with other federal funds on their PPP forgiveness application. Requesting reimbursement for the same cost from two different funding sources is fondly referred to as “double dipping.” We break down some key considerations around double dipping related to federal, state, local and private funding. Federal funding In Memorandum M 20-26, the Office of Management and Budget (OMB) makes clear its position that the federal government prohibits an organization from being reimbursed twice for the same expense. The Department of Defense released an FAQ providing guidance echoing the memo. Funds that may be subject to double-dipping restrictions include the following: Cost reimbursement grants Fee for service or fixed rate with an expenditure true-up equating to a cost-reimbursement grant Medicaid funding received in the form of a grant (funding is not tied to a specific individual with a contract to provide services) Federal flow-through grants from the three categories above State or local awards with similar guidance in effect  Medicare and Medicaid payments received as a provider would not be considered a federal award.  According to Federal Acquisition Regulation (FAR) 31.201-5, the applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by a contractor shall be credited to the government. NFPs that obtain PPP forgiveness will likely see costs normally included in their indirect cost rate (ICR) as allowable costs reduced by any amount forgiven. The impact on future ICR negotiations could be substantial. Lastly, readers should note that the recently passed CAA amended previous regulations that prevented entities from claiming both forgiveness on PPP loans and the Employee Retention Credit (ERC). While entities may now obtain both sources of funding, entities may not apply PPP and ERC funding to the same costs. State, local and private funding Guidance from state and local agencies is highly variable, and they may elect to apply different rules than federal agencies. Interpretations of state and local guidance is likely to be even more inconsistent. NFPs may find more flexibility with private grantors, but early communication with all funding sources is of the utmost importance. The lack of consistency highlights the need for NFPs to closely track all grant costs, regardless of whether they are treated as contract revenues or restricted contributions for accounting purposes, as well as those charged to PPP. PPP forgiveness application In practice, there is a belief that NFPs can be flexible with the costs chosen to allocate to PPP proceeds.  NFPs should carefully apply PPP proceeds to costs that are not funded by other grants, contracts and contributions. In addition, NFPs should keep internal records of which costs are being applied to PPP forgiveness, federal, state, local and private grants and contracts. We recommend keeping cost records by funding source at least until the end of the Small Business Administration audit eligibility period. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

In this NFP Online Journal blog post, we break down some key considerations around the Paycheck Protection Program (PPP) and double dipping related to federal, state, local and private funding.

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Authored by Paul Dillon, Christine Faris, Michelle Hobbs, Mike Schiavo and Michael Wronsky Both houses of Congress have now passed the American Rescue Plan Act of 2021 (the Act). In the process, the Senate made several substantive changes to the version the House passed at the end of February. The Act now heads to the White House where President Biden is expected to sign it into law prior to March 14, when unemployment benefits are set to expire.  Notable changes by the Senate include expansion of the employee retention credit (ERC), additional restrictions on executive compensation deduction limitations for public companies, tax exclusions for a portion of unemployment benefits, and a faster phaseout for the income threshold for individual tax rebates.  Key provisions Employee retention credit The ERC is extended to apply to qualified wages paid by eligible employers through Dec. 31, 2021. Beginning after June 30, 2021, the credit is expanded to apply to recovery startup businesses, defined as employers that began operations after Feb. 15, 2020, with average gross receipts of $1 million or less, and have not experienced a full or partial suspension or significant decline in gross receipts for the calendar quarter. Additionally, “severely financially distressed” employers, with gross receipts for a calendar quarter that have declined by more than 90% from the same calendar quarter in 2019, can claim the ERC on any wages paid to employees during the calendar quarter. The credit also becomes refundable against the Medicare tax after June 30, 2021. Paycheck Protection Program The Act further expands the PPP to include certain internet publishing organizations (NAICS code 519130) and increases program funding another $7.25 billion. The Act also creates new eligibility for certain not-for-profit organizations with not more than 300 employees and that spend less than $1 million or 15% of receipts and expenses on lobbying activities. In addition, charitable organizations can be eligible for PPP loans if they employ 500 or fewer employees per physical location.  Individual tax rebates The Act provides rebate checks of $1,400 per individual (including dependents) based on their adjusted gross income (AGI) reported on their 2019 tax return (or 2020 return, if filed). However, the final version accelerates the phase-out range of taxpayers no longer eligible for the direct payments.   Eligible individuals mean any individual other than nonresident aliens or individuals who are a dependent of another taxpayer at the beginning of the year. Trusts and estates are also ineligible. Restaurant Revitalization Fund The Act establishes the Restaurant Revitalization Fund. Through this program, the Small Business Administration (SBA) will provide grants to restaurants, food trucks, bars, brewpubs and other eligible entities to cover payroll, rent, utilities, food costs and other expenses essential to operations. Entities with more than 20 locations, publicly traded companies and entities that have applications pending under the grants for shuttered venue operators program are not eligible. Of the $28.6 billion appropriated for this program, $5 billion is earmarked for businesses with gross receipts of $500,000 or less. Further, during the initial 21-day period of the program, the Act directs the SBA to prioritize grants to small businesses owned by women, veterans, and socially and economically disadvantaged small businesses. Grants received under this program are exempt from federal income tax, and expenses paid with the funds are deductible.  Child tax credit and dependent care benefits enhancements The Act increases the child tax credit to $3,000 per qualifying child ($3,600 in the case of children under the age of 6 as of the close of the tax year) and makes it refundable for 2021. The increased credit over the $2,000 available under prior law would phase out at AGI levels of $150,000 for joint filers, $112,500 for head of household and $75,000 for all other taxpayers. The AGI phase-out levels for the $2,000 previously available credit remain the same ($400,000 for joint filers, $200,000 for all others). The Act additionally instructs the Treasury Department to establish a program under which taxpayers will receive periodic advance payments that in total equal 50% of the estimated credit they are entitled for the year. Paid leave payroll tax credits extensions Originally provided for by the Families First Coronavirus Response Act, the payroll tax credits for providing paid sick and family leave are extended through Sept. 30, 2021. Additionally, effective for calendar quarters beginning after March 31, 2021, the limit on wages that can be taken into account for computing the family leave credit with respect to all calendar quarters in total increases to $12,000 from $10,000, and the 10-day limit on the emergency paid sick leave credit resets. In other words, if, as of the end of the first calendar quarter of 2021, an employer reaches both of these respective limits for a given employee, the employer would be able to claim an additional family leave credit up to $2,000 of qualified family leave wages plus an emergency paid sick leave credit up to 10 days for qualified sick leave wages paid to that same employee during the second and third quarters of 2021.  Taxability of student loan forgiveness Student loans forgiven after Dec. 31, 2020, and before Jan. 1, 2026, can be excluded from gross income except in certain circumstances. The Act does not itself include student debt forgiveness, but it could be a sign that potential legislation may be on the horizon. Unemployment benefits The federal unemployment subsidy remains at $300 per week and is further extended through Sept. 6, 2021. For taxpayers with AGI of less than $150,000, the first $10,200 of unemployment benefits received in 2020 will not be subject to income tax (in the case of a joint return, the first $10,200 received by each spouse). Election to allocate interest expense worldwide repealed The Act repeals a provision allowing U.S. affiliated groups to elect to allocate and apportion interest expense on a worldwide basis to determine taxable income applied to foreign tax credit limitations. Section 864(f) was enacted as part of the American Jobs Creation Act of 2004, but its implementation has been deferred several times. This section is relevant in computing the foreign tax credit limitation, which is based on the amount of taxable income from foreign sources and the allocation and apportionment of deductions between U.S.- and foreign-source gross income from different limitation categories. Allocating and apportioning interest expense on a worldwide basis would generally result in increasing the ability to use foreign tax credits. Executive compensation deductibility limitations  The Act expands the executive compensation deduction, which is limited to $1 million each for the highest paid executives at public companies. The limitation will now apply to the CEO, CFO and the next five highest-paid employees. Currently, this limit applies to the CEO, CFO and the top three highest-paid employees.  The purpose of this provision is to offset the costs of providing funding relief to financially struggling multiemployer and single-employer pension plans as described below. It is effective for tax years beginning after 2026.  Excess business loss limitation First enacted in the Tax Cuts and Jobs Act (TCJA), the limitation of certain current trade or business losses of noncorporate taxpayers was extended through 2026. Indexed for inflation, the TCJA placed a $250,000 ($500,000 for married filing joint taxpayers) limit on using these losses originally through 2025. The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily suspended the limitation for the 2018, 2019 and 2020 tax years. Pension plan relief The Act contains provisions to assist troubled multiemployer pension plans as well as single-employer pension plans. Multiemployer plans – The Act creates a special program to allow the Pension Benefit Guaranty Corporation (PBGC) upon application by plan sponsors to make direct cash payments to financially troubled pension plans to ensure they remain solvent. Applications must be submitted by Dec. 31, 2025. Single-employer plans – The Act provides that shortfall amortization bases for plan years beginning in 2019 and 2020 would be reduced to zero. For plan years beginning after Dec. 31, 2019, all shortfalls would be amortized over 15 years rather than seven years under current law. Cost-of-living adjustment freeze for qualified retirement plans The Act contains provisions to freeze cost-of-living adjustments for certain annual limitations beginning after Dec. 31, 2030. The 2030 dollar amount would remain in effect until further notice. Defined benefit plans – The limitation on annual benefits Defined contribution plans – The limitation on contributions and other additions Compensation – The limitation on the annual compensation taken into account under the plan  The freeze on the cost-of-living adjustments described above would not apply in the case of a plan maintained by one or more collective bargaining agreements.  The freeze on cost-of-living adjustments applicable to benefits, contributions and compensation is designed to: Raise revenue and help offset the cost of the multiemployer plan reforms. Fill a budget hole in the 10-year scoring window. The freeze may also serve to foreshadow future legislative proposals to cut back on tax incentives for retirement plans as revenue raisers to offset the cost of other policy proposals. Expanded 1099 reporting The Act expands the 1099 reporting threshold for third-party settlement organizations to $600 annually with no fixed number of transactions from $20,000 and 200 transactions per payee under current law. This provision would be effective for transactions after Dec. 31, 2021. This provision is intended to capture more of the money earned by independent contractors in so-called “gig economy” jobs. This will primarily affect companies like eBay, Airbnb, Amazon, but the final rules and ensuing guidance will need to be reviewed to see how expansive this change may be.   We encourage you to reach out to your Baker Tilly adviser regarding how any of the above may affect your tax situation. 
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The fifth federal COVID-19 relief bill is moving on to be signed by the president. The massive bill includes extensions to the employee retention credit, unemployment benefits, PPP qualification parameters among other programs, and it establishes a revitalization fund for restaurants.

