Tax-relief Archives - BusinessWest

Examining the Impact of the American Families and Workers Act of 2024

By Contributor February 15, 2024

Accounting and Tax Planning Special Coverage

Potential Tax Relief

By Kristina Drzal Houghton, CPA

This article, written on Feb. 2, highlights the U.S. House of Representatives’ Jan. 31 passage of the Tax Relief for American Families and Workers Act of 2024 (H.R. 7024). However, it’s important to note that the details are subject to change pending the Senate’s vote and the ultimate signing into law by the president.

Despite concerted efforts to get the bill to the Senate in time for the current tax-filing season, this deadline has unfortunately lapsed, causing some concern over timing and efficacy. However, lawmakers remain optimistic about swift passage in the subsequent stages, aiming to minimize the impact on the IRS and enable prompt relief for taxpayers.

INDIVIDUAL TAX RELIEF

One of the core components of this legislation includes an increase in the child tax credit, a move set to benefit families with children across the nation. This concept is further strengthened by the introduction of a refundable portion determined per child, a clear advantage for growing families.

The proposed bill introduces a single change regarding the child tax credit. Currently, the credit is $2,000 per child for taxpayers who do not exceed certain income thresholds. A portion of this credit can be refunded up to $1,600 in 2023. The refundable portion is limited based on the number of qualifying children and the taxpayer’s earned income.

Under the proposed law, the refundable amount will be calculated per child, resulting in a total refundable amount. This change applies to the 2023-25 tax years. Additionally, the maximum amount of the refundable credit will be increased to $1,800 for 2023, $1,900 for 2024, and $2,000 for 2025. The overall child tax credit will also be adjusted for inflation from 2024 onward.

“One of the core components of this legislation includes an increase in the child tax credit, a move set to benefit families with children across the nation. This concept is further strengthened by the introduction of a refundable portion determined per child, a clear advantage for growing families.”

Notably missing from this legislation was a provision that addresses an aspect of the state and local tax deduction, which was capped at $10,000 by the Tax Cuts and Jobs Act in 2017. The $10,000 cap applies to taxpayers filing either single or married filing jointly. Advocates were hoping for a provision to increase the married filing joint cap to be twice the single cap and eliminate that marriage penaly.

BUSINESS TAX RELIEF

In a bid to support the innovative spirit of America, the Tax Relief for American Families and Workers Act also includes provisions to delay the requirement to capitalize and amortize research and experimentation expenditures. This is further bolstered by an extension of the 100% bonus depreciation for properties in service prior to Jan. 1, 2026.

For the hardworking business sector, the Act provides an increase in the Code Sec. 179 deduction limitation and expense limitation for property put into service post-2023.

Research and Experimental Expenses

Under current law, domestic research and experimental expenditures incurred in tax years starting after Dec. 31, 2021 must be amortized over five years. Previously, these expenses could be immediately deducted in the year they were paid or incurred. Research or experiment costs outside the U.S. are deductible over a 15-year period. The proposed law would postpone the application of this rule for research and experimental costs related to domestic activities until tax years starting after Dec. 31, 2025. There will be no change for activities outside the U.S. The bill includes transitional rules for research credits and accounting changes.

Observation: H.R. 7024 provides that a taxpayer can reflect the retroactive application of Section 174 expensing via a change in method of accounting with either a one-year Section 481(a) adjustment or an elective two-year Section 481(a) adjustment. Alternatively, eligible taxpayers generally would be permitted to amend their first tax year beginning on or after Jan. 1, 2022, to reflect current expensing of eligible Section 174 expenditures. Due to the late passage of this bill, businesses may want to consider applying for an extension of time to file their returns so they can analyze which of the three options is most beneficial for them.

Business Interest Limitation

Under current tax law, prior to 2022, the calculation of adjusted taxable income for the business interest expense limitation (Code Sec. 163(j)) excluded deductions for interest, taxes, depreciation, amortization, or depletion (IBITDA). However, starting from 2022, only deductions for interest and taxes were considered, excluding depreciation, amortization, and depletion. The new law would reintroduce depreciation, amortization, and depletion for tax years starting after Dec. 31, 2023, and before Jan. 1, 2026. Additionally, taxpayers can choose to include depreciation, amortization, and depletion for tax years beginning after 2021 and before 2024.

Observation: H.R. 7024 provides that a taxpayer can reflect the retroactive application of using IBITDA to calculate the interest limitation. The bill does not provide as much information on how to effect the retroactive elction as it does with Section 174. Taxpayers with large limitation in 2022 may find it advantageous to amend their returns for this retroactive adoption. It is also unclear if you can elect to provide the provision for 2023 without amending 2022.

For the hardworking business sector, the Act provides an increase in the Code Sec. 179 deduction limitation and expense limitation for property put into service post-2023.

Bonus Depreciation

The most recent change, under the Tax Cuts and Jobs Act of 2017, allowed for immediate expensing of qualified property placed in service between Sept. 17, 2017 and Jan. 1, 2023 (100% bonus depreciation). Starting in 2023, the first-year depreciation gradually reduces (80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026) until it is eliminated for property placed in service in 2027. The proposed bill extends 100% bonus depreciation for property placed in service before Jan. 1, 2026 (Jan. 1, 2027 for longer production period property and certain aircraft). In 2026 and 2027, the 20% and 0% bonus depreciation rates would continue to apply.

