IRS releases guidance on Q4 removal of employee retention credit

December 6, 2021|By RSM US LLP

December 05, 2021

The Infrastructure Investment and Jobs Act passed in November ended the employee retention credit (ERTC) early, changing the eligible wages to only those paid before Oct. 1, 2021 rather than Jan. 1, 2022 as previously expanded in the American Rescue Plan Act. This change does not apply to recovery startup businesses. 

Many businesses were filing for this credit on quarterly Form 941, or retroactively on Form 941-X, and thus, are not be able to file for the fourth quarter. Some businesses, though, may have been holding payroll tax deposits in anticipation of fourth quarter credits as prior guidance allowed. The IRS has now released Notice 2021-65 (the Notice) to provide guidance for those employers to make adjustments for the taxes now owed for the fourth quarter that were not previously anticipated.

Specifically, the Notice provides:

  • Employers who already received an advance payment of the fourth quarter credit, and who are no longer eligible for the fourth quarter, must repay the amount by the due date for the fourth quarter employment tax return or be subject to failure to pay penalties.
  • Employers who were following prior guidance to reduce fourth quarter deposits in anticipation of a credit, and who are no longer eligible for a credit in the fourth quarter, will not be subject to failure to deposit penalties for deposits due on or before Dec. 20, 2021 if the employer deposits such amounts by the due date for wages paid on Dec. 31, 2021, according to the employer’s deposit schedule and reports the liability on the fourth quarter employment tax return per the instructions. It is important to note if this liability would result in more than $100,000 due on Dec. 31, 2021, then the next day rule will apply.

Employers who do not qualify for penalty relief under the Notice may provide a reasonable cause explanation upon receipt of an IRS notice of a failure to deposit penalty.

This Notice has been anticipated since legislation to remove the credit drifted into the fourth quarter itself. Some companies had speculated a longer grace period through the first quarter of 2022 may apply, but this is not the case. Employers should carefully review the guidance and coordinate with payroll providers, where applicable, to address the deadlines for penalty relief.

 

This article was written by Anne Bushman, Karen Field and originally appeared on 2021-12-05.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2021/irs-releases-guidance-on-q4-removal-of-employee-retention-credit.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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IRS issues employee retention credit gross receipt exclusion procedure

August 11, 2021|By RSM US LLP

August 10, 2021

In very welcomed news, the IRS released guidance allowing employers to exclude Paycheck Protection Program (PPP) loan forgiveness, Restaurant Revitalization Fund (RRF) grants, and Shuttered Venue Operator Grants (SVOG) from the Employee Retention Tax Credit (ERTC) gross receipts calculation. 

Background

Eligibility for the ERTC may be dependent on the relative reduction in gross receipts between periods (for more background on the ERTC, read our article here). For example, an employer that can demonstrate at least a 50% decline in gross receipts for a quarter in 2020 may be eligible. For 2021, the employer that can demonstrate at least a 20% decline in gross receipts may be eligible. To determine gross receipts, the ERTC requires employers to look to section 448(c) and Reg. section 1.448-1T(f)(2)(v) or section 6033 and Reg. section 1.6033-2(g)(4) depending on the classification of an entity. 

In this recent revenue procedure, the IRS concluded that congressional intent was to allow employers to participate in the ERTC in conjunction with the aforementioned loan forgiveness or grant programs in the CARES Act and that including these items in gross receipts may preclude eligibility for some employers that would otherwise be eligible. As a result, the IRS issued a safe harbor election in Rev. Proc. 2021-33 to exclude PPP loan forgiveness and the relief grant amounts in the calculation of gross receipts for ERTC eligibility calculations. 

RSM INSIGHT:

These sections of the Internal Revenue Code and regulations would normally require the inclusion of tax-exempt income such as PPP loan forgiveness, restaurant revitalization grants, and shuttered venue operator grants. This exemption is only for the ERTC and does not change reporting for any other tax reporting purpose, including Form 990 reporting.

Election of safe harbor for ERTC gross receipts calculation

Employers that wish to elect the safe harbor method should consistently exclude amounts related to PPP loan forgiveness, RRF grants, and SVOGs from ERTC gross receipt calculations for all relevant periods. Additionally, all employers treated as a single employer under the ERTC aggregation rules for the employer must apply the safe harbor. 

Employers are able to revoke this election, should they so choose, by adjusting all affected employment tax returns.

Final thoughts

This safe harbor is only applicable to the ERTC gross receipts computation and only exempts PPP, RRF, and SVOG. Employers should determine if they received any other funding sources or other non-traditional items that should be included in ERTC gross receipts. For example, for tax-exempt entities, the ERTC credit amount itself was not eliminated from the gross receipt calculation.

The ERTC refund amount is not income to the employer but does cause a reduction in the tax deduction for the year in which the qualified ERTC wages are paid. Given the upcoming tax return deadlines for 2020, employers and their advisors need to determine ERTC credits for 2020 fairly soon to apply them to the tax return. Otherwise, the employer may have to amend the 2020 tax return to reduce the compensation tax deductions by the ERTC refund amount.

The guidance issued in Rev. Proc. 2021-33 is a continuation of recent guidance in regard to ERTC, including guidance released last week in Notice 2021-49 as discussed in our recent tax alert. Employers should contact their tax advisor for more information on ERTC and the safe harbor election.

