Tax-Free Employer Contribution to Student Loan Debt Incentive

Mar 23, 2021

Statistics show that a mere 8% of employers offer some kind of student loan repayment option. While this is not a new phenomenon, bigger corporations like Google and Hulu recognize the value-add of such offering to attract and retain top talent. Recent changes to a CARES Act provision providing employers tax incentives if they offer student loan repayments has been making news. Similar to employer-sponsored retirement and health care plans, employers can contribute up to $5,250 toward an employee’s student loan balance (principal or interest) and the payment will be free from payroll and income tax under Section 2206 of the CARES Act. This temporary tax-free provision has now been extended for at least five years, and employers are starting to take notice.

Due to the pandemic, many employers are focusing efforts on employee wellbeing and financial stability. This opportunity benefits both sides: the employee doesn’t have to pay income tax on the $5,250 and the employer gets a tax deduction. Some employers have evaluated the benefit of providing annual raises or offering a contribution to student loan debt. Given the economic impact of the pandemic, some may prefer the latter. Especially with student loan interest suspended until September of this year.

If you are interested in taking advantage of this tax-free provision, employers who already maintain an educational assistance program will need to amend their program, and employers who do not already maintain such a program will need to adopt one. Developing a written plan that outlines: 1) how to notify employees of the program, 2) eligibility and, 3) benefits is a good place to start. If you have questions, please contact your William Vaughan Company advisor today.

Categories: COVID-19, Tax Planning


COVID-Related Fraud Risk on the Rise

Feb 19, 2021

Many small business owners do not believe their businesses can or will fall victim to occupational fraud. Due to this belief and budget restrictions, many small businesses do not make this a priority, which leaves them vulnerable.

According to the Association of Certified Fraud Examiners’ 2020 Report, financial statement fraud is the costliest type of occupational fraud affecting organizations. Financial statement fraud is not only costly from a fiscal standpoint, but it also impacts trust within the organization, the community, and with investors.

The rapid advance of COVID-19 has placed a significant strain on organizations and individuals alike. Donald R. Cressey’s fraud triangle theory includes the three major factors that are commonly present when financial statement fraud occurs: Pressure, Opportunity, and Rationalization.

Here is how COVID-19 has impacted these factors:

Pressure – Organizations are facing challenges never experienced before. COVID-19 has left many facing revenue loss, supply chain disruptions, and employee wellness concerns. All these factors, and more, are causing undue pressure to meet financial expectations.

Opportunity – While organizations are receiving state and federal funding to cope with the financial impact of COVID-19 disruption, there are dramatic shifts in operations with remote working and a reduction of in-office staff. This means internal controls are reduced and accessibility increased. These become prime opportunities for fraud.

Rationalization – Mounting stress impacts individual decision-making skills, leading people to rationalize actions they would otherwise regard unacceptable or illegal. Employees may rationalize they are “owed” financial support because of the work they do.

Some potential areas to consider when thinking about your organization include:

  • Revenue recognition – The timing and amount of revenues recognized.
  • Allowances and reserves – Changes in methodology and unusual adjustments.
  • Valuations – Significant estimates used in projections, declining cash flows, and idle assets.
  • Treatment of expenses – Expenses are recorded in the proper period.
  • Disclosures – The adequacy and sufficiency of disclosures.
  • Margins – Reasonableness of margins given the current year operations.
  • Internal control – Opportunity for control override.

These are just a few of the common ways for financial statement fraud to occur. While we all work diligently to recover from the COVID-19 disruption, we need to be aware of the heightened risks and adjust our processes and tasks to monitor for this risk.

If your company needs assistance, William Vaughan is here to assist you.

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Juli Seiwert, CPA

419.891.1040 | juli.seiwert@wvco.com

Categories: Audit & Accounting, COVID-19


Ohio Court Sides with Restaurant Group in Business Interruption Insurance Lawsuit

Feb 15, 2021

The U.S. District Court for the Northern District of Ohio recently ruled in the case of Henderson Road Restaurant Systems, Inc. vs. Zurich American Insurance Company, that the restaurant group is entitled to business interruption insurance coverage due to lost sales and increasing expenditures as a result of a government-ordered shutdown. Business interruption insurance has been widely disputed during the COVID-19 pandemic as many business owners have sought compensation for losses incurred during government-imposed shutdowns and curfews. The court ruled in favor of the restaurant group claiming it had a valid claim even though a provision within the policy denied coverage for any shutdowns caused by a microorganism. The Court argued the government orders were what caused the shutdown, not the actual novel coronavirus. Thus, the microorganism provision does not prevent the repayment.