Increased 179 Deduction

Under current law, businesses can choose to expense certain qualifying property instead of depreciating it. This includes tangible personal property, off-the-shelf computer software, and qualified real property used in the active conduct of a trade or business. The deduction is limited to an inflation-adjusted amount. In 2024, the deduction is capped at $1.22 million, reduced dollar-for-dollar by expenses exceeding $3.05 million.

Employee Retention Credit

The Employee Retention Tax Credit (ERTC) was established in March 2020 during the COVID-19 pandemic. The purpose of the credit was to provide businesses with a credit against certain payroll taxes if they retained employees during lockdowns that may have impacted their income. The American Rescue Plan Act of 2021 extended the credit and expanded its scope to include Medicare taxes and dropped the precentage threshold for revenue decrease establishing eligibility for the credit. Taxpayers were able to make ERTC claims until April 15, 2025, despite the expiration of the period for which the credit can be claimed.

The IRS has identified fraudulent claims made by taxpayers, often unknowingly, facilitated by third-party processors (COVID-ERTC promoters) who boldly advertised on television and plagued businesses with calls implying that almost any business qualified due to facts and circumstances. To address this issue, the IRS temporarily suspended the acceptance of new claims in late 2023 while investigating potential instances of fraud in its backlog. Additionally, an amnesty program was established for taxpayers to voluntarily withdraw unqualified claims or repay the credit without penalty.

The proposed bill aims to combat fraudulent claims by increasing penalties for COVID-ERTC promoters, extending the limitations period on assessments of ERTC claims to six years, and imposing reporting requirements on COVID-ERTC promoters similar to promoters of listed transactions. Notably, the bill sets Jan. 31, 2024 as the deadline for making ERTC claims.

In Addition

In an effort to reduce compliance burdens on businesses, the Act raises the filing threshold for Form 1099-NEC and 1099-MISC from $600 to $1,000 for payments post-Dec. 31, 2023. The $1,000 will be adjusted for inflation.

IN SUMMARY

In essence, the Tax Relief for American Families and Workers Act of 2024 is a comprehensive package addressing varied aspects of the American economic landscape with a keen eye on relief and progression. These changes aim to promote economic growth, support independent contractors and businesses, and address housing affordability concerns.

While the House’s passage of the Act marks a significant milestone, it’s important to keep a vigilant eye on the upcoming Senate proceedings, as the Act still requires approval there before becoming law.

Kristina Drzal Houghton, CPA is a partner at the Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.

Understanding the Employee Retention Credit

By Contributor June 23, 2020

Accounting and Tax Planning Special Coverage

This Tax-relief Provision of the CARES Act Brings Advantages to Employers

By Carolyn Bourgoin, CPA

Businesses that either repaid in a timely fashion or did not receive a loan pursuant to the Paycheck Protection Program (PPP) should explore their eligibility for the new Employee Retention Credit, one of the tax-relief provisions of the CARES Act passed on March 27.

Like the PPP loan program, the Employee Retention Credit (ERC) is aimed at encouraging eligible employers to continue to pay employees during these difficult times. Qualifying businesses are allowed a refundable tax credit against employment taxes equal to 50% of qualified wages (not to exceed $10,000 in wages per employee).

Let’s take a look at who is eligible and how to determine the credit.

Who Is an Eligible Employer?

All private-sector employers, regardless of size, that carry on a trade or business during calendar year 2020, including tax-exempt organizations, are eligible employers for purposes of claiming the ERC. This is the case as long as the employer did not receive, or repaid by the safe-harbor deadline, a PPP loan. The IRS has clarified that self-employed individuals are not eligible to claim the ERC against their own self-employment taxes, nor are household employers able to claim the credit with respect to their household employees.

Carolyn Bourgoin

First Step: Determine Eligible Quarters to Claim the Credit

Eligible businesses can claim a credit equal to 50% of qualified wages paid between March 12 and Dec. 31, 2020 for any calendar quarter of 2020 where:

• An eligible employer’s business was either fully or partially suspended due to orders from the federal government, or a state government having jurisdiction over the employer limiting commerce, travel, or group meetings due to COVID-19; or

• There is a significant decline in gross receipts. Such a decline occurs when an employer’s gross receipts fall below 50% of what they were for the same calendar quarter in 2019. An employer with gross receipts meeting the 50% drop will continue to qualify thereafter until its gross receipts exceed 80% of its gross receipts for the same quarter in 2019. Exceeding the 80% makes the employer ineligible for the credit for the following calendar quarter.

This is an either/or test, so if a business fails to meet one criteria, it can look to the other in order to qualify. An essential business that chooses to either partially or fully suspend its operations will not qualify for the ERC under the first test, as the government did not mandate the shutdown. It can, however, check to see if it meets the significant decline in gross receipts for any calendar quarter of 2020 that would allow it to potentially claim the ERC.