 

This article was written by Anne Bushman, Karen Field , Ryan Corcoran, Maureen Hansen and originally appeared on 2021-08-10.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2021/irs-issues-employee-retention-credit-gross-receipt-exclusion-pro.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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IRS enhances employee retention credit guidance for open questions

August 5, 2021|By RSM US LLP

August 04, 2021

Employers impacted by COVID-19 that may be eligible for the employee retention tax credit (ERTC) finally have some additional guidance from the IRS that addresses a few unanswered questions, although some outstanding questions are still unanswered.

Background

The ERTC was originally enacted by in the CARES Act in March 2020. Its use by taxpayers was significantly increased when additional statutes expanded and extended it. First, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) passed in December 2020 provided a number of changes to the ERTC including allowing employers to take the ERTC and a PPP loan both. Most of these changes were applicable starting Jan. 1, 2021 and (at the time) only applied to the first two quarters of 2021. 

We discussed many of the Relief Act changes in our article on the IRS’s initial guidance in Notice 2021-20 that was issued in March 2020 covering the 2020 ERTC. 

Subsequently, the IRS issued Notice 2021-23 with some additional guidance on the Relief Act changes that are effective in 2021. These are covered in our prior alert from April 2021.

Congress again extended the ERTC from June 30, 2021 to Dec. 31, 2021 in the American Rescue Plan Act (ARPA) passed in March 2021.

Now, the IRS has issued Notice 2021-49 (the Notice) to clarify some previously unanswered questions in the prior two notices and to include provisions for the extensions and additions to the ERTC provided in ARPA that were not addressed in the prior guidance.

American Rescue Plan Act additions to 2021 ERTC

The Notice restates that the ARPA extended the ERTC for the third and fourth quarters of 2021 and that the credit now applies against Medicare taxes (or the RRTA equivalent) rather than Social Security taxes. The credit remains refundable so this change does not limit employers’ credit but rather is a reporting and government funding matter. The maximum credit remains $7,000 per employee per quarter for the third and fourth quarters. 

The ARPA added a “recovery start-up business” to the list of eligible employers as a third category of eligible employer (beyond being impacted by government orders or having a significant decline in gross receipts). The Notice clarifies that when a trade or business is started is determined using section 162 principles, and that a tax-exempt employer would use all of its operations and average annual gross receipts under section 6033 in determining whether it is a recovery start-up business. Further, a recovery start-up business that is a small employer can include all wages paid as qualified wages up to the $50,000 maximum credit allowed for recovery start-up businesses.

The Notice also provides some guidance for “significantly financially distressed companies” which is a new provision added by ARPA that allows certain large employers to use all wages paid for ERTC purposes.

For the third and fourth quarters, wages used for (i) PPP loan forgiveness, (ii) the shuttered venue operators grant or (iii) the restaurant revitalization grant cannot also be used for ERTC purposes. The Notice also discusses ARPA “double dipping” rules for credits described in sections 41, 45A, 45P, 45S, 51, 1396, 3131 and 3132 of the Code. Under these rules, the same wages cannot be used for both these credits and for ERTC purposes.

As a reminder, ARPA extended the statute of limitations from the normal three years to five years for any ERTC claimed in the third and fourth quarters, as restated in the Notice.

The Notice further provides that the guidance in Notices 2021-20 and 2021-23 continues to apply for the third and fourth quarters as much of the ARPA extension mirrors prior statutes on ERTC provisions.

Clarifications on unanswered questions for 2020 and 2021 ERTC

In addition to covering changes and additions by ARPA, the Notice also covers some areas that were still uncertain based upon the statute and prior notices. Specifically, the Notice provides:

  • Full-time equivalents do not have to be included in the full-time employee count but their wages are considered for qualified wages for purposes of the credit calculation.
  • Tip income is generally included in qualified wages, with limited exceptions per the section 3121(a) definition; further, the same wages can be used for the employee retention credit and the section 45B credit. 
  • Taxpayers claiming 2020 employee retention credits must reduce the wage deduction on the 2020 income tax return, requiring an amended return or administrative adjustment request (AAR) for taxpayers that filed the 2020 federal income tax return prior to calculating the 2020 employee retention credit. 
  • The election to use the preceding quarters’ gross receipts to measure a significant decline in gross receipts applies quarter-by-quarter allowing the employer to make a different decision each quarter in 2021.
  • Wages paid to a majority (more than 50%) owner of a corporation, or a majority owner’s spouse are not qualified wages unless the majority owner does not have any living parents, children or siblings. This is because of interaction in sections 51(i)(1), 152(d)(2) and 267(c). Certain related minority owners may fall under the same rule. These requirements are complex; any company in this situation should carefully review these rules.   
  • A partner cannot be an employee of the partnership in which the partner is an owner and thus generally should not have 3121(a) wages from that entity for purposes of the ERTC.
  • Rules in Notice 2021-20 for calculating 2019 gross receipts when acquiring businesses in 2020 or starting a business in 2019 apply the same to businesses acquired in 2021 or businesses started in 2020.

Takeaways

Some employers have little time left before the extended due date for filing 2020 federal income tax returns. This puts pressure on determining a reasonable estimate for any 2020 employee retention credits without having to file an amended return or AAR. Those that have already filed 2020 income tax returns without analyzing the applicability of the credit still have the opportunity to do so while the statute of limitations remains open; however, the burden and cost of filing those amended returns or AARs will have to be weighed with the amount of anticipated credit. This also highlights the need to analyze 2021 credit applicability sooner rather than later so that the same time crunch does not apply to the 2021 income tax filings.

As a note, the infrastructure bill released on August 1st includes a provision which would limit qualified wages (for employers that are not a recovery start-up business) to those paid on or before Sept. 30, 2021; in other words, the employee retention credit may no longer apply in the fourth quarter of 2021 if the bill passes as currently drafted.  As of the date of this article, the bill has not yet been considered by the House or the Senate.  