In its defense, the insurer argued the restaurant group did not satisfy the requirement within the policy stating business income loss must be tied to “a direct physical loss of or damage to”. However, the court agreed with the restaurant group noting it lost its ability to use the insured properties for their intended purpose. The judge maintained the temporary state and local closure orders led to the restaurant group to suffer a covered loss because the orders prohibited them from allowing in-person dining, which was the foundation of their business model.

The case has been certified for an immediate appeal. If the court’s decision survives the appeal, all businesses in Ohio closed due to shutdown orders may be entitled to recover some form of their losses from their insurer. Policyholders and insurers in Ohio await a resolution of these key issues and will look for clarification of the policy interpretation rules by the Sixth Circuit or the Ohio Supreme Court.

For more information on our restaurant practice and the services we offer, please connect with our practice leader below:

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Kristin Metzger, CPA

Restaurant Practice Leader

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Categories: COVID-19, Restaurant & Hospitality


Employee Retention Tax Credit Expanded Under CAA

Jan 06, 2021

Prior to the passage of the Consolidated Appropriations Act, 2021, (CAA), the Employee Retention Tax Credit (ERTC) was as afterthought reserved to the deepest recesses of most employers’ minds as in the original CARES Act, taking a PPP loan and requesting subsequent forgiveness of that loan precluded businesses from also taking the ERTC. At best, the ERTC was a backup option for businesses that failed to request a PPP loan on time or had too many employees for the PPP loan. Now, however, with the passage of the Consolidated Appropriations Act, 2021 just days ago, the ERTC is retroactively available to employers even if they took a PPP loan.

The ERTC is a refundable payroll tax credit that can be taken against employment taxes equal to 50 percent of the qualified wages an employer pays to employees after March 12, 2020, and through December 31, 2020.

This post dives into the details of the ERTC and the mechanics of how employers can capitalize on this additional benefit.

The ERTC for 2020
As noted above, employers that borrowed a PPP loan can now also claim the ERTC for 2020 but not on the same dollars of payroll costs. What this means is wages and health care costs used in calculating the ERTC cannot also be used in deriving PPP loan forgiveness. Simply put, there’s no double-dipping. In order the qualify for the ERTC an employer must satisfy one of the following conditions:

  • Full or partial suspension of business operations during any calendar quarter due to government orders limiting commerce, travel, or group meetings as a result of COVID-19 (this does not include individuals business choices or simple advisories by public officials), OR
  • A significant (>50%) decline in gross receipts in a 2020 calendar quarter in relation to the same quarter in 2019.

If the significant gross receipts decline qualification is met, every quarter thereafter is considered a qualifying quarter until the first day of a calendar quarter following a quarter in which gross receipts returned to at least 80% of the gross receipts in the same quarter during 2019.

Example: Gross receipts for 2020 are $100,000, $150,000, $100,000, and $120,000 for Q1, Q2, Q3, and Q4 of 2019 respectively. Gross receipts are $45,000, $112,500, $83,000, and $90,000 for Q1, Q2, Q3, and Q4 of 2020 respectively. The employer would qualify for the ERTC beginning in quarter one since gross receipts decreased 55%. Quarter four would not be a qualified quarter since gross receipts rose back to 83% of the prior year’s receipts during the 3rd quarter.

If a business began in the middle of a quarter, gross receipts would be extrapolated to estimate the total quarter’s receipts. For example, if a business began on June 1st and reported $50,000 in gross receipts for the month, the business would use $150,000 of gross receipts for the 2nd quarter of 2019 ($50,000 x 3 months). Extrapolated gross receipts would be used for any prior quarter in 2019.

Once an employer has determined they qualify under one of the stipulations above, the next step is to determine on which wages to calculate the credit. First, in the event that a business is fully or partially suspended, only wages paid during the period of suspension can be used in calculating the ERTC. If the business qualifies based on the gross receipts test, the wages from each qualifying quarter can be used. The number of average monthly full-time employees (FTEs) significantly affects what wages can be used under either qualifying event. If the employer had less than or equal to 100 average monthly (FTEs) in 2019, then all wages paid to all employees during the eligible time period can give rise to a credit. If however, the employer had greater than 100 average monthly FTEs in 2019, only wages paid to employees during the eligible time period to NOT WORK are eligible for the credit. For purposes of this rule, and FTE is an employee who, for any calendar month in 2019, had an average of at least 30 hours of service per week or 130 for the month. This is not a fractional calculation. All employees working less than 30 hours count as zero FTEs in the average monthly calculation.

After considering all of the qualifications, the calculation of the credit is pretty straightforward. The ERTC is 50% of up to $10,000 of wages, including certain health insurance costs per employee per year. Let’s look at a simple example.