Congress passes latest round of stimulus legislation

Video The employee retention credit (ERC) is a fully refundable payroll tax credit made available by the Coronavirus Aid, Relief and Economic Security (CARES) Act to employers, including not-for-profits (NFPs). Earlier in March, Baker Tilly hosted a webinar discussing changes to the ERC. If you missed it, watch the on-demand recording. Now, listen to Baker Tilly’s NFP specialists as they highlight unique considerations for NFPs and what it could mean for your organization. They discuss: The Consolidated Appropriations Act (CAA) changes and how they may impact your organization Eligibility requirements including employee counts and qualifying wages Deadlines and next steps This recording does not replace the detail or expertise included in the earlier webinar, but rather highlights key considerations unique to the NFP industry.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

This on-demand webinar discusses the employee retention credit (ERC) and considerations unique to the not-for-profit (NFP) industry.

Employee retention credit updates for not-for-profits

video The Consolidated Appropriations Act (CAA), passed on Dec. 27, 2020, included significant extensions and enhancements to the Employee Retention Credit (ERC). The Coronavirus Aid, Relief, and Economic Security (CARES) Act had previously disallowed recipients of the Paycheck Protection Program (PPP) loan to take advantage of this credit. With the passage of the CAA, businesses can now potentially benefit from both the ERC and PPP loan. New and important guidance on the ERC continues to be released regularly. View this on-demand webinar with Baker Tilly tax professionals for an overview on changes to the ERC and what it could mean for you and your business. View the recording in order to: Understand the CAA changes and how they may impact your business Uncover eligibility requirements including employee counts and qualifying wages Review deadlines and next steps
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

View this on-demand webinar with Baker Tilly tax professionals for an overview on changes to the employee retention credit (ERC) and what it could mean for you and your business.