 

This article was written by Anne Bushman, Karen Field and originally appeared on 2021-08-04.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2021/irs-enhances-employee-retention-credit-guidance-for-open-questio.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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The IRS provides further guidance on the Employee Retention Tax Credit

April 5, 2021|By RSM US LLP

April 04, 2021

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) provided a number of changes to the Employee Retention Tax Credit (ERTC). Most of these changes are only applicable starting Jan. 1, 2021 and (at the time) only applied to the first two quarters of 2021. Congress has since extended the ERTC from June 30, 2021 to Dec. 31, 2021.    

We discussed many of the Relief Act changes in our article on the IRS’s initial guidance in Notice 2021-20. The IRS has now issued Notice 2021-23 with some additional guidance on the Relief Act changes that are effective in 2021.

  • The Relief Act provisions allow governmental colleges or universities (such as state universities) to apply for the credit (if otherwise eligible) for 2021.   
    • The Notice provides that the IRS will use section 1.170A-9(c) for the definition of governmental college or university and use 1.170A-9(d) for determining a governmental entity providing medical or hospital care.   
    • A related rule provides that the wages used in determining the ERTC qualified wages for a governmental college or university or entity providing medical/hospital care includes most, but not all, wages paid to governmental employers that would otherwise be exempt from FICA/Medicare (for example, certain employees of state governments under sections 3121(b) (7)).
  • The Relief Act provisions changed the ERTC gross receipts eligibility test from a “more than 50% decline in gross receipts” to a “more than 20% decline in gross receipts” for 2021.  
    • The Notice confirms that the gross receipts test for the first two quarters of 2021 is NOT under the special two-quarters rule allowable in 2020. Under the two-quarters rule, once a company had a more than 50% reduction in gross receipts for a quarter, the company was also treated as meeting the ERTC eligibility rule for the following quarter, even if the company’s gross receipts rebounded in that next quarter. With this change, in 2021 the company must satisfy the “more than 20% decline in gross receipts” on a quarter-by-quarter basis.   
    • The Notice also discusses the Relief Act provision allowing a company to elect to use a look-back rule (applying the gross receipts numbers from the previous quarter, rather than the current quarter, in showing a more than 20% decline in gross receipts). While not completely clear, it appears that the employer makes this election on a quarter-by-quarter basis.
  • The Notice provides special rules for companies that were not in existence in 2019. Generally, the company can use the first or second quarter of 2020 (as applicable) to show the more than 20% decline in gross receipts.
  • The Notice discusses the Relief Act change for 2021 that allows an employer using the section 51 Work Opportunity Credit for a given employee to nevertheless claim an employee retention credit based on wages paid to that employee (if otherwise eligible under the ERTC rules). However, the employer cannot use the same wages for both the Employee Retention Credit and the Work Opportunity credit. 
  • The Notice provides more guidance on the rules around advanced credits under the ERTC. Under the Relief Act, for 2021, only a ‘small employer’ can use Form 7200 to claim the ERTC.  
    • However, even a ‘small employer’ can only claim 70% of the ‘average quarterly wages’ paid in 2019. However, both a ‘large employer’ and a ‘small employer’ can reduce payroll tax deposits as a mechanism for obtaining the credit earlier than under the Form 941.  
    • The Notice provides guidance on how a small employer should determine the average quarterly wages, including guidance for seasonal employers. In general, the employer averages the wages from the four quarters in 2019 reported on Form 941 Line 5c (Medicare wages and tips). An employer not in existence in 2019 can generally use the average quarterly wages for 2020. Other detailed guidance is provided for other fact patterns.
    • As a note, because the first quarter of 2021 is now complete and most payroll companies have closed, or will soon close, the Form 941 processing period, most companies will have to use the Form 941 X to claim the credit for the first quarter of 2021.
 

This article was written by Karen Field and originally appeared on 2021-04-04.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2021/the-irs-provides-further-guidance-on-the-employee-retention-tax-.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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President Biden signs American Rescue Plan Act of 2021

March 11, 2021|By RSM US LLP

November 01, 2021

American Rescue Plan Act of 2021 becomes law

The $1.9 trillion relief and stimulus package known as The American Rescue Plan Act of 2021 was signed into law by President Joe Biden on Thursday, March 11, a day after Senate amendments were passed by the House of Representatives. 

The legislation provides funding for coronavirus-related relief to millions of families, state and local governments, small businesses and exempt organizations, schools, infrastructure initiatives, public transportation entities, cybersecurity measures and more. The primary purpose of the act is relief and recovery from the public health and economic crises, and it includes several tax provisions worth discussing with those objectives in mind.

This alert provides a broad overview of the major components of coronavirus-related funding made available by the Act and tax law changes associated with the relief.

Recovery Rebates to individuals

The Act provides for a refundable tax credit of $1,400 to each eligible adult individual ($2,800 in the case of most married couples) and an additional $1,400 for each dependent as defined for tax purposes. The credits phase out in ranges of income that vary by filing status, while the highest range is $160,000 for married joint filers. The credit will be paid out in advance like the Economic Impact Payments under the CARES Act and the 2020 Tax Relief Act. The Congressional Research Service estimates that these payments—also known economic impact payments, recovery rebates or stimulus checks—will go to 145.4 million households and total approximately $380 billion.