As seen in the table above, Jed’s quarter 3 wages are limited to $1,000 since $9,000 of his wages were already accumulated in quarters 1 and 2. Likewise, Jack’s wages are limited beginning in the second quarter and none of his wages are eligible in quarter 3.

One caveat to keep in mind when running the numbers on this credit is that wages up to the amount of the credit are not allowed as a deduction on the employer’s income tax return. So if an employer claims a $5,000 credit on $10,000 of wages, $5,000 of those wages are non-deductible for tax purposes.

As for businesses with multiple entities or subsidiaries, the following aggregation rules apply:

  • if ONE business in the group has been partially or fully suspended, then all businesses in the group are considered to have been partially or fully suspended
  • when calculating the percentage decline in gross receipts quarter over quarter, the gross receipts of ALL aggregated businesses must be taken into account
  • when determining FTEs for purposes of the 100 FTE threshold, employees from all of the businesses in the group must be added together

Finally, in order to claim this credit, the employer can use one of two approaches. First, employers will report their total qualified wages and related health insurance costs for each quarter on their quarterly payroll tax returns (Form 941 for most employers). The credit is then taken against amounts that would have otherwise been deposited including federal income tax withheld, the employer’s share of Social Security and Medicare tax, and the employees’ share of Social Security and Medicare tax. The second acceptable method is to request an advance of the ERTC by submitting Form 7200.

OK – intermission. Stand up, stretch, use the restroom, and refill your coffee. We made it through the 2020 provisions of the Employee Retention Tax Credit. Next, we are going to breeze through the extension of the ERTC into 2021 provided by the Consolidated Appropriations Act, 2021. Here we go…

Changes for the 2021 ERTC Program
Congress voted to extend the ERTC into 2021 with the program set to end on June 30, 2021. The credit percentage has been increased from 50% to 70% and it is now calculated on $10,000 of wages per employee per quarter. In addition, the FTE threshold is up to 500 FTEs vs. 100 in 2020 and, what is considered a significant reduction in gross receipts quarter over quarter is down from greater than 50% to greater than 20%. Furthermore, congress tossed up a softball by including the provision that, when considering gross receipts for the first quarter of 2021, the employer can elect to compare Q4 of 2020 vs. Q4 of 2019 instead of Q1 of 2021 vs. Q1 of 2019 in the event that there’s a benefit to doing so.

One additional rule put in place for 2021 is that the advance credit claimed via Form 7200 cannot exceed 70% of the average quarterly wages paid in 2019.

As can be expected, the various allocations and calculations possible under the multitude of possible scenarios are far too comprehensive to include in the overview of this blog. When considering the ERTC for your business, do not hesitate to reach out to a William Vaughan adviser for assistance on maximizing the benefits of this program.

By: Jon Floering, CPA

Categories: COVID-19, Tax Planning


Americans Begin to Receive Second Round of COVID-19 Stimulus Checks

Dec 30, 2020

Tuesday afternoon, U.S Treasury Secretary Steven Mnuchin took to social media announcing the disbursement timeline for the second round of stimulus checks. He noted the following:

  • Direct Deposit – Individuals who have direct deposit set up with the IRS can start looking for their second stimulus payments as early as last evening (12/29) and continue into next week.
  • Paper Checks – The IRS will begin sending out paper checks today, Wednesday (12/30/20), which means people should begin receiving those checks within the next two weeks.*
  • Status of Payment – Mnuchin also stated later this week, you can check the status of your payment here

*To speed up delivery, a limited number of people will receive their second stimulus payment by debit card. But the form of payment for your second stimulus check may be different than your first payment. Some people who received a paper check last time might receive a debit card this time, and some people who received a debit card last time could receive a paper check. The pre-paid cards will come in white envelopes that “prominently displays the U.S. Department of the Treasury seal,” the IRS said. The card will bear the Visa name on the front and the name of the issuing bank, MetaBank, will be on the card’s back. The information included with the card will explain that this is your Economic Impact Payment. There’s more information on the pre-paid cards here.

While Congress remains in discussion about an increase to a $2,000 stimulus amount, what we know for now is:

  • As it currently stands, the checks will be for $600 for eligible adults, and $600 per dependent, meaning a family of four could receive $2,400.
  • Individuals who earned less than $75,000 and those married filing jointly who earned less than $150,000 in 2019 are eligible for the full amount.
  • Those who made more are eligible for reduced stimulus checks at a rate of $5 per $100 of additional income.
  • The checks phase out completely for individuals that earned $87,000 and couples that made $174,000 in 2019.

If you have questions regarding your stimulus check, please contact your William Vaughan Company advisor or contact us at 419.891.1040. We’d be happy to help!

Categories: COVID-19