Updates to the employee retention credit

Authored by Paul Dillon, Christine Faris, Michael Wronsky and Devin Tenney On March 1, 2021, the IRS released Notice 2021-20, providing long-awaited guidance on the retroactive changes made to the employee retention credit (ERC) by the Consolidated Appropriations Act, 2021 (CAA). The notice is mainly in the form of 71 frequently asked questions (FAQ), most of which are similar to the ERC FAQ the IRS previously published on its website. Specifically, the notice outlines how Paycheck Protection Program (PPP) loan borrowers who have already applied for forgiveness can claim the ERC. Broadly, the ERC can be retroactively claimed for qualified wages reported on a forgiveness application that exceed the total reported payroll and nonpayroll costs needed to support the forgiven amount of the loan.  Further, the notice adopts the definition of “full-time employee,” initially provided by the IRS FAQ for use in determining an employer’s headcount to assess whether it is a large or small employer, without requiring either seasonal workers or part-time employees be included in the computation. It also defines key terms used in determining whether an employer is eligible under the suspension test. This tax alert is a preliminary overview of critical points covered by the notice. Baker Tilly will provide additional information in the coming weeks and months as we analyze the guidance in detail. Key takeaways The notice retains the FAQ format of the preexisting IRS guidance: updating it for retroactive changes made to the ERC by the CAA and making additional clarifications. The notice does not cover CAA updates to the credit that apply exclusively to 2021. While the guidance relies on the FAQ format, by being incorporated in a notice and formally published in the Internal Revenue Bulletin, it allows taxpayers to rely on the contents for penalty protection. Determining PPP loan recipient’s qualified wages: A PPP loan recipient is deemed to have made an election under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to exclude qualified wages from its ERC determination for all wages that are reported on an application for forgiveness — up to the amount of total payroll and nonpayroll costs reported on the application needed to support the forgiven amount. The ERC can be claimed on qualified wages in excess of this figure, but not on any amounts for which the election is deemed made (unless forgiveness is ultimately denied). As stated in the notice, the IRS’ position is effectively that an employer “cannot reduce the deemed election by the amount of the other eligible expenses that it could have reported on its PPP Loan Forgiveness Application” (emphasis added); a potentially damaging blow to borrowers that have already filed a forgiveness application.  The borrower is not considered to have made the election for any qualified wages paid that are not included in payroll costs reported on the forgiveness application.  Example 1: Employer X received a PPP loan of $200,000 and is an eligible employer for ERC purposes who paid $250,000 in qualified wages during the second and third quarter of 2020 (which overlapped with X’s covered period). X reported $250,000 of payroll costs on its loan forgiveness application, which was ultimately approved by the Small Business Administration (SBA) in full. X is deemed to have made an election to exclude $200,000 of qualified wages from its ERC determination (the maximum reported payroll costs needed to support the $200,000 forgiven amount), and can claim the ERC for the remaining $50,000 of qualified wages in 2020’s second and third quarters. Example 2: Same facts as Example 1, except X additionally incurred and reported $80,000 of eligible nonpayroll costs on its forgiveness application. In this instance, X is deemed to have made an election to exclude $120,000 of qualified wages ($200,000 PPP loan principal * 60% minimum payroll cost requirement), the minimum amount of payroll costs together with the reported nonpayroll costs needed to support the $200,000 of forgiveness. X can therefore claim the ERC on $130,000 of qualified wages ($250,000 total, less $120,000 in reported payroll costs needed to support forgiven amount) in the second and third quarters of 2020. Example 3: Same facts as Example 2, except X did not report the $80,000 of eligible nonpayroll costs on its forgiveness application, despite incurring them during its covered period. As such, X is deemed to have elected to exclude $200,000 of qualified wages from its ERC determination (the maximum reported payroll costs needed to support the $200,000 forgiven amount) and can claim the ERC for the remaining $50,000 of qualified wages in 2020’s second and third quarters. FAQ definition of “full-time employee”: For purposes of the 2020 credit, an employer is considered a large employer if it had more than 100 average full-time employees in 2019 (for purposes of the 2021 credit, the 100 threshold is increased to 500). The notice retains the same definition of full-time employee provided by the original IRS FAQ for this purpose, which appears to limit the employees that need to be included in the calculation to those who performed an average of at least 30 hours of service per week or 130 hours of service in the month. References to part-time employees and seasonal workers remain absent from the definition.  “More than nominal portion” of employer’s operations defined: An essential business can be an eligible employer under the suspension test if based on the facts and circumstances that “more than a nominal portion” of its operations have been suspended by a government order. Per Q&A No. 11, a portion of an employer’s operations will be considered more than nominal for the quarter in which the employer is testing eligibility if either: The gross receipts from that portion of the business make up at least 10% of the employer’s total gross receipts (both determined using the gross receipts from the same calendar quarter in 2019), or The hours of service performed by employees in that portion of the business make up at least 10% of the employer’s total employee service hours (both determined using the service hours performed by employees in the same calendar quarter in 2019). “More than nominal effect” on employer’s operations defined: An employer can qualify under the suspension test if its operations are not shut down, but rather subject to a government-mandated modification that has “more than a nominal effect” on the operations under the facts and circumstances. Per Q&A No. 18, a modification will have more than a nominal effect if it results in a 10% or more reduction in an employer’s ability to provide goods or services in its normal course of business. The notice however does not appear to provide any parameters by which this reduction can be measured. Factors for defining “comparable operations” via telework provided: An employer subject to a government-ordered closure will not be eligible under the suspension test if it can maintain “comparable operations” via telework. Q&A No. 16 provides the following four factors for consideration in determining whether comparable operations have been maintained and allows for additional factors to be considered if relevant:  Telework capabilities – Determine whether an employer has adequate support (IT and otherwise) such that operations can continue from another location.  Portability of employees’ work – Determine the amount of work that is portable or otherwise adaptable to be performed from a remote location. Need for presence in employee’s physical workspace – If an employer’s physical workspace is so critical to its trade or business operations that central tasks cannot be performed remotely, this factor alone indicates the employer is unable to continue comparable operations. Examples of critical physical workspaces include laboratories or manufacturing involving special equipment or materials that cannot be accessed or operated remotely.  Transitioning to telework operations – A period of adjustment to telework is expected, and an employer will not be considered to have a suspension of operations while it experiences inefficiencies attributable to the transition. However, if an employer incurs a significant delay (for example, two weeks) in moving operations to comparable telework on account of a need to, for example, implement teleworking policies or provide employees with necessary equipment, the employer’s operations may be deemed subject to a partial suspension during such a transition period.  Some areas remain unclear: While much is covered by the notice’s 102 pages, questions and areas of uncertainty remain, most notably, whether foreign affiliates must be included for aggregation purposes.  Please reach out to your Baker Tilly tax advisor to discuss how the above may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS issued guidance regarding retroactive changes made to the employee retention credit, including how Paycheck Protection Program loan borrowers can claim the ERC – even if they already applied for forgiveness.

IRS updates, formalizes ERC guidance 

Authored by Paul Dillon, Christine Faris, Michelle Hobbs and Michael Wronsky By the end of February, the House of Representatives is expected to pass the American Rescue Plan Act of 2021 (the Act), a combination of several bills making up the fifth stimulus legislation package designed to provide further economic relief from the continuing COVID-19 pandemic. The Senate is expected to begin discussions the first week of March when it is likely the legislation will be modified and sent back to the House. While the Act contains an increase of the minimum wage to $15 per hour, this provision was deemed to violate the Senate reconciliation rules. Additionally, other elements of the Act may not have unanimous support of all Democratic senators.  Both chambers of Congress are using budget reconciliation to pass the Act. In the Senate, this means the Act is not subject to filibuster and only a simple majority is needed to pass it. Therefore, ratification can occur without any Republican votes if no Democratic senator dissents. The final bill is expected to be signed into law by President Biden shortly after passage by both chambers. From a tax perspective, what is not included in the Act is perhaps as important as what is included. The Act contains no tax increases, including those that had been outlined in President Biden’s campaign proposals. At this time, individual, corporate and capital gains rates are unchanged, and no adjustments were made to the estate and gift tax regime. During a CNBC interview earlier this month, Treasury Secretary Janet Yellen said any tax increases sought by the Biden administration would be introduced gradually, suggesting these would come later in 2021 as part of a larger legislative package and be phased in slowly. Meanwhile, the Act does include several tax provisions such as an extension of the employee retention credit, another round of individual tax rebates and enhancements to the child tax credit. Notable nontax provisions include modifications to the Paycheck Protection Program (PPP), an increase to and continuation of the federal unemployment subsidy as well as funding for primary school and higher education institutions, and vaccine distribution.  Key provisions Employee retention credit The refundable quarterly payroll tax credit, designed to assist employers experiencing full or partial suspensions or significant declines in gross receipts in keeping employees on their payroll, was extended to apply to qualified wages paid through Dec. 31, 2021. Beginning after June 30, 2021, the credit will become a refundable payroll tax credit against the Medicare tax, otherwise known as the hospital insurance tax. Paycheck Protection Program The Act further expands the PPP to include certain internet publishing organizations (NAICS code 519130) and increases program funding another $7.25 billion. The Act also creates new eligibility for certain not-for-profit organizations with not more than 300 employees and spend less than $1 million or 15% of receipts and expenses on lobbying activities. In addition, charitable organizations can be eligible for PPP loans if they employ 500 or fewer employees per physical location. Finally, the SBA affiliation rules will no longer apply to not-for-profit organizations.  Individual tax rebates The Act provides rebate checks of $1,400 per individual (including dependents) based on their adjusted gross income (AGI) reported on their 2019 tax return (or 2020 return, if filed). Payment amounts will begin to phase out for single filers with AGI of $75,000 or higher ($150,000 for joint, $112,500 for head-of-household filers).  EIDL grants and other loan proceeds Under the Act, Economic Injury Disaster Loan (EIDL) grants as well as restaurant revitalization grants would be exempt from federal income tax. Further, similar to forgiven PPP loans, these exclusions from taxable income would not result in a loss of tax deductions for expenses funded by those grants. Child tax credit and dependent care benefits enhancements The Act increases the child tax credit to $3,000 per qualifying child ($3,600 in the case of children under age 6 as of the close of the tax year) and makes it refundable for 2021. The increased credit over the $2,000 available under prior law would phase out at AGI levels of $150,000 for joint filers, $112,500 for head of household, and $75,000 for all other taxpayers. The AGI phase out levels for the $2,000 previously available credit remain the same ($400,000 for joint filers, $200,000 for all others). The Act additionally instructs the Treasury Department to establish a program under which taxpayers will receive monthly advance payments of the credit they are due, from July through December 2021. Paid leave payroll tax credits extensions Originally provided for by the Families First Coronavirus Response Act, the payroll tax credits for providing paid sick and family leave are extended through Sept. 30, 2021. Additionally, effective for calendar quarters beginning after March 31, 2021, the limit on wages that can be taken into account for computing the family leave credit with respect to all calendar quarters in total increases to $12,000 from $10,000, and the 10-day limit on the emergency paid sick leave credit has been reset. In other words, if, as of the end of the first calendar quarter of 2021, an employer reached both of these respective limits for a given employee, they would be able to claim the family leave credit on up to an additional $2,000 of qualified family leave wages and another 10 days of the emergency paid sick leave credit for qualified sick leave wages paid to that same employee during the second and third quarters of 2021.  Unemployment benefits The federal unemployment subsidy increases to $400 per week from $300 and is further extended through Aug. 29, 2021.  Election to allocate interest expense worldwide repealed The Act repeals a provision allowing U.S. affiliated groups to elect to allocate and apportion interest expense on a worldwide basis to determine taxable income applied to foreign tax credit limitations. Section 864(f) was enacted as part of the American Jobs Creation Act of 2004, but its implementation has been deferred several times. This section is relevant in computing the foreign tax credit limitation, which is based on the amount of taxable income from foreign sources and the allocation and apportionment of deductions between U.S.- and foreign-source gross income from different limitation categories. Allocating and apportioning interest expense on a worldwide basis would generally result in increasing the ability to use foreign tax credits. Pension plan relief The Act contains provisions to assist troubled multiemployer pension plans as well as single-employer pension plans. Multiemployer plans – The Act creates a special program to allow the Pension Benefit Guaranty Corporation (PBGC) upon application by plan sponsors to make direct cash payments to financially troubled pension plans to ensure they remain solvent. Applications must be submitted by Dec. 31, 2025. Single-employer plans – The Act provides that shortfall amortization bases for plan years beginning in 2019 and 2020 would be reduced to zero. For plan years beginning after Dec. 31, 2019, all shortfalls would be amortized over 15 years rather than seven years under current law. Cost-of-living adjustment freeze for qualified retirement plans The Act contains provisions to freeze cost-of-living adjustments for certain annual limitations beginning after Dec. 31, 2030. The 2030 dollar amount would remain in effect until further notice. Defined benefit plans – The limitation on annual benefits Defined contribution plans – The limitation on contributions and other additions Compensation – The limitation on the annual compensation taken into account under the plan    The freeze on the cost-of-living adjustments described above would not apply in the case of a plan maintained by one or more collective bargaining agreements.   For more information about how these issues may affect you, connect with your Baker Tilly tax professional.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The House passed the fifth federal COVID-19 relief bill. Carrying a hefty price tag – $1.9 trillion – and facing an uphill battle as it moves to the Senate.