Paycheck Protection Program (PPP) modifications 

The Act appropriates an additional $7.25 billion to the Small Business Administration for purposes of carrying out the PPP. In addition, it expands the organizations and entities eligible to receive PPP loans. However, the Act does not appear to extend the March 31, 2021, program deadline.

Expansion of Paycheck Protection Program (PPP) for nonprofit organizations

The Act expands PPP eligibility in two ways for nonprofit organizations. First, all organizations described in section 501(c), except for organizations described in section 501(c)(4), are eligible to receive PPP loans if they otherwise meet the eligibility criteria. Second, certain nonprofit organizations qualify for a per-physical-location employee threshold, which permits an organization with more than one physical location to qualify for PPP provided that the employee threshold is not exceeded on a per-physical-location basis.

Entity type

Employee threshold

Per-physical-location employee threshold

Lobbying limitations

501(c)(3)

500

500

None

501(c)(19)

500

None

None

501(c)(6)

300

None

Lobbying income = 15% of gross receipts

Lobbying activities = 15% of total activities

Lobbying expenses = $1,000,000

All other 501(c)
(other than 501(c)(4)

300

300


Additional PPP expansion

The Act also expands PPP eligibility to certain internet publishing organizations that are assigned a NAICS code of 519130, certify in good faith as an internet-only news publisher or periodical publisher, and are engaged in the collection and distribution of local or regional national news and information. 

Shuttered Venue Operator Grants (SVOG) 

The Act appropriates an additional $1.25 billion to the SBA to carry out the SVOG program, of which $500,000 is restricted to provide technical assistance to help applicants access the System for Award Management (SAM), a successor, or an alternative grant application system.

The Act removes the limitation that SVOG recipients are ineligible to receive PPP loans after Dec. 27, 2020. Prior to this change, potential SVOG applicants needed to decide between the two programs. As a result of this modification, any PPP funds awarded after Dec. 27, 2020, to an SVOG applicant will simply reduce the amount of SVOG grant dollars the applicant may receive.

Restaurant revitalization grants

Restaurants also finally got relief they have been asking for. The Act establishes a new grant program—the restaurant revitalization fund containing $28.6 billion in available funds. An eligible entity can receive a grant that is equal to the amount of the pandemic-related revenue loss of the entity, which is defined as the gross receipts of the eligible entity during 2020 subtracted from the gross receipts of the eligible entity in 2019. There are special rules for (1) an entity that was not in operation for the entirety of 2019, (2) an entity that opened between Jan. 1, 2020, and the date before the date of enactment of the Act, and (3) an entity that has not yet opened but has incurred eligible expenses. Grants are limited to a maximum of $10 million, with an additional limit of $5 million per physical location of the eligible entity. The provision reduces eligibility for any amounts received from a covered loan made under the 2020 or 2021 PPP.

Eligible entities include an expansive list, including restaurants, food stands, food trucks, food carts, caterers, saloons, inns, taverns, bars, lounges, brewpubs, tasting rooms, taprooms, certain breweries, wineries, distilleries or other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink. Also included are entities located in an airport terminal or one that is a Tribally-owned concern.

Excluded entities are state or local government-operated businesses; businesses that, as of March 13, 2020, owned or operated (together with any affiliated businesses) more than 20 locations, regardless of whether those locations do business under the same or multiple names; entities that have a pending application for or have received a SVOG; or publicly-traded companies.

$5 billion of the grants are to go to entities with gross receipts during 2019 of not more than $500,000, and the remainder will be awarded by the SBA in an equitable manner to eligible entities of different sizes based on annual gross receipts.

Grants can be used for payroll costs, payments of principal or interest on any mortgage obligation, rent payments, utilities, maintenance expenses, supplies, food and beverage expenses, covered supplier costs, operational expenses, paid sick leave, or any other expenses that the SBA deems essential to maintaining the eligible entity.

During the initial 21-day period for awarding grants, the SBA is to prioritize grants to small business concerns owned and controlled by women, veterans, or socially and economically disadvantaged small business concerns.

Economic Injury Disaster Loans (EIDL) and similar funding

The Act provides additional recovery funding for targeted EIDL advances in the amount of $15 billion, to remain available for targeted advances until expended. $10 billion is appropriated for entities covered under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) and $5 billion for certain entities covered under the EIDL advances of the CARES Act.

Exemptions from taxation and other tax provisions

As with prior COVID-19 relief packages, Congress has provided exceptions to the taxation of various recovery programs. Under the Act, Congress suspends the taxation of up to $10,200 of unemployment compensation for a taxable year beginning in 2020 if the adjusted gross income of the taxpayer for that year is less than $150,000. 

Exempted from taxation under this bill are EIDL advances issued as part of the Economic Aid Act. The Act further provides that no deduction is to be denied, no tax attribute is to be reduced, and no basis increase denied due to the exemption from gross income. Similar income tax treatment is provided for the restaurant revitalization grants that will be issued as part of the Act.

Although the Act does not currently offer any student loan forgiveness, it does introduce a gross income exclusion provision. Specifically, the forgiveness of student loans from Jan. 1, 2021, through Dec. 31, 2025, generally does not result in taxable income. This exclusion applies to loans expressly provided for postsecondary educational expenses and does not apply to discharges resulting from the provision of services to the educational organization or the lender. 

Employee Retention Credit

The Act extends the employee retention credit (ERC) to Dec. 31, 2021, with certain changes.  

A large employer that is severely financially distressed (more than a 90% decline in gross receipts) can use the small employer “all employee wages” rule in determining the credit.   

