Nov 15, 2021
Don’t leave ERTC money on the table!
The Employee Retention Tax Credit (ERTC) is a provision established under the CARES Act which has been enhanced by additional legislation and could provide an immense amount of capital to employers. Unfortunately, statistics are showing the credit is being underutilized. The good news is with year-end planning on the horizon, now is the perfect time to leverage the ERTC.
What is the ERTC?
This is a refundable tax credit employers can claim against certain employment taxes, equal to a percentage of qualified wages and health insurance premiums paid after March 12, 2020, and before September 30, 2021.
For 2020, the credit is 50% of qualified payments, up to $10,000 per employee. Simply put, an eligible business has the potential to request refunds of up to $5,000 per employee for the year.
For 2021, the credit increases to 70% of qualified payments, up to $10,000 per employee per quarter. The credit was intended to run through December 31, 2021, but the passing of the recent Infrastructure Bill put an end to it after September 30. Nevertheless, the credit is still fair game for the first three quarters of 2021. With a maximum credit of $7,000 per employee, per quarter, a business eligible for all three quarters of 2021, could receive refunds of $21,000 per employee. Without question, the ERTC can provide much-needed dollars for eligible employers.
How do I know if my business is eligible?
For most businesses, eligibility is determined by meeting one of two tests; with a third test available for quarters 3 and 4 of 2021, which will be outlined later.
- TEST #1 – A measure of decline in gross receipts. If an employer experiences a significant decline in gross receipts for any calendar quarter, as compared to the same calendar quarter in 2019, they will be eligible for the credit in that quarter. For 2020, this is defined as gross receipts that are less than 50% of gross receipts for the same quarter in 2019, and for 2021, this is gross receipts being less than 80% of gross receipts for the same quarter in 2019.
- TEST #2 – A full or partial suspension of operations. If an employer was subject to any full or partial suspension of operations because of government orders related to COVID-19 they could be eligible. These orders could be Federal, State, county, and/or municipality. Even if your business was deemed essential and was not directly affected by such orders, there still could be avenues to be eligible for the credit.
- TEST #3 – Under a third test, if a business can meet the definition of a recovery startup business, they can claim the credits for the 3rd and 4th quarters of 2021 only (not exceeding $50,000 per quarter). A recovery startup business is any employer that began a trade or business after February 15, 2020, and has average annual gross receipts of less than $1,000,000.
What are some important details to keep in mind?
- First, gross receipts are determined based on the method used for the employer’s tax return. Meaning, if your business uses the cash method for tax purposes, then gross receipts for Test #1 should be calculated using the cash method, even if your financial statements use the accrual method. This could be beneficial for businesses, especially during times when the pandemic was hitting the hardest and collections slowed.
- Another important item to keep in mind is that, for this credit, employers are considered either small or large. For 2020, a small employer is one that, based on 2019 counts, averaged 100 or fewer full-time employees. For 2021, this number increases to an average of 500 or fewer full-time employees, still based on 2019 counts. If a business is above these amounts, they are considered large. Small employer status is more advantageous because it allows qualified wages to include all wages paid. If a business is considered a large employer, qualified wages are limited to wages paid to an employee only for the time that employee was not providing services. For example, if your business is a large employer and operations were partially suspended, but all your employees continued working during that time, your business may not be able to claim any credits on the wages paid during that suspension period. For this purpose, a full-time employee is an employee that, in 2019, averaged at least 30 hours per week or 130 hours per month. As an example, an employer in 2019 who had 5 employees that worked 25 hours per week and 5 employees that worked 30 hours a week, would only be considered to have 5 full-time employees. Early on, a common misconception was that full-time employees were equal to full-time equivalents, which may have caused some businesses to think they were large employers, when in fact that may not be the case.
- Finally, there are several different paths a business could take to qualify for the ERTC based on a full or partial suspension of operations due to governmental orders. As previously mentioned, even if your business was not directly affected by the orders, there still could be ways to qualify for the credit. We encourage you not to overlook this test as it could be very beneficial to revisit.