State & Local Government

House expected to advance latest round of stimulus legislation

Employer payroll tax credits, loans, and other Consolidated Appropriations Act incentives There are numerous relief programs available to lessen the burden of employee expenses and help businesses survive. The Consolidated Appropriations Act, 2021 (“CAA”), funds the government for the next fiscal year and consists of several bills that together mark the fourth economic stimulus package designed to help taxpayers continue to weather coronavirus-related closures. The CAA extends and enhances many relief provisions that were included in the Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act. Each business must determine which relief programs will have the most positive impact on their business, while also ensuring the benefits they choose can work together. Baker Tilly’s coronavirus benefit coordination matrix not only explains who can use each benefit but also how each benefit coordinates with others. 
A preview of the matrix is shown below, highlighting the Paycheck Protection Program: 
Download the matrix to learn more about which benefits may help your business during this challenging time, such as: PPP – second draw loans Employee retention credit – 2021 version Emergency Paid Sick Leave credit Emergency Paid Family and Medical Leave credit  Work Opportunity Tax Credit  Shuttered Venue Operators grant Restaurant Revitalization Fund grant Emergency Economic Injury Disaster Loan R&D credit payroll tax offset

Understand Coronavirus benefit and relief programs, who is eligible and how the benefits coordinate with other programs.

Family Business

Not-For-Profit Coronavirus Resources

Relief Funding Assistance

Coronavirus benefit coordination matrix

Authored by Devin Tenney and Christine Faris On Dec. 27, 2020, the Consolidated Appropriations Act (CAA) was signed into law, comprising several bills that provide continued economic relief from the COVID-19 pandemic. Chief among this relief is an extended and expanded employee retention credit (ERC), featuring sweeping changes impacting its availability both retroactively and prospectively.  Due to the prospective nature of certain notable changes to the now extended ERC, the CAA, in effect, creates an entirely new credit for 2021 that is separate and distinct from the ERC available for 2020, and appears to offer a significant opportunity for many employers. Employers are strongly encouraged to work with their tax advisors to explore eligibility in both 2020 and 2021, to ascertain if one or more opportunities are presented.  Retroactive changes The Coronavirus Aid, Relief, and Economic Security (CARES) Act incentivized employee retention by offering a payroll tax credit based on employee wages paid or incurred from March 13, 2020, through Dec. 31, 2020. However, the CARES Act prohibited Paycheck Protection Program (PPP) loan recipients from also taking an ERC. Given the immense popularity of the PPP, this limitation excluded numerous employers from eligibility for the credit. The CAA changes this by striking this prohibition from the CARES Act and allowing employers to potentially benefit from both the PPP and the ERC. The CAA also codifies certain guidance previously provided by the Internal Revenue Service pertaining to gross receipts for tax-exempt entities and treatment of certain allocable healthcare expenses such as qualified wages.  For those employers that already received a PPP loan in 2020 and are looking to take advantage of the ERC in 2020, it’s important to understand both how the credit works and that the rules remain unchanged for 2020. Broadly, the ERC is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order (Suspension Test) or (2) a significant decline (i.e., greater than 50%) in gross receipts due to COVID-19 (Gross Receipts Test).  For the 2020 credit, the amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020. Qualified wages are limited to $10,000 per employee for the entire year — allowing up to $5,000 in credit per employee. Wages that can be treated as “qualified” hinge on whether an employer is a large or small employer. Specifically, large employers may only count as qualified wages those wages paid for services not rendered, whereas small employers can count all wages paid as qualified. For 2020, a large employer is one with more than 100 average full-time equivalent employees based on calendar year 2019. Additional resources and guidance pertaining to these rules can be found on bakertilly.com. Employers should be aware of two items of note pertaining to the coordination between PPP loans and the ERC: PPP loan forgiveness and the ERC are not available for the same wages (i.e., no double dipping). The mechanics for calculating the retroactively available ERC are unclear at this time. Guidance is forthcoming from the Treasury Department and Small Business Administration, which hopefully will clarify how the two benefits interact. As such, we strongly encourage waiting to pursue claiming the retroactive credit until this clarity is provided. Prospective changes (applicable to 2021 only) As discussed above, the ERC available to employers in 2021 should be treated as a different credit from its 2020 counterpart, a distinction drawn as a result of the sweeping changes that the CAA made to the ERC for the first and second quarters of 2021 only. These changes, paired with the lifting of the prohibition on PPP recipients, presents an opportunity for employers meeting certain eligibility criteria to obtain refundable payroll tax credits of potentially significant dollar value.  The following is a non-exhaustive list summarizing key changes to the ERC that are prospective only, and therefore apply only to the period of Jan. 1, 2021, through June 30, 2021: Large employer threshold increased to 500 from 100. The prior rules permitted employers with 100 or fewer 2019 average full-time equivalent employees to count all eligible wages paid as qualifying wages. That limit increased to 500 average full-time equivalent employees in 2019, greatly expanding the amount of wages many employers can treat as qualified. However, keep in mind that aggregation rules apply. Qualified wages. The limit on the amount of qualifying wages per employee increased to $10,000 per calendar quarter in 2021 from $10,000 per calendar year, for total potential qualified wages of $20,000 — double the limit in 2020.  Credit conversion ratio. The amount of the credit increased to 70% from 50% of qualifying wages, entitling employers up to $7,000 per employee per quarter in 2021 ($14,000 in total). This is a significant increase of the $5,000 limit for 2020. Gross Receipts Test relaxed for 2021. As many employers found eligibility under the Gross Receipts Test out of reach due to the greater than 50% decline in gross receipts requirement, lawmakers reduced the threshold by requiring employers to a greater than 20% decline in gross receipts compared to the same quarter in 2019. Under this change, an employer may elect to have the test determining eligibility for the quarter measure whether the gross receipts for the immediately preceding quarter are less than 80% of the gross receipts for the same calendar quarter in 2019. What is currently unknown is whether the election, once made, is permanent, requiring employers to look at the prior quarter to determine eligibility for the current quarter. Employers may still rely on the Suspension Test to show eligibility in 2021.  Based on these changes to the credit for 2021, a remarkable opportunity is presented to employers that can show they: qualify as a small employer for 2021 (i.e., 500 or fewer average full-time equivalent employees in 2019), and  experienced a greater than 20% decline in their gross receipts in the fourth quarter of 2020 and/or the first quarter of 2021 compared to the comparable quarter in 2019.  We encourage you to reach out to your Baker Tilly advisor regarding how the above may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The latest round of COVID-19 relief extends and expands the employee retention credit, creating retroactive and prospective changes for employers.