A “Recovery Startup Business” provision allows “a company that began carrying on a trade or business after Feb. 15, 2020,” that is not otherwise eligible for the ERC under the gross receipts or the governmental order test, to receive up to a $50,000 maximum credit per quarter. Two other requirements apply: 

  • Average annual gross receipts for such employer under section 448(c)(3) for the up to 3 year period before such quarter do not exceed $1 million.
  • Only wages up to $10,000 can be counted for the quarter and it appears the $7,000 limit also still applies.

The statute of limitations period for new employee retention credits shall not expire before the date that is five years after the later of two dates: either the date on which the original return is filed, or the date on which the return is treated as filed under section 6501(b)(2) (generally April 15 of the following year for information returns filed during a given year).

Current rules apply through the June 30 period under prior legislation. The rules added in this Act apply for wages paid after June 30, 2021, and before Jan. 1, 2022.

Affordable Care Act premium tax credits

For 2021 and 2022, the premium tax credits available for health insurance purchased on the health insurance marketplace (also known as the exchange) are increased. In addition, eligibility for the credits for those two years is expanded to include individuals with household incomes exceeding 400% of the federal poverty level.  

Individuals receiving unemployment benefits in 2021 can qualify for larger premium tax credits for that year.

For 2020, individuals who received advanced premium tax credits in excess of the amount to which they were entitled may not need to repay the excess credits.

Paid sick leave and paid family leave credits

The Act extends tax credits for employer-provided paid sick and family leave established under the Families First Coronavirus Response Act (FFCRA) through Sept. 30, 2021; adds vaccination-related events in the list of eligible leave reasons; and increases the wages covered by the paid family leave credit to $12,000 per worker, from $10,000. The Act also implements a five-year statute of limitations and nondiscrimination rules for the paid leave eligible for the credit. 

Similarly, the Act extends tax credits for paid sick and paid family leave to eligible self-employed individuals.

These provisions are effective for April 1, 2021, to Sept. 30, 2021. Note that the mandatory paid leave has not been extended, but the tax credits are available to employers whose paid leave would have fallen under the FFCRA provisions had they still been in effect.

Changes to existing tax law

The 2017 Tax Cuts and Jobs Act enacted provisions preventing noncorporate taxpayers from deducting business losses in excess of $500,000 for joint filers ($250,000 single or married filing separately) against nonbusiness income, wage and/or investment income. The CARES Act in 2020 eliminated this provision for tax years beginning before Dec. 31, 2020. The Act extends the applicability of this provision through tax years beginning before Jan. 1, 2027. 

The Act also repeals a provision allowing U.S.-affiliated groups to elect to allocate interest on a worldwide basis. section 864(f) was enacted as part of the American Jobs Creation Act of 2004 and was originally slated to become effective in 2009. Congress, however, delayed the election’s effective date three times, largely because of its cost. section 864(f) was finally scheduled to become effective in 2021, but the Act permanently repeals section 864(f) retroactively before it can ever take effect. 

The section 864(f) election would have been relevant for taxpayers in computing the section 904 foreign tax credit limitation, and would likely have been particularly beneficial for taxpayers subject to residual U.S. tax on global intangible low-taxed income (GILTI) due to apportionment of interest expense to the GILTI basket. The election could have generally enhanced the ability of taxpayers to take foreign tax credits, and its repeal will have particular impact on taxpayers with significant debt in offshore subsidiaries.

The Act also expands the exclusion from gross income for employer-provided dependent care assistance from $5,000 to $10,500 (or half that amount for married filing separately) for taxable years beginning during 2021. An employer can amend its plan retroactively to the first day of the plan year as long as it adopts such an amendment by the last day of the year.

In addition, the Act expands the group of covered employees of public companies under section 162(m) to include another five highest-paid employees (seemingly whether officers or not) to the current group of the three highest paid officers and the CEO and CFO. Thus, public companies will be limited to deducting $1 million in compensation to a larger group of employees. The new group of five will be covered employees for the years they are in the highly compensated group, but the law does not include them in the forever-covered provision that applies to the other officers. This provision takes effect for tax years beginning after Dec. 31, 2026.

Unemployment benefits

The Act extends through Sept. 6, 2021, most unemployment provisions originally enacted as part of the CARES Act. Included among these extensions is the unemployment reimbursement for nonprofit and government employers. In addition, from April 1, 2021, through Sept. 6, 2021, the reimbursement rate increases from 50% to 75%.

COBRA premium assistance

Individuals eligible for COBRA continuation coverage under a group health plan due to termination of employment or reduction of hours can have all of their COBRA premium costs covered for the period April 1, 2021, through Sept. 30, 2021. This premium assistance received by individuals is not subject to federal income tax. Premium assistance is not available if the individual is eligible for COBRA due to a voluntary termination of employment.

Individuals eligible for premium assistance can elect to enroll in a different health plan than the one they were enrolled in at the time of the COBRA qualifying event, if certain conditions are met. 

COBRA premium assistance is also available to individuals who did not elect COBRA, or who discontinued COBRA before April 1, 2021, if otherwise eligible. In addition, individuals eligible for COBRA premium assistance but who pay COBRA premiums for the applicable periods are entitled to reimbursements for those premiums.  

Notices about premium assistance must be provided to individuals, and the government is expected to issue model notices within 45 days of enactment of the Act.

The Act allows the employer maintaining the group health plan to claim a refundable payroll tax credit against its Medicare tax for the amount of the premium assistance. This credit must be coordinated with certain other credits, such as the employee retention credit and the paid sick leave and paid family leave credits. Advanced refunds of the credit and reductions in payroll tax deposits in anticipation of the credit are allowed. Special rules apply for multiemployer plans and for railroad employers.  