What are my next steps?
With year-end planning season looming, your William Vaughan Company advisor will surely be discussing this topic with you in the coming weeks. If you are not currently a client, but this topic has piqued your interest and you would like us to look at how this credit might benefit your business, please do not hesitate to reach out to us. As mentioned, the credit has been generally underutilized, so we would love to help your business realize the greatest benefits it can.
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Mike Hanf, CPA, CGMA
Categories: Tax Planning
Nov 01, 2021
Charitable Gift Planning Opportunities
In the third installment to our Timely Estate Planning Strategies Series, we outline how traditional income and estate planning may incorporate an individual’s desire to fulfill philanthropic goals. Giving can be done both while living (receiving current income tax deductions) and through one’s will at the time of death (garnering estate tax deductions). However, given the current ‘perfect storm’ we outlined in the first blog of the series, there is no better time to address your giving strategies.
The estate tax exclusion is currently $ 11.7 million per individual which means persons with an estate less than this will NOT benefit from charitable bequests in their wills. The emphasis for these individuals should be obtaining current income tax deductions while fulfilling their charitable intent. Individuals with taxable estates greater than $ 11.7 million can receive a double tax benefit by making lifetime charitable gifts. The donation is deductible for income tax purposes when the gift is made; the property along with any future appreciation is removed from the taxable estate.
Several opportunities to benefit from current charitable gifts are available. It is important to note, total itemized deductions including charitable deductions must exceed the standard deduction to receive a current income tax benefit. Some of your options include:
- Bunching contributions into one year to make sure you exceed the standard deduction.
- Contributing to Donor-Advised Funds (DAFs). A large contribution to the fund in year one provides the income tax deduction. After which, amounts can be paid from the fund to charities over a designated number of future years.
- Donating to Charitable Remainder Trusts. The remainder interest in a given property is donated to charity, obtaining a current income tax deduction, and retaining an annuity (income) interest in the property during the donor’s lifetime. Or the reverse of this,
- Giving to Charitable Lead Trusts. This provides a charity an annual distribution while the remainder interest passes to a Trust beneficiary in the future.
- Making Qualified Charitable Distributions (QCDs). Taxpayers over the age of 70 1/2 contribute directly from their IRA to a specified charity. The distribution is not taxable and no charitable deduction is taken. Structured properly, this can convert required minimum distributions into nontaxable withdrawals from the retirement account.
Your WVC advisor would love to meet with you and your estate planning team to see how charitable transactions could help you meet your philanthropic goals in a tax-efficient manner.
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wvco.com | 419.891.1040
Categories: Estate Planning
Oct 21, 2021
Low-Interest Rate Opportunities
An important component of personal financial and estate planning often includes transferring assets and future growth of those assets to younger generations or to charitable organizations while reducing current income taxes and future potential estate taxes. Once properly made, appreciation of such transfers and any future income generated thereon can be free of transfer taxes.
The current low-interest-rate environment provides an excellent opportunity to shift wealth to future generations. While we cannot predict the future, we can anticipate the writing on the wall. As noted in our previous post, Estate Planning Strategies Before Year-End: Part One, recent and proposed massive spending by the federal government will likely put pressure on rates. This coupled with various proposals to modify tax laws relating to gift and estate taxation, individuals should plan on implementing any such plans sooner rather than later.
Planning techniques benefitting from lower rates include the following:
1. Charitable Lead Annuity Trust (CLAT). This trust can be set up to provide annual distributions to charity for a specified number of years. Any growth in the value of the assets above the applicable federal interest rate passes to the non-charitable remainder beneficiaries (i.e. the taxpayer’s children) free of estate or gift tax at the termination of the trust.
2. Intra-Family Loans. It’s a good time to loan money to family members or trusts for members’ benefit. Interest can be charged at very low rates; to the extent the borrowers are able to leverage the funds to generate a return greater than the stated rate, wealth will be transferred without any transfer tax.