Lodging

Multifamily Housing

Real Estate Investors

Real estate coronavirus resources

Updates to employee retention credit present significant opportunities for employers 

Authored by Christine Faris and Devin Tenney As we move into the final quarter of 2020, this will be a year where there has been significant legislative and regulatory impact in the areas of employee benefits and executive compensation. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 repealed the maximum age for IRA contributions and delayed the age for required minimum distributions (RMDs) to age 72. The Families First Coronavirus Response Act (FFCRA) established two new payroll tax credits, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the employee retention credit and payroll tax deferral to help small business employers. With all of that said, the following topics of interest will be important for you to consider for both year-end tax planning and perhaps tax planning in the coming year: 1. Maximum age for IRA contributions repealed: One of the purposes of the SECURE Act was to help individuals save for retirement. This was partly accomplished by repealing the age limit for making contributions to a traditional IRA. Prior to 2020, an individual who attained age 70½ during the calendar year was not permitted to make contributions to a traditional IRA.  2. Required age for RMD delayed: Another change made by the SECURE Act was to delay the age requirement to begin taking RMDs from age 70½ to age 72. The CARES Act went a step further by eliminating RMDs for 2019 and 2020. These changes allow taxpayers to retain their retirement savings in tax-favored arrangements, thus delaying income tax on the RMDs. 3. Employer payroll tax credits for emergency paid sick leave and emergency family and medical leave: The FFCRA created the emergency paid sick leave and expanded emergency family and medical leave benefits for employees who are unable to work due to COVID-19. For employers who provide either or both types of emergency leave, the employer is entitled to refundable payroll tax credits equal to the amount of wages required to be paid under the emergency sick pay or emergency family medical leave pay requirements. The emergency paid sick leave entitles employees up to 10 days (80 hours) of sick pay at rates of up to $5,110, or $511 per day, depending on the reason for the leave. The emergency family and medical leave entitles employees up to an additional 10 weeks (40 hours per week) of pay up to $200 per day. The payroll credits are designed to offset these amounts. The credits are claimed on Forms 941, 941-X or 7200 against the employer portion of Social Security taxes (not Medicare taxes). Any credit in excess of total employer Social Security taxes on the wages with respect to the employment of all employees of the employer the excess is a refundable credit to the employer. The credits are allowed for wages paid through Dec. 31, 2020. 4. Employee retention credit: The CARES Act created the employee retention credit (ERC) to provide assistance to employers who continue to pay their employees despite their operations being affected by COVID-19. Broadly, the ERC is a refundable quarterly payroll tax credit against certain employer payroll taxes. The ERC is available to employers of all sizes that have experienced either (1) a full or partial suspension in their operations as a result of governmental order or (2) a significant decline in gross receipts due to COVID-19. The amount of the credit is 50% of qualified wages paid or incurred from March 13, 2020, through Dec. 31, 2020. Qualified wages are generally limited to $10,000 per employee, subject to employer size restrictions. Employers may claim the ERC on a timely filed Form 941, through an adjustment with Form 941-X or in advance via Form 7200 in the same manner as the FFCRA credits discussed above.  5. Employer payroll tax deferral: The CARES Act permits employers to defer timely payment of the employer’s portion of Social Security tax that would otherwise be required to be made during the period from March 27, 2020, through Dec. 31, 2020, without penalty or interest charges. Employers must pay 50% of the deferred amount by Dec. 31, 2021, and the remainder by Dec. 31, 2022. Employers are not required to make a special election to be able to defer deposits and payments of these employment taxes. Deferral of the employer’s share of Social Security tax is reported on Forms 941 or 941-X. 6. Transition relief expires on Dec. 31, 2020, to amend certain executive nonqualified deferred compensation arrangements: Prior to the Tax Cuts and Jobs Act (TCJA), the $1 million executive compensation deduction limitation applied to a covered executive until the executive had, in general, a termination of employment. As a result, if the employer expected that the company’s tax deduction would be limited due to the $1 million executive compensation deduction limitations, the employer could delay payments under the nonqualified deferred compensation (NQDC) arrangement until the limitation no longer applied. However, the TCJA broadened the scope of the $1 million deduction limitation to provide that once an executive is a covered employee, the executive will remain a covered employee regardless of employee status or death. Under the TCJA, a payment could be delayed indefinitely. Because elimination of the delay would otherwise be an impermissible acceleration of payment, the Treasury Department issued proposed regulations that may be relied upon permitting employers to amend their NQDC arrangements to eliminate the delay provision. However, such an amendment must be made no later than Dec. 31, 2020.  7. Extended due date for adopting a qualified retirement plan: An employer may adopt a qualified retirement plan for a taxable year after the last day of the taxable year provided it is adopted before the due date, including extensions, for filing the employer’s tax return for the taxable year. For example, an employer who wants to adopt a qualified retirement plan for calendar year 2020 has until Sept. 15, 2021, for a partnership or corporate employer, or Oct. 15, 2021, for a self-employed employer, to adopt the plan. 8. Reminder for 401(k) plan sponsors: Long-term, part-time employee eligibility requirements take effect in 2021: For sponsors of 401(k) plans, a key upcoming change is the requirement to expand eligibility to long-term, part-time employees, effective for plan years beginning on or after Jan. 1, 2021. Under this rule, if a part-time employee has worked at least 500 hours in three consecutive years and is at least age 21 by the last day of the three consecutive year period, he or she must be offered the opportunity to make elective deferrals to the employer’s 401(k) plan. For purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, plans are not required to take into account hours of service in plan years beginning before Jan. 1, 2021. As a result, although affected plan sponsors will need to start tracking hours for this purpose beginning in 2021, plans will not be required to permit qualifying long-term, part-time employees to make deferrals under 401(k) plans before plan years starting in 2024. 9. Pooled employer plans for retirement benefits are permitted: Unrelated employers without any commonality may pool their resources by participating in a new type of multiple employer plan (MEP). The new retirement plans, referred to as pooled employer plans or open MEP, are treated as a single plan. In addition, the “one bad apple” rule will no longer apply provided the procedure is followed for ensuring that one employer’s failure to meet the qualification requirements will not result in the disqualification of the MEP or open MEP. This is effective for plan years beginning after Dec. 31, 2020. 10. Nonrefundable tax credit for startup costs of adopting a new qualified retirement plan: An employer with 100 or fewer employees may be eligible for a nonrefundable income tax credit for startup costs of adopting a new qualified retirement plan. The amount of the credit for a taxable year is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit is for three years.  11. FICA taxation rules for nonqualified deferred compensation: We are still seeing numerous instances where employers are not taking into account deferred compensation for FICA at the appropriate time. Pursuant to the FICA “special timing rule,” deferred compensation is required to be taken into account at the later of the time of the performance of services and at such time when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit — this is usually at such time as the benefit becomes vested. This, of course, is in contrast to the SECA rules, that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should be focused on making sure that the deferred compensation, even if not distributed, is taken into account correctly in accordance with the “special timing rule” in a setting that requires payment of FICA taxes. 12. Proposed regulations interpreting Internal Revenue Code section 457 rules: In the summer of 2016, the Department of the Treasury issued proposed regulations interpreting section 457 deferred compensation rules which apply to tax-exempt organizations and governmental subdivisions. These proposed regulations primarily addressed issues attendant with the granting and administration of “ineligible plans of deferred compensation” under section 457(f) and are slated to become effective until following such time that final regulations have been issued. As of the time of the preparation of this letter, we have seen no activity by the current administration that would suggest that these regulations will be finalized anytime soon. Therefore, for the present, we are regarding these proposed regulations as an indication of the IRS’ interpretation of certain income tax issues attendant with the application of section 457 rules, and nothing more. For more information on this topic, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

