Tax & Payroll Credits
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Help with COVID-19 Tax & Payroll Credits
There are several federal and state tax law changes related to the COVID-19, and there are new developments seemingly every day. Amidst the current crisis, two significant pieces of stimulus legislation were signed into law and provide opportunities for businesses.:
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)
The Families First Coronavirus Relief Act (FFCRA)
The CARES Act
Employee Retention Credit
This credit is available to employers with less than 500 employees who retain employees during a period of shut-down. It is also available to employers with less than 100 employees during a period when the business sees a drop in gross receipts of greater than 50% over the same period in the prior year. This credit is not available to any employer who utilizes the paycheck protection loan described above.
Employer Payroll Tax & Self-Employment Tax
A business or a self-employed taxpayer can defer paying the employer share of Social Security tax that would otherwise be due from the date the bill is signed until December 31, 2020. The deferred amount would be paid 50% on December 31, 2021, and 50% on December 31, 2022. For a self-employed taxpayer, the “employer” share of the social security tax is half of the total self-employment tax related to social security.
This deferral is allowed for taxpayers using payroll credits under the FFCRA, but it is not available to any employer who utilizes the paycheck protection loan.
Qualified Improvement Property
Tax Reform included a provision eliminating the “qualified improvement property” qualifying for a 15-year asset life and eligible for 100% bonus depreciation. It was a drafting error in the bill. The CARES act fixes the drafting error and restores the 15-year qualified improvement property life. This change is retroactive to 2018 and allows taxpayers to amend their 2018 or 2019 returns to take advantage of the provision.
Business Interest Expense Limitation
Tax Reform also included a provision to limit business interest to 30% of adjusted taxable income for certain taxpayers beginning in 2018. The CARES Act increases the limit to 50% for tax years 2019 and 2020.
Changes to Net Operating Loss Rules
The CARES act reinstates the ability to carry back the taxpayer’s net operating loss for losses from 2018, 2019, and 2020. These losses can be carried back five years.
Additionally, losses carried to 2019 and 2020 will be permitted to offset 100% of taxable income.
There are several tax implications from FFCRA, including a 100% tax credit for amounts paid out to employees under the provisions for sick pay or family leave. Please note this provision applies only to employers with 500 employees or less, and there are certain other exemptions for employers with under 50 employees.
The bill provides the following benefits to employees:
Employees who are on sick leave because they are ill or because of a government-ordered shut-down of the business can receive their full pay, up to $511 per day for 10 days, or $5,110 total.
Leave taken to care for children whose schools or daycares have closed is paid at two-thirds the employee’s regular rate of pay, with a maximum of $200 per day for 10 weeks, or $10,000 total.
Employers cannot force employees to use up vacation or other sick time before receiving this benefit.
Self-employed individuals can also receive a benefit up to the limits described above.
There is a 10-day waiting period before this benefit applies. Employees can use existing sick or vacation time to cover these days.
Employers receive a tax credit on their quarterly payroll tax return for wages paid under the FFCRA in that quarter. This credit is refundable if the total wages related to the FFCRA exceed the total payroll tax liability. Employers may also shorten their payroll tax deposits based on the expected credit. Employers may also apply for an advance if the expected credit is more than their total payroll tax liability.
We can help you identify all credits you may be eligible for. Smith Schafer has over over 45 years of experience helping businesses effectively manage taxes, credits, and deductions.
Do You Have Questions?
More than two years after COVID-19 changed the world, business valuations are still challenging. At the midpoint of 2022, the idea that things have returned to ‘normal’ is certainly debatable. In many instances, historic valuation inputs, specifically past performance, cannot be taken as an indication of future performance.
Business owners are facing operational and financial challenges, including those related to recruiting and employee retention. As of March 2022, the Employment Cost Index for total compensation in the Midwest rose by 5.1% compared to March 2021.
The Employee Retention Tax Credit (ERTC) helped employers bolster cash flow and avoided layoffs during the most uncertain periods of COVID. The confluence of state issued forced business closures and stay at home orders created adverse conditions for many Minnesota companies. The program provided a desperately needed capital infusion to struggling businesses.
We are committed to continuing to provide excellent service as we all navigate these unprecedented times. We are grateful for our relationship and encourage you to contact us if you have questions or would like more information.
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