3. “Defective” Grantor Trusts. When a taxpayer (grantor) transfers assets to fund this trust, certain rights might be retained causing the trust to be “defective”. This may include the right to substitute other assets of equal value in future years. As a result, the annual income of the trust remains taxable to the grantor even though the income inures to the benefit of the beneficiaries. The effect of this is to reduce the grantor’s taxable estate by the amount of the income taxes paid annually. These trusts are often used to sell assets expected to grow in the future to the trust in exchange for a low-interest rate promissory note. The grantor does not recognize gain from the sale, and no income is recognized on the interest payments. The appreciation in the assets will be realized by the next generation without any transfer tax.
4. Charitable Remainder Trust. If a current income tax deduction is more important than saving transfer taxes, this trust may be implemented. The trust will make annual payments to its beneficiaries for a period of time. At the termination of the trust, the principal balance goes to the specified charity. This “remainder interest” is calculated at a present value to determine the current charitable contribution income tax deduction available to the donor. Lower interest rates translate to a larger remainder interest, and thus larger income tax deduction.
5. Grantor Retained Annuity Trust (GRAT). A grantor transfers assets to the trust and retains the right to receive specified payments from the trust for a specified number of years. At the end of the trust term, the accumulated principal of the trust passes to the specified donees, often the grantor’s children.
The annual payments can be structured so that the present value of the annual payments will equal the value of the property transferred to the trust. The trust is said to be “zeroed-out” because the donees’ remainder interest has no value for gift tax purposes, thus no gift tax exemption is used and no gift tax is due. To the extent, the increase in the value of the assets exceeds the annuity stream paid to the grantor, the assets remaining in the trust pass to the beneficiaries becoming a tax-free gift.
These are just some of the planning opportunities your William Vaughan advisor can discuss with you. We encourage you to take this important step now to avoid potentially detrimental changes which have been proposed in Washington. Early adoption and implementation have perhaps never been more important.
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wvco.com | 419.891.1040
Oct 11, 2021
Current Ideal Estate & Gift Planning Environment On Its Way Out
For the past few years, we have experienced a near-perfect environment for estate and gift planning purposes given the vastly expanded exemption amounts, low-interest rates, and retention of step-up in basis at death.
The Perfect Storm
How did we get here you ask? When Congress passed the 2017 Tax Cuts and Jobs Act (TCJA), substantial changes were made to the estate, generation-skipping transfer, and gift tax laws. Most notably, the TCJA included:
- A doubling of the basic exclusion amount from $5 million to $10 million, indexed for inflation, and an exclusion amount of $11.7 million for 2021. Coupled with proper planning around the concept of portability of a spouse’s amount, this could allow a married couple up to $23.4 million of assets to be exempt from the estate tax.
- The retention of the concept of “step-up” in basis at death. With the increased estate exclusion amount, income tax savings from the basis step-up at death sometimes became more important than trying to avoid estate tax via gifting or other transfer techniques.
These provisions were to be effective from 2018 through the end of 2025. Furthermore, regulations subsequently issued by the IRS stated there would be no clawback or adjustment of increased amounts taken by taxpayers during this period when the amounts reverted back to the old amounts on January 1, 2026.
This coupled with recent ultra-low interest rates left taxpayers and their planners taking a renewed interest in reviewing family gift and estate plans to take advantage of the perfect storm.
While these conditions were expected to remain until 2026, the political winds have changed and with that is incredible uncertainty regarding what changes might be coming and when.
A number of proposals have been outlined which would greatly impact gift and estate plans—both existing and those contemplated. Among the proposed changes:
- drastic reduction in the basic estate exclusion amount
- possible increase in estate tax rates
- restrictions on certain transfers in trust
- restrictions on discounts when valuing property
More critical are the various effective dates proposed which may be retroactive to earlier this year.
While no one can predict the future, these potential changes make for increased risks and uncertainty in planning in the current environment. What is clear, however, is that regardless of what changes are ultimately made and when their effective date might be, the estate and gift tax rules will be far less liberal or beneficial than they are right now.
What Should I Do Now?