An update on significant legislative and regulatory impact in the areas of employee benefits and executive compensation. 

Private Wealth

Employee benefits and executive compensation update

Play video Our financial institution industry and Washington national tax professionals hosted a webinar to discuss the Employee Retention Credit (ERC) and how banks can access the benefits. Listen to the webinar recording to learn what is important for depository and lending operations to take advantage of the tax credit. We covered: How the ERC can be coordinated with other benefits, like the payroll tax deferral and FMLA How your bank can claim the ERC on Form 941 Situations where banks may be eligible for the ERC We also hosted a live Q&A with our attendees at the end of the webinar. The Q&A is available in the recording.  During the webinar, our Washington National Tax presenter referenced a helpful FAQ document that the IRS put together to help companies understand the ERC.  If you believe that your bank may be eligible for the ERC, contact us and we’ll talk through your current situation.

The  information provided here is of a general nature and is not intended to  address the specific circumstances of any individual or entity. In  specific circumstances, the services of a professional should be sought.  Tax information, if any, contained in this communication was not  intended or written to be used by any person for the purpose of avoiding  penalties, nor should such information be construed as an opinion upon  which any person may rely. The intended recipients of this communication  and any attachments are not subject to any limitation on the disclosure  of the tax treatment or tax structure of any transaction or matter that  is the subject of this communication and any attachments.

Our webinar covered how banks can access the Employee Retention Credit (ERC), claiming the tax credit on Form 941 and an overview of what is important for depository and lending operations.

Financial Services

Banking & Capital Markets

Community Banks 

Banking and capital markets coronavirus resources

Employee retention credit: exploring the benefit for banks

Authored by Michelle Hobbs Paycheck Protection Program The law and rules governing the PPP have been updated since this article was originally published. Please see our two-part series, PPP revisited, based on current legislation and guidance.   A widely popular lifeline for many small businesses, the Paycheck Protection Program (PPP) was enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and replenished three weeks later in “Stimulus 3.5.” The recently passed Paycheck Protection Program Flexibility Act of 2020 (Flexibility Act) made additional changes to the program. With the principal purpose being to help employers retain their employees on the payroll, these loans are designed to now cover payroll and related expenses paid or incurred during a maximum 24-week period (recently updated from an eight-week period) that follows the date the loan proceeds are received, or from that date through Dec. 31, 2020, whichever period is shorter. Primarily, small business employers with 500 or fewer employees (affiliation rules apply) qualify for the loan program. Individuals qualifying as sole proprietors as well as independent contractors can also participate.  The PPP’s loan forgiveness component likely is the favorite feature of the program. If at least 60% of the loan proceeds are used to fund payroll expenses (with up to 40% going solely toward paying covered rent obligations, covered utility payments or interest on covered mortgage obligations), the borrower may be eligible for full forgiveness of the PPP loan. A prorated forgiveness formula is available for borrowers who do not meet the requirements for a full forgiveness of the PPP loan.  It is this forgiveness feature that raises numerous tax questions. In general, loan forgiveness results in taxable income. When loan forgiveness escapes taxation through one of a limited number of exceptions, the cost is a reduction of certain tax attributes (net operating losses, depreciable basis, etc.) belonging to the loan recipient. Regarding PPP loans, the CARES Act stipulates any PPP debt forgiveness is to be excluded from gross income. However, there is no requirement to reduce tax attributes.  Unfortunately, in a blow to taxpayers, the IRS recently released guidance indicating expenses paid using forgiven PPP loan proceeds would not be deductible. So, while the forgiven loan proceeds are not taxable, the expenses paid with those same proceeds are not deductible. Congress proposed bipartisan legislation in May to allow deductibility of permissible PPP expenses even when the associated loan proceeds are forgiven. Members of both the Senate and the House of Representatives have publicly said the current IRS guidance does not reflect congressional intent. To date, this legislation has not passed, though it may ultimately be attached to a larger stimulus or tax package.  In the meantime, the Small Business Administration (SBA) released, and subsequently updated for changes made by the Flexibility Act, the PPP loan forgiveness application along with instructions. While simple on its face — the entire package is only 12 pages — the application requires a lot of supporting data. For example, to substantiate eligible expenses, payroll records should include the number of full-time and part-time employees, payroll frequency (weekly, bi-weekly, semi-monthly, monthly, etc.), salary and leave benefits per person as well as healthcare and retirement benefits on a per-employee basis. Keep in mind, salary and wages are capped at $100,000 per employee on an annualized basis. In addition, copies of payroll tax returns, benefit plan payment invoices, and bank, mortgage interest, rent and utility statements should be retained for at least six years and made available to the lender when requested.  Recently, the SBA published a shorter version of the application, which can be used by borrowers who did not have employees at the time they applied for their loan, or did not reduce their employment levels or employees’ pay during the covered period.  Borrowers who did reduce their employment levels but can attest that they were unable to operate at pre-COVID-19 levels (due to compliance with government health and safety guidelines) are also eligible to use the streamlined form.   Self-employed individuals are eligible for PPP loan forgiveness using a formula taking either: 8/52 of line 31 of the individual’s 2019 Schedule C for an eight-week period, or Two and a half months of 2019 net profit (Schedule C, line 31), up to a maximum of $20,833, if using the 24-week forgiveness period. This limit applies in total across all of the individual’s businesses.  In other words, if an individual operates multiple businesses and files a separate Schedule C for each, the maximum loan forgiveness amount for the individual is $20,833.   For employers, the maximum amount of cash compensation eligible for forgiveness is generally limited to $46,154 per employee over the 24-week covered period in 2020 (note this maximum amount would be smaller for borrowers whose covered periods end on Dec. 31, 2020, short of 24 weeks). However, there is an additional limit on amounts paid to owner-employees or general partners, being the lesser of $20,833 or two and a half months of total 2019 compensation across all related businesses. This could further restrict the amount of owner compensation eligible for forgiveness for many taxpayers. Unfortunately, owner-employee is not formally defined, but the updated forgiveness application does refer to “owner employees of an S-corporation”. Finally, it is unclear whether other individuals would fall under this definition, if attribution rules apply, or how related-party salaries are combined when calculating the limitation.   Economic Injury Disaster Loans (EIDL) Program Separate and distinct from the PPP, the EIDL is a long-running program. Designed to help businesses, renters and homeowners located in federally declared disaster regions, the CARES Act expanded the EIDL to assist taxpayers during this COVID-19 pandemic. Taxpayers that have suffered an economic hardship due to the pandemic are eligible if they meet certain requirements: In existence on Jan. 31, 2020 Businesses with fewer than 500 employees Sole proprietors, independent contractors, most private not-for-profit organizations, cooperatives and tribal small businesses are included as businesses eligible to participate.   Due to funding limitations and the volume of submitted applications, the SBA initially restricted this program to U.S. agricultural businesses. Effective June 15, 2020, the EIDL loan program was expanded to allow more businesses and not-for-profit organizations to apply.  The CARES Act relaxed the normal EIDL rules, resulting in the following parameters:  The maximum EIDL is a $2 million working capital loan at a rate of 3.75% for businesses and 2.75% for not-for-profits with up to a 30-year term Payments on coronavirus EIDL loans are deferred for one year Up to $200,000 can be approved without a personal guarantee Approval can be based on a credit score and no first-year tax returns are required  Borrowers do not have to prove they could not get credit elsewhere No collateral is required for loans of $25,000 or less; for loans of more than $25,000, general security interest in business assets will be used for collateral instead of real estate The borrowers must allow the SBA to review its tax records  Businesses can apply for EIDL loans through Dec. 31, 2020 The CARES Act also authorized a $10,000 Emergency EIDL grant that can be used to pay sick leave, payroll, rent and mortgage payments. While the Emergency EIDL grant does not have to be repaid, it does reduce the amount of PPP loan forgiveness. Employee retention credit The employee retention credit (ERC) is a fully refundable tax credit equal to 50% of qualified wages. Applying to wages paid between March 13, 2020, and Dec. 31, 2020, eligible employers can receive up to a $5,000 maximum credit per employee (based on $10,000 of qualified wages, including qualified health plan expenses). Keep in mind, wages and related payroll taxes constituting the credit cannot also be deducted as compensation expense.  Further, the ERC is not available for wages for which the employer received a credit for paid sick or family leave under the Families First Coronavirus Response Act. In addition, wages paid to certain family members, including children, parents, aunts, uncles, among others, are not eligible for the credit. Eligible employers are those that have had business operations partially or completely shut down by government order. Otherwise known as the suspension test, qualified wages are those paid solely during the shutdown. In addition, employers can also qualify for the ERC if gross receipts for the calendar quarter in 2020 are less than 50% of gross receipts for the same calendar quarter in 2019 (gross receipts test). On the other hand, employers deemed essential, but still have a significant loss in revenue due to their customers being shut down or having to shelter in place could potentially qualify for the ERC if facts and circumstances fit the requirements.  Employers that have also borrowed using the PPP should not request advance payment of the ERC via Form 7200 (Advance Payment of Employer Credits Due to COVID-19). Currently, it is unclear whether employers can even use the ERC for periods prior to borrowing if participating in the PPP. As a result, we recommend affected employers file Form 7200 with their quarterly payroll return (Form 941). Finally, while the aggregation rules do apply to a controlled group of employers or to separate divisions, it is unclear how the suspension test would be applied if the group members operated different trades or businesses. For example, consider a brother-sister controlled group, one entity operates a restaurant and meets the suspension test while the other is a farming enterprise and does not. In this situation, it is unknown whether the entities would both be ineligible for the ERC or treated separately. We recommend each separate trade or business be evaluated individually to apply the suspension test. View more insights from our guide to tax planning during and after COVID-19
For more information, please visit our Coronavirus Resource Center.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Several programs were created or expanded, including the Paycheck Protection Program, Economic Injury Disaster Loans and the employee retention credit, to help soften the economic blow of the pandemic.

