Oct 17, 2022
The Inflation Reduction Act of 2022 (2022 IRA) was passed to incentivize investment in clean energy and promote the reduction of carbon emissions. A large share of the incentives come in the form of tax credits, which in some cases are extensions or expansions of current credits, such as those for electric vehicles or residential energy upgrades.
Of the tax provisions introduced by the 2022 IRA, one of the most significant to businesses has been the expansion of the Energy Efficient Commercial Buildings Deduction (§179D), which increases the maximum deduction and updates the eligibility requirements for a property’s reduction of energy costs, in addition to other changes.
Under the expanded provision, a deduction is allowed for all or part of the cost of certain energy-savings improvements made to domestic, commercial buildings placed in service as part of the building’s:
- interior lighting systems
- heating, cooling, ventilation (HVAC), and hot water systems
- building envelope
The tax deduction benefits both commercial building owners and lessees along with designers of government-owned buildings. Additionally, the provision states that installation of energy-efficient property may occur as a result of new construction, or through the improvement of an existing commercial or government building.
Efficiency standard: To qualify for the deduction, newly updated eligibility requirements call for energy-efficient property to reduce associated energy costs by 25% or more (decreased from 50% or more) in comparison to a reference building that meets the latest efficiency standards.
Applicable amount: The applicable dollar value of the deduction is $0.50 per square foot, an increase of $0.02 for each percentage point above 25% that a building’s total annual energy cost savings are increased. However the amount cannot be greater than $1/ square foot, and the maximum amount of the deduction in any tax year cannot exceed $1/ square foot minus the total deductions taken over the previous three years (or during a four-year period in cases where the deduction is allowable for someone other than the taxpayer). The applicable dollar value will be adjusted for inflation for tax years beginning after 2022.
An increased dollar value is available for projects that satisfy prevailing wage and apprenticeship requirements for the duration of the construction.
Alternative deduction for energy-efficient retrofit property. Under the 2022 Inflation Act, taxpayers may elect to take an alternative deduction for a qualified retrofit of any eligible property. However, instead of a reduction in total annual energy power costs, the deduction is based on the reduction of energy usage intensity.
For more information on how you may be able to take advantage of this deduction or any other tax relief provisions under the 2022 Inflation Act, contact William Vaughan Company’s team of trusted tax professionals.
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Categories: Tax Planning
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
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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Categories: Tax Planning
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