The gross-receipts test does not require that a business establish a cause for the drop in gross receipts, just that the percentage drop be met.

Second Step: How Many Employees?

Determining the wages that qualify for the ERC depends in part on whether an employer’s average number of full-time-equivalent employees (FTEs) exceeded 100 in 2019. An eligible employer with more than 100 FTEs in 2019 may only count the wages it paid to employees between March 12, 2020 and prior to Jan. 1, 2021 for the time an employee did not provide services during a calendar quarter due to the employer’s operations being shut down by government order or due to a significant decline in the employer’s gross receipts (as defined previously).

“All private-sector employers, regardless of size, that carry on a trade or business during calendar year 2020, including tax-exempt organizations, are eligible employers for purposes of claiming the ERC.”

In addition, an employer of more than 100 FTEs may not count as qualifying wages any increase in the amount of wages it may have opted to pay employees during the time that the employees are not providing services (there is a 30-day lookback period prior to commencement of the business suspension or significant decline in gross receipts to make this determination).

In contrast, qualified wages of an employer that averaged 100 or fewer FTEs in 2019 include wages paid to any employee during any period in the calendar quarter where the employer meets one of the tests in step one. So even wages paid to employees who worked during the economic downturn may qualify for the credit.

Due to the potential difference in qualifying wages, it is important to properly calculate an employer’s ‘full-time’ employees for 2019. For purposes of the ERC, an employee is considered a full-time employee equivalent if he or she worked an average of at least 30 hours per week for any calendar month or 130 hours of service for the month. Businesses that were in operation for all of 2019 then take the sum of the number of FTEs for each month and divide by 12 to determine the number of full-time employee equivalents. Guidance has been issued by the IRS on this calculation for new businesses as well as those that were only in business for a portion of 2019.

Third Step: Calculate the Credit Based on Qualifying Wages

As mentioned earlier, the Employee Retention Credit is equal to 50% of qualifying wages paid after March 12, 2020 and before Jan. 1, 2021, not to exceed $10,000 in total per employee for all calendar quarters. The maximum credit for any one employee is therefore $5,000.

Wages that qualify toward the $10,000-per-employee cap can include a reasonable allocation of qualified healthcare costs. This includes an allocation of the employer portion of health-plan costs as well as the cost paid by an employee with pre-tax salary-reduction contributions. Employer contributions to health savings accounts or Archer Medical Savings Accounts are not considered qualified health-plan expenses for purposes of the ERC.

Qualifying wages do not include:

• Wages paid for qualified family leave or sick leave under the Family First Coronavirus Relief Act due to the potential payroll tax credit;

• Severance payments to terminated employees;

• Accrued sick time, vacation time, or other personal-leave wages paid in 2020 by an employer with more than 100 FTEs;

• Amounts paid to an employee that are exempt from Social Security and Medicare taxes (for example, wages paid to statutory non-employees such as licensed real-estate agents); or

• Wages paid to an employee who is related to the employer (definition of ‘related’ varies depending on whether the employer is a corporation, a non-corporate entity, or an estate or trust).

Eligible employers who averaged more than 100 FTEs in 2019 will then be potentially further limited to the qualifying wages paid to employees who were not providing services during an eligible calendar quarter.

How to Claim the ERC

An eligible business can claim the Employee Retention Credit by reducing its federal employment-tax deposit (without penalty) in any qualifying calendar quarter by the amount of its anticipated employee retention credit. By not having to remit the federal employment-tax deposits, an eligible business has the ability to use these funds to pay wages or other expenses. In its FAQs, the IRS clarified that an employer should factor in the deferral of its share of Social Security tax under the CARES Act prior to determining the amount of employment-tax deposits that it may retain in anticipation of the ERC. The retained employment taxes are accounted for when the Form 941, Employer’s Quarterly Federal Tax Return, is later filed for the quarter.

If the ERC for a particular quarter exceeds the payroll-tax deposits for that period, a business can either wait to file Form 941 to claim the refund, or it can file the new Form 7200, Advance Payment of Employer Credits Due to COVID-19, prior to filing Form 941 to receive a quicker refund.

If an employer later determines in 2021 that they had a significant decline in receipts that occurred in a calendar quarter of 2020 where they would have been eligible for the ERC, the employer can claim the credit by filing a Form 941-X in 2021.

Additional Rules

For purposes of determining eligibility for the credit as well as calculating the credit, certain employers must be aggregated and treated as a single employer.

Also, as a result of claiming the Employee Retention Credit, a qualifying business must reduce its wage/health-insurance deduction on its federal income-tax return by the amount of the credit.

In summary, the Employee Retention Credit is one of several tax-relief options provided by the CARES Act. As it is a refundable credit against federal employment taxes, it is advantageous to all employers, even those who will not have taxable income in 2020. Employers who did not receive PPP funding should check to see if they meet the eligibility requirements and take advantage of this opportunity.

Please note that, at the time this article was written, Congress was considering additional relief provisions that may or may not have impact on the information provided here. u

Carolyn Bourgoin, CPA is a senior manager at Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; [email protected]

Examining the Impact of the American Families and Workers Act of 2024