Pensions

The Act provides the Pension Benefit Guaranty Corporation with the ability to make direct cash grants (funded by the U.S. Treasury) to those multiemployer pension plans that are the most financially troubled. The Congressional Budget Office estimates the costs of these grants to be more than $85 billion. 

Multiemployer pension plans will have the ability to amortize investment losses over 30 years; to delay, temporarily, any requirement to designate the plan as in either endangered, critical or critical and declining status; and plans that are already in critical and endangered status can temporarily extend their funding improvement and rehabilitation periods. 

The Act also provides single-employer plan funding relief by extending the amortization periods for funding shortfalls and the pension funding stabilization percentages. 

Pandemic relief funding not centered on tax 

Several components of the spending package that are not centered on tax issues stand out for the amount of funding they entail and their potential effects on Americans and the economy. They include:

State and local fiscal aid: $350 billion to states, territories, Tribes, and local governments for their response to the pandemic, to offset revenue losses, strengthen economic recovery and provide premium pay for essential workers. Also, $10 billion as part of a new Critical Infrastructure Projects program to help states, territories, and Tribal governments complete capital projects directly enabling work, education, and health monitoring, including remote options, in response to the pandemic. 

COVID-19 vaccines and testing: $48.3 billion for testing, contact tracing, personal protective equipment for health workers and enabling mitigation measures sure as isolation and quarantine. Also, $7.5 billion in Centers for Disease Control and Prevention funding for vaccine distribution, and $5.2 billion to the Biomedical Advanced Research and Development Authority to support advanced research, development, manufacturing, production, and the purchase of vaccines.

Health care workforce: $7.66 billion to bolster the size of the public health workforce and its COVID-19 response.

K-12 schools: $125 billion for public K-12 schools to safely reopen for in-person learning, address learning loss, and support students as they work to recover from the long-term impacts of school closures and remote education due to the pandemic. 

Higher education: $39.6 billion to colleges and universities and their students. At least  half of such funding must be spent on emergency financial aid grants to students, with the other half available to defray lost revenue and increased costs from declining enrollment, the transition to online learning, closures of revenue-producing services and facilities, and COVID-19 testing, vaccination, PPE and classroom retrofits. 

Child care: $39 billion for child care, including nearly $24 billion for Child Care Stabilization grants and almost $15 billion for the Child Care and Development Block Grant (CCDBG) program. States must use Child Care Stabilization funds to award subgrants to qualified child care providers that are either open or temporarily closed to help support their operations during the pandemic. CCDBG funds can be used flexibly by states, including for child care subsidies.

Broadband for remote learning: $7.2 billion to the Federal Communications Commission to help schools and libraries ensure that schoolchildren can fully participate in remote learning.

Emergency Rental Assistance: $21.6 billion in Emergency Rental Assistance to augment the $25 billion provided by the Consolidated Appropriations Act in late December.

Public transportation: $30.4 billion of additional relief funding to transit agencies to prevent layoffs of transit workers and prevent severe cuts to transit services.

Small Business Capital: $10 billion for the State Small Business Credit Initiative to help states support small businesses. 

Defense Production Act: $10 billion to expand domestic production of personal protective equipment, vaccines, and other medical supplies.

Information technology and cybersecurity: $2 billion to equip federal agencies with modern technology and cybersecurity tools to deliver services and benefits (e.g. vaccine development and distribution, transition to remote work) that Congress has provided to fight COVID-19. 

Economic Development Administration: $3 billion to aid communities in rebuilding local economies, including $750 million for the travel, tourism, and outdoor recreation sectors. 

Food supply chain: $4 billion to support the food supply chain through the purchase and distribution of food, the purchase of PPE for farmworkers and other frontline food workers, and financial support for farmers, small- and medium-sized food processing companies, farmers markets and others.

 

This article was written by Anne Bushman, Alexandra O. Mitchell, Patti Burquest, Andy Swanson and originally appeared on 2021-11-01.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2021/president-biden-signs-american-rescue-plan-act-of-2021.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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Guidance issued for employers claiming the Employee Retention Credit

March 2, 2021|By RSM US LLP

March 01, 2021

On March 1, 2021, the IRS issued much anticipated guidance related to the Employee Retention Credit (ERC) in Notice 2021-20

Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), Congress retroactively made changes to the ERC, as we previously discussed. The most significant change is that companies that received a Paycheck Protection Program (PPP) loan are now eligible to claim the ERC retroactively in 2020. The IRS issued this Notice to address the areas in need of clarity with respect to this interaction, as well as to formalize many of the previously issued IRS FAQs (which have not yet been updated on the FAQ site but now contain a legend alerting taxpayers of the Notice). 

Items of note in the Notice

Notably, the Notice only covers the 2020 implications for the Employee Retention Credit (ERC), it does not address changes made for 2021 from the Relief Act, although many of the items covered will apply to both periods as much of the rules work the same for both years. Businesses should expect further guidance to address other 2021 issues stemming from the Relief Act expansion and extension of the credit.