Manufacturing & Distribution

Retail

Food & Beverage

Federal coronavirus rescue programs

Authored by Devin Tenney, Paul Dillon, Michelle Hobbs, Christine Faris and Michael Wronsky This alert has been revised to reflect updated guidance provided by the Small Business Administration and the IRS. On April 29, 2020, the IRS provided guidance on the employee retention credit (ERC), by significantly expanding upon a list of “frequently asked questions” (FAQ) posted on its website. The FAQ now includes 94 questions covering an array of topics, including the determination of eligible employers and qualified wages, and how the credit interacts with other relief provisions provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and Families First Coronavirus Response Act (FFCRA).  This alert focuses on certain key areas where the IRS provided new or updated guidance.  Background The ERC is a fully refundable payroll tax credit made available by the CARES Act to employers, including not-for-profits, that had their operations fully or partially suspended as a result of a government order limiting commerce, travel or group meetings (the “suspension test”). The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis (the “gross receipts test”). The ERC is equal to 50% of qualified wages, not to exceed $10,000 per employee, paid by the employer from March 13, 2020, through the end of the calendar year. Qualified wages paid by an employer with 100 or fewer employees generally include all wages paid during the economic hardships described above; for employers with more than 100 employees, qualified wages are limited to wages paid to employees while they are not performing services. Qualified wages can also include qualified health plan expenses paid by the employer. Key takeaways from the IRS FAQ Determining eligibility under the suspension test Essential employers that have not been ordered to fully or partially shut down generally are not considered to have a suspension of operations. An employer that operates an essential business most likely will not qualify under the suspension test if the governmental order allows the employer to remain open, even though nonessential businesses being shut down by the order may have an effect on the employer’s operations. Exceptions are available for employers whose: 
1. Facts and circumstances indicate their operations have in effect been suspended due to an inability to obtain critical goods or materials because their suppliers have been shut down, or 
2. Hours of operation have been reduced due to a governmental order. An essential employer will not qualify under the suspension test solely because its customers are subject to a government stay-at-home order. Consider a gas station that is not required to close its location or suspend its operations because it is deemed to be essential. However, its business has suffered significantly because its community is under a governmental order that limits travel and requires residents to stay at home except for certain essential needs. The gas station is not eligible for the ERC under the suspension test. However, if its gross receipts declined by more than 50%, it could be eligible for the ERC under the gross receipts test.  Employers required to close their physical locations, but able to maintain comparable operations through telework are not considered to have a suspension of operations. This can have implications to an employer deemed “nonessential,” but because they are able to continue their operations remotely at a comparable level, they do not pass the suspension test. 
It is unclear what constitutes operations comparable to the business’ operations prior to the closure, but a nonessential employer would likely need to show a significant impact on their ability to perform its operations remotely (e.g., entire functions shut down or a significant reduction in the employer’s capacity to perform operations at a normal level).  It is important to note that the IRS repeatedly emphasizes during its discussion of the suspension test-related issues that employers who are ineligible for the credit on this basis may still be considered an eligible employer if it passes the gross receipts test.  Paycheck Protection Program (PPP) loan recipients are ineligible for the credit  The CARES Act provides that taxpayers cannot benefit from both a PPP loan and the ERC, but, prior to the issuance of these FAQ, it was unclear whether the ERC could be claimed for periods prior to borrowing. The FAQ states that PPP loan recipients cannot claim the ERC regardless of 1) the date of the loan, and 2) whether and when the loan is forgiven. Further, if an employer in an aggregated group is a PPP loan recipient, the entire group is rendered ineligible for the credit.  However, on May 6, 2020, the Small Business Administration updated its list of Paycheck Protection Program Loans Frequently Asked Questions to provide that employers who repay their PPP loans pursuant to a safe harbor by May 14, 2020, will be deemed to have never received the loan and, therefore, eligible for the ERC. For additional details on this safe harbor, please see our previous alert. Impact of aggregation The CARES Act provided that a controlled group of entities as determined under the Internal Revenue Code’s aggregation rules will be considered a single employer when determining eligibility for the ERC, but it was unclear on how the facts and circumstances of one or more component controlled group members would affect the group as a whole. The expanded IRS FAQ addresses several questions in this area: A single business entity operating in multiple locations whose operations have been suspended in one or more jurisdictions, but not others, will qualify under the suspension test. This could be a huge boost to employers with a national or regional presence under this circumstance, as they would qualify under the suspension test with respect to all of its operations in all locations. A single employer in a controlled group qualifying under the suspension test qualifies the entire aggregated group. The FAQ provides that an entire aggregated group’s operations are deemed fully or partially shut down, if merely one of its members’ operations are suspended by a governmental order. For example, consider a restaurant chain that is an aggregated employer group of multiple facilities in various locations. If one restaurant is ordered closed by a governmental order, the entire chain will be considered an eligible employer under the suspension test, even if multiple restaurants are located in jurisdictions not subject to any government restrictions.  The gross receipts test considers the revenue of the entire aggregated group. Consider two entities, X and Y, that are a brother-sister controlled group. Both entities had 2019 second-quarter gross receipts of $500,000. X is in an area hard hit by COVID-19, and its 2020 Q2 gross receipts were only $150,000, 30% of its 2019 Q2 figure. Y is located in an area not as heavily affected by the virus, and its 2020 Q2 gross receipts were $400,000 (80% of its 2019 Q2 figure). Despite X experiencing a significant decline in gross receipts on its own, since the group’s 2020 Q2 gross receipts were 60% of the 2019 Q2 amount, neither entity is eligible for the ERC. Determination of qualified wages For employers eligible for the ERC due to a full or partial suspension in its operations, qualified wages are limited to the period the order is in force. If the order was effective for only a portion of the calendar quarter, the employer can still claim the credit, but only for wages paid during the period the order is in force. Consider a business partially shut down by a governmental order While the business qualifies under the suspension test in both the first and second quarters, the ERC would not be available for wages paid prior to March 13, 2020, or after April 30, 2020.  Eligible employers with more than 100 employees may not treat vacation, holidays, sick days or other leave under preexisting policies as qualified wages. The IRS reasons these wages were accrued during a prior period in which the employees provided services and, therefore, cannot be considered wages while the employee did not work. Conversely, since all wages paid by eligible employers with 100 or fewer employees are considered qualifying wages, such paid leave can produce an ERC. Qualified wages are determined on a pre-tax basis. Federal income and payroll taxes withheld or imposed do not reduce an employer’s qualified wages paid. Healthcare expenses may be treated as qualified wages. Employers with 100 or fewer employees can generally allocate health plan expenses to qualifying wages paid and treat such health plan expenses as qualifying wages. The IRS updated the FAQ to provide this is true even if an employer continues a furloughed or laid-off employee’s healthcare coverage, but does not continue to pay wages to the furloughed or laid-off employee. 
Employers with more than 100 employees that furlough their workers or reduce their hours, but continue to provide them with healthcare coverage may treat health plan expenses allocable to the time that the employees are not working as qualified wages. To illustrate, a business qualifying under the suspension test reduces its employees’ hours by 50%, but continues to pay 60% of their wages and 100% of their health plan expenses. The business’ qualifying wages consist of both the 10% of wages paid to its employees while they are not working and the 50% of the health plan expenses, as they are allocable to the time the employees are receiving benefits, but are not providing services.  Final thoughts It is important to note that each section of the FAQ is prefaced with the following: “This FAQ is not included in the Internal Revenue Bulletin, and therefore may not be relied upon as legal authority. This means that the information cannot be used to support a legal argument in a court case.” Though not primary authority, the FAQ does provide a window to the IRS’ view of the matters covered in the absence of official guidance, which we hope is forthcoming. That said, there is no guarantee that these positions will be the same as those reflected in any formalized guidance. In closing, the IRS recommends taxpayers retain records supporting their ERC computations for at least four years. We continue to review the FAQ and monitor developments in this area. Please reach out to your Baker Tilly tax advisor to discuss how these changes may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS issued an expanded list of frequently asked questions to help businesses that are pursuing the employee retention credit.

