Tax season may have just ended, but there continues to be various news on legislation and COVID relief.
Individual Payments for Child Tax Credit Starting on July 15.
While this has not received a lot of press, be aware you may be receiving payments from the IRS soon if you have a child under 18 claimed as a dependent and your income is under certain thresholds. The American Rescue Plan Act provided for advanced payments of the child tax credit anticipated on a taxpayer’s 2021 income tax return. The payments will begin on July 15, 2021. Thereafter, they will be made on the 15th of each month unless the 15th falls on a weekend or holiday and will continue through December 2021. The total amount paid out prior to the end of the year will estimate 50% of the IRS’s estimate of the 2021 credit. Recipients will receive the monthly payments through direct deposit, paper check, or debit cards. The IRS says that it is committed to maximizing the use of direct deposit. You will need to keep track of these payments for the preparation of your 2021 individual tax return.
The IRS also is required to build an “Opt Out” option on their website for those taxpayers who may not want to receive the monthly payments.
For more information, please visit the IRS website.
Finally, Some Support for Recent Startups
A “recovery startup business” that began operations after February 15, 2020, with $1M or less in average annual gross receipts can now qualify for the employee retention credit (see below) for the third and fourth quarters of 2021. The credit is capped at $50K per quarter, and at this point is not subject to any shutdown restrictions or gross receipts decline tests. In other words, if you started a business after February 15, 2020, you are eligible for a 70% credit against wages paid up to a $50K credit per quarter.
As an example, if you qualify and paid wages of $70K per quarter, you could qualify for a $50K refundable credit and only be out of pocket $20K.
Employee Retention Credit (ERC)
Unfortunately, we continue to hear too many stories of tax preparers who ignored the ERC for their clients in 2020. We also hear too many stories of payroll services who also did not inquire about the credit to have the quarterly payroll returns filed accurately. This credit, in many cases, can be larger than the funds received through the PPP program. Many businesses don’t realize they qualify for the credit.
If your business was fully or partially shut down on a government order, or you had a “substantial” (either 20% or 50%) decline in gross receipts per quarter compared to 2019, you are eligible for a credit up to $7,000 per employee. We have been helping many clients and non-clients with this credit and its interaction with the PPP loans.
There are two areas of caution with the credit.
First, there are “new companies” that are advertising services to prepare this credit and filings for you. They are typically charging a percentage of the refund as their fee. There is no reason to use one of these companies for the service. As you can imagine, some of these companies are turning out to be less than reputable – and you don’t want a less than reputable company in possession of your payroll records and employee information.
Second, if you qualified in 2020 and filed or amended payroll tax returns to claim the credit, the credit MUST be reported on your 2020 tax returns. Many firms who ignored the credit for their clients altogether and filed annual income tax returns (corporate, partnership, or individual) may now realize their clients qualify for the credit. While amended payroll tax returns for 2020 can be filed throughout 2021 to claim the credit, keep in mind, the associated income tax returns will have to be amended as well. In the case where an income tax return was filed without the credit, many firms will report the credit for 2020 on the 2021 income tax returns. This is incorrect and will put the credit at risk upon any examination of the returns. Keep in mind, the IRS has extended the statute for the ERC to five years vs. three. So, we suspect there will be a number of returns audited in the future.
While this article is non-authoritative, it’s one of many that can be found with a simple search that speaks to the subject: When is the Amount of the Employee Retention Credit Subject to Tax?
Lastly, the IRS will most likely not process these credits for 2020 for six months or longer. So, the money won’t be refunded any time soon. If you qualify in 2021, there are some options to receive your money faster.
PPP1 Forgiveness Applications
As stated in an earlier communication, forgiveness applications should now be available through most, or all, lenders and should be considered for filing as soon as possible. For loans under $150K, the application is extremely simple. However, if you need to coordinate the PPP forgiveness with the Employee Retention Credit, or other grants or programs like Families First, the application may not be so straightforward. If your business received assistance from another government program besides PPP that assisted with payroll, we would encourage you to check with your tax preparer prior to filing the application.
The general funds for the second round of PPP funding have been exhausted. The SBA and lenders are not taking new applications at this time, and there is no “chatter” on replenishing the general fund.
However, in January, $15B was set aside for CFI lenders (Community Financial Institutions). Recently, there was approximately $8B left in these allocated funds. You may be able to qualify and obtain a loan from one of these lenders. These lenders should be able to lend through community development, minority, or microlending. If you feel you would qualify for one of these, you may still apply for a PPP2 loan until May 31 or until the lender closes the program.
Biden’s Potential Tax Reform
There continue to be rumblings of a Biden tax overhaul, and the infrastructure bill that includes some tax provisions. Some of these bills may include changes retroactive to January 2021. Needless to say, any Biden tax bill needs to be evaluated seriously as they may include some of the largest tax increases in decades. Without Republican support, most likely the earliest any tax plan could pass is late fall or early winter when the reconciliation process becomes available again to Congress. Our Planning for a Biden Administration Tax Plan presentation from December is still a good summation of possible changes. More to come on this over the next few months.
Should you have any questions on any of these topics, or any other items that relate to your situation, do not hesitate to contact us at 215-723-4881 or via email. We’ll be happy to discuss your situation with you.
Finally, we want to thank everyone for the continued compliments related to our Zoom series over the past year. We continue to evaluate the tax landscape and will not hesitate to have another Zoom session if it will be a substantial benefit to the participants.