In addition, the Notice primarily uses language that mirrors that published in earlier FAQs while giving taxpayers more authoritative guidance to rely on when taking positions with respect to the credit. Much of the Notice is written in question and answer format similar to the FAQs, structured with very similar categories, and using many of the same examples. A few areas addressed in the Notice provide more insight than the previous FAQs such as:

  • What is a nominal portion of the business that will be considered a partial suspension?  An essential employer may qualify for the ERC if it has a partial suspension of operations that is more than a nominal portion of its business and due to a government order. Nominal was not previously defined. The Notice provides that a portion of the business that makes up 10% of a business’s gross receipts or 10% of the total number of hours of service performed by the employer’s employees is deemed to be more than nominal. Essentially this provides a safe harbor for treating a portion of a business as more than nominal, and if not using that safe harbor, a facts and circumstances general rule still applies to determine what is nominal.
  • What is considered comparable operations?  Under the previous FAQs and the Notice, employers that are able to continue comparable operations even though they were subject to government orders, are not considered to be fully or partially suspended by government orders. The Notice added factors to consider in determining whether operations are considered to be comparable to operations prior to closure including telework capabilities, the amount of portable work, the role of the physical work space, and the transition time to be able to telework (with transitions longer than two weeks being considered significant).
  • What modifications are considered to have more than a nominal impact? While the examples of modifications from the FAQs are repeated in the Notice, the Notice also adds factors to consider whether modifications have more than a nominal effect. Those factors include limited occupancy, appointment-only services that previously offered walk-ins, restrictions on certain services such as buffets or requiring face coverings. Although these modifications are listed as examples, facts and circumstances still apply to determine whether they have more than a nominal impact. Similar to above, a 10% impact on the ability to provide services is deemed to be more than nominal as a safe harbor.
  • What documentation should businesses keep with respect to the ERC?  The Notice provides that employers should maintain adequate records for at least four years to support credits claimed including documentation showing eligibility (e.g. orders that suspended operations, records supporting more than nominal impacts or proof of gross receipts levels), records of qualified wages by employee (including support for time not working for large employers), allocable qualified health plan expenses, determination of aggregated group status and copies of any applicable forms claiming the credit.

Many of the other items addressed in the Notice do not contain additional detail beyond the FAQs despite there being a lot of ambiguity left in the FAQs. For example, the Notice does not further clarify the definition of full-time employee or the impacts of mergers, acquisitions or divisions that change the aggregated group during applicable periods. Likewise, the Notice does not give further relief for the section 280C(a) income tax deduction implication. 

Nonetheless, having certain items stated in an IRS Notice, which can be relied upon, provides additional clarity where there has been some confusion, for example, stating that a larger employer cannot count paid time off as qualified wages. In addition, the Notice clarifies that employers do need to file Form 941-X for earlier quarters in which the qualified wages were paid to claim the credit for those quarters. 

PPP forgiveness interaction

Obviously, the most significant guidance many taxpayers were awaiting relates to the interaction for those entities that took PPP loans that were, or will be, forgiven and that cannot use the same wages for both purposes. The Notice provides many examples with respect to various scenarios an employer may have with respect to its PPP forgiveness amounts and payroll expenses reported on the PPP forgiveness application.

The Notice provides that an employer that received a PPP loan is deemed to have elected not to take the ERC for the amount of payroll costs reported on the PPP forgiveness application up to (but not exceeding) the minimum amount of payroll costs sufficient to support the amount of PPP loan forgiveness. Any qualified wages that are not included in the PPP payroll costs, or that exceed the amount of the PPP forgiveness amount, are still eligible for the ERC, as an election is not deemed to have been made for those qualified wages. 

For example, an employer that had a $200,000 PPP loan and that reported $250,000 of eligible payroll costs on its PPP forgiveness application is deemed to have made an election out of the ERC for the $200,000 (up to the amount of the forgiveness), but the remaining $50,000 that exceeds the PPP loan amount is not deemed to have been elected out of ERC and remains eligible for ERC.

Unfortunately, though, the Notice provides that if taxpayers already filed for PPP forgiveness and did not include other eligible expenses on its PPP forgiveness application, the deemed ERC election cannot be reduced by the amount of eligible expenses that could have been claimed but were not claimed on the PPP forgiveness application. 

For example, an employer that had a $200,000 PPP loan and showed $200,000 of payroll costs and no other eligible expenses on its forgiveness application is deemed to have elected out of the ERC with respect to the $200,000, even though it may have had $70,000 of other eligible expenses that could have been reported on the PPP forgiveness application.

For now, there is no mechanism for PPP borrowers that have already submitted forgiveness applications to amend the payroll and nonpayroll costs included on the forgiveness application. With the amount of PPP recipients now eligible to claim the ERC it remains to be seen whether the SBA will issue procedures on amending forgiveness claims.

To the extent a taxpayer has not yet applied for PPP forgiveness, a taxpayer might want to consider whether to include some other expenses, not just payroll expenses, to support the forgiveness, in order to claim more wages for ERC credits. 

Takeaway

The additional light shone on the Employee Retention Credit (ERC) by the changes in the Relief Act have caused many taxpayers to revisit the applicability of the ERC for 2020, both those who originally were ineligible due to PPP loans and those who were not but were unaware of the broader partial suspension rules for eligibility because businesses had so many items to focus on and adapt to during 2020. The Notice provides welcome guidance that can be relied upon, but also leaves many aspects of the credit up to facts and circumstances analyses, which still require careful thought and documentation. Businesses should work with qualified advisors to understand the guidance, take reasonable positions based upon that guidance and have adequate documentation of those positions. In many instances, following a careful process such as this will result in significant liquidity opportunities for employers experiencing business impacts from COVID-19.