Real Estate

Construction

Construction coronavirus resources

IRS significantly expands employee retention credit FAQ

Authored by Paul Dillon, Michelle Hobbs, Christine Faris, Michael Wronsky and Devin Tenney  In a May 7, 2020, update to its list of “frequently asked questions” (FAQ) on the employee retention credit (ERC), the IRS revised the manner in which employers determine the amount of their qualified healthcare expenses for which the credit can be claimed. In a significant taxpayer-favorable development, eligible employers that continue to provide their employees with healthcare coverage can now claim the ERC for these costs regardless of whether the employees continue to receive a salary.  This development marks a reversal of the IRS’ previous stance that only healthcare expenses allocable to employee wages could produce the credit. Lawmakers were quick to rebuke this position, saying it did not conform to congressional intentions behind the ERC, which include incentivizing employers to continue to provide its workers with healthcare coverage during the pandemic.  To illustrate the effect of this change, consider an employer whose operations have been shut down due to a government order. In response, the employer furloughs all of its workers, stops paying their salaries but continues to provide them with healthcare benefits. Based on the IRS’ prior guidance, none of the employers’ costs would have factored into its ERC calculation because there were no qualifying wages related to the associated healthcare expenses. Now, all of the healthcare costs can be considered in determining the credit, as they were provided while the employer’s operations were suspended pursuant to the government order. Note that in the case of an employer with more than 100 employees, the costs must also be attributable to a period during which its workers are not providing services. In this example, that test would be met as the employees were furloughed outright.  For more background and details on the ERC, please see our previous tax alert, which has been revised to reflect this change. The complete FAQ is posted on a dedicated IRS webpage.  Please reach out to your Baker Tilly tax advisor to discuss how these changes may impact your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

The IRS is now allowing employers that continue to pay healthcare coverage for their employees to claim the employee retention credit for these costs – even if those employers aren’t continuing to pay their employees a salary. 

Healthcare & Life Sciences

Healthcare provider coronavirus resources

IRS expands allocable healthcare expenses eligible for employee retention credit

The extended and expanded employee retention credit (ERC) from the Consolidated Appropriations Act (CAA) could have significant benefits for you and your business. However, the regulations surrounding the ERC tend to be fact specific and tedious. Baker Tilly has a put together set of comprehensive resources available to assist businesses that are considering taking advantage of the ERC.

New guidance is being released regularly. Contact our ERC specialists to learn if you qualify for the ERC.

Baker Tilly can help you navigate the extended ERC

erc-updates-per-caa-april-2021.pdf

Employee retention credits as updated by the Consolidated Appropriations Act, 2021 (CAA)

The CAA made several significant employer-friendly changes to the ERC and have effectively created two separate versions of the credit, one for 2020 and another for 2021. We have developed a flowchart that outlines the differences between the two and guidance on how to determine eligibility. 

Each business must determine which relief programs will have the most positive impact on their business. Baker Tilly’s coronavirus benefit coordination matrix not only explains who can use each benefit, but how each benefit coordinates with others.

A preview of the matrix is shown below, highlighting the 2021 employee retention credit.

Webinar: Updates to the employee retention credit

Updates to employee retention credit present significant opportunities for employers

For more information or to learn how Baker Tilly specialists can help, reach out to your Baker Tilly advisor or contact our team.

Baker Tilly has developed a set of comprehensive resources that are readily available to assist businesses that may be eligible for the employee retention credit (ERC).

Baker Tilly’s tax team contributes to clients’ success by accelerating tax deductions, increasing tax credits, reducing cash taxes and mitigating risks.

Baker Tilly offers specialized federal tax compliance and planning expertise to help businesses optimize value while minimizing their tax burden.

Baker Tilly has developed a comprehensive set of solutions that are readily available to assist qualifying businesses that have received, or will receive, loan proceeds that may be eligible for forgiveness under the PPP.

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Tax

Federal Tax

Paycheck Protection Program (PPP) Solutions

Baker Tilly can help you navigate the extended ERC

Employee retention credits as updated by the Consolidated Appropriations Act, 2021 (CAA)

Download the flowchart

Coronavirus benefit coordination matrix

Download the coronavirus benefit matrix

Webinar: Updates to the employee retention credit

Updates to employee retention credit present significant opportunities for employers