We believe significant planning opportunities exist under the current law and urge you to review your personal plans now. If new trusts or other asset transfer plans are contemplated, you will need to act immediately.
Here are some basic recommendations. Stay tuned to our series as we will delve into two other opportunities you should be considering before year-end:
- Make Gifting A Priority – Your timeframe to complete gifts may be much shorter if your plan involves an irrevocable grantor trust or gifts of interests in nonbusiness assets held in a limited liability company (LLC), partnership, or other private entity.
- Fund Grantor Trusts – Irrevocable grantor trusts allow you to gift assets and continue to be the owner of those assets for income tax purposes. Under the new proposals, these tax benefits would no longer be possible as soon as the new law is enacted.
- Complete Gifts of Nonbusiness Assets in LLCs or LPs – Currently, if you gift a minority or non-controlling interest in a private entity, the interest is valued at a lower price to account for the lack of control and marketability. Under the new proposals, these discounts would go away if the LLC’s assets include publicly traded securities, non-operating cash, or other passive, non-business assets.
We highly encourage you to not only contact your William Vaughan Company practitioner but also your financial advisors so your personal situation can be reviewed and updated before your potential risk may increase.
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wvco.com | 419.891.1040
Jul 16, 2021
As we are heading into the second half of 2021, individuals are now starting to receive their advance Child Tax Credits payments as a result of President Biden’s American Rescue Plan. The law, signed in March, increases the overall child tax credit, expands it to include children turning 17 this year, and adds another annual $600 benefit per child under six years old. While the advance payment on the credit may be a welcomed windfall, there are some important aspects of this tax credit individuals should be aware of when receiving these payments.
Individuals with dependent children started receiving monthly payments on July 15th which are estimated to total half of the amount of their estimated 2021 Child Tax Credit. The other half of the Child Tax Credit will be received when the 2021 Tax Return is filed in 2022. Individuals are required to reconcile the payments received on their 2021 Tax Return so they should keep track of the payments received throughout the year and include that information with their tax documents.
If an individual receives more than what is due to them, they will be required to pay back the difference. This differs from the stimulus payments, where individuals were allowed to keep the additional funds. This primarily applies to those with a dramatic increase in income during 2021. An example of this scenario:
- If your income level qualified you to receive additional Child Tax Credits in 2020, and your new income level in 2021 does not, you will have to pay back the money received in regards to the additional Child Tax Credit you no longer qualify for.
Increase in Tax Due
The advance child tax credit received will be in lieu of claiming the tax credit on the 2021 income tax return. Since half of this credit will be received by the time the 2021 income tax return will be due, the amount of the child tax credit will be halved on the 2021 Return. This means that there will be fewer credits to offset against the tax due, which may cause a higher-than-normal tax due, or decrease the potential refund some are used to receiving. This holds especially true for those with a dramatic increase in income for 2021.
Opting Out of Advanced Payments
If taxpayers do not wish to receive the advanced payments of the Child Tax Credit, they can elect out of them. Typical reasons for opting out of the advanced payment are as follows:
- An individual normally has a balance due to the IRS after filing their taxes
- An individual doesn’t claim a dependent every year due to shared custody arrangements
- An individual’s dependent(s) is(are) aging out of the range of the credit
- An individual prefers having a large tax refund
Anyone wishing to elect out of the advanced payments, you may do so by clicking this link and following the instructions provided.
Changing Bank Account Information
If taxpayers would like to learn how to change/update their banking or direct deposit information, click here.
New IRS Portal
The IRS is currently developing a portal in which a user can enter updated information impacting the amount of payment an individual will receive. A user can do all of the following in this portal:
- Update marital status
- Enter in children born in 2021
- Re-enrollment into the Child Tax Credit if you were previously unenrolled
- Adjust your income for the calculation of the Child Tax Credit
As previously stated, this portal is still in development but the IRS is looking to release this portal in the coming months. Reach out to your WVC professional for questions on your specific situation.
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wvco.com | 419.891.1040
Categories: Tax Planning