 

This article was written by Anne Bushman and originally appeared on 2021-03-01.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2021/guidance-issued-for-employers-claiming-the-employee-retention-cr.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

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Borrower’s accounting for debt restructurings and modifications

November 2, 2020|By RSM US LLP

November 01, 2020

When modifying or restructuring outstanding debt arrangements, entities should evaluate all facts and circumstances to ensure the debt modification is appropriately accounted for in accordance with Subtopic 470-50, “Debt – Modifications and Extinguishments,” or Subtopic 470-60, “Debt – Troubled Debt Restructurings by Debtors,” of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification. To help entities navigate this guidance, the FASB recently released a Staff Educational Paper, Topic 470 (Debt): Borrower’s Accounting for Debt Modifications, which provides an overview of the accounting guidance for, and includes examples of, common debt modifications and exchanges.

 

This article was written by RSM US LLP and originally appeared on 2020-11-01.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/financial-reporting/borrowers-accounting-for-debt-restructurings-and-modifications.html

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how the Gallagher, Flynn & Company, LLP can assist you, please contact us.

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IRS issues final regulations on meals and entertainment deductions

October 1, 2020|By RSM US LLP

September 30, 2020

On Sept. 30, 2020, the IRS issued final regulations that provide guidance for meal and entertainment deductions under section 274 of the Internal Revenue Code (Code). We previously summarized the proposed regulations and the related IRS Notice 2018-76 here. This alert summarizes the changes made by the final regulations.

Entertainment expenses 

The final regulations generally keep the existing definition of entertainment. Similarly, the final regulations confirm that the nine exceptions to entertainment expenses under section 274(e) remain the same. 

The final regulations generally apply the guidance in Notice 2018-76 and the proposed regulations to all food or beverages, including travel meals and employer-provided meals, as well as food and beverages provided at or during an entertainment activity. In particular, the final regulations keep, but clarify the distinction between entertainment expenditures and food or beverage expenses in the context of business meals provided at or during an entertainment activity. For example, the final regulation adds a requirement that the amount separately invoiced or separately charged for food or beverage on the bill for an entertainment event must reflect the venue’s usual selling cost if they were purchased separately from the entertainment, so as to avoid inflating the food and beverage expenses to take advantage of the potential deduction. The final regulations provide examples showing the difference in deduction treatment between situations in which the cost of food and beverages provided as part of an entertainment activity were stated separately or were not stated separately on the invoices for the event. 

Food and Beverage Expenses 

Generally, the final regulations apply the guidance in the proposed regulations to food and beverage expenses. This includes keeping the conditions a taxpayer must satisfy to qualify for a 50% deduction.

The final regulations also provide some helpful definitions. First, the deduction limitation rules generally apply to all food and beverage, whether characterized as meals, snacks or other type of food. Additionally, a food and beverage expense includes any delivery fees, tips, and sales tax. However, it does not include indirect expenses such as the cost of transportation to a meal. 

1. Business meal

The final regulations modified and added to examples provided in section 1.274-11 and 1.274-12 to clarify how certain expenses may satisfy the conditions to deduct a business meal. Additionally, for the purpose of better understanding the conditions, the final regulations include employees in the definition of “business associate.”

2. Travel meal 

In addition to applying the general rules for meal expenses from proposed regulations, the final regulations incorporate the substantiation requirements in section 274(d) to travel meals and confirm that most meals (food and beverage) while an employee is on travel are 50% deductible. However, the final regulations apply the limitations in section 274(m)(3) to expenses for food or beverages incurred while on travel for spouses, dependents or other individuals accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel. Thus, if an employee and the employee’s spouse (or a self-employed individual and spouse) travel together for the employee’s business, the cost of a meal for the spouse is almost always nondeductible.  

3. Exceptions

The final regulations explain how the six exceptions in section 274(e) apply to food and beverage expense. Much of the application remained the same but the regulations add some helpful examples. 

Expenses treated a compensation under section 274(e)(2) or (e)(9)

Section 274(e) provides that if a meal is included in the employee’s (or self-employed individuals) taxable compensation, the cost of the meal can be deducted. The final regulations note that including an amount that is too low will limit the tax deduction. Where a taxpayer includes less than the proper value of the meal in compensation, the final regulations provide that the taxpayer must apply the dollar-for-dollar methodology. Under that dollar-for-dollar methodology, the taxpayer may deduct meal expenses to the extent that the expenses do not exceed the amount of the expenses that are treated as taxable compensation.  The regulations provide examples of the treatment of meals provided in employer-run cafeterias, including where companies use the “direct cost” method of charging employees for the meals.

Reimbursement under section 274(e)(3)

The final regulations address reimbursements arrangements between an employer and its customer where the customer is obligated to reimburse the employer for meals (usually travel meals) provided to the employees working on a customer contract.  As in current regulations, the 50% deduction limitations apply to employer unless, under a reimbursement arrangement, the employer accounts to its customer with substantiation that satisfies the requirements of section 274(d) (in which case the customer bears the 50% loss of deduction. The regulations provide examples further addressing these fact patterns and fact patterns involving independent contractors under similar arrangements.

Recreation under section 274(e)(4)

The final regulations confirm that the “social or recreational event” exception in section 274(e)(4) applies to food or beverage expenses for company holiday parties, annual picnics, or summer outings that are primarily for employees other than owners and highly compensated employees and thus do not discriminate in favor of the highly compensated or owners of the company.

Items available to the public under section 274(e)(7)

The final regulations generally retain the guidance provided in the proposed regulations, along with the examples of what constitutes offering items to the general public. As a general rule, if more than 50% of the food or beverage is likely to be consumed by the general public, the expenses are likely to be 100% deductible. The regulations and examples add some clarity to who is or is not a member of the general public. The general public does not include employees, owners or contractors. In addition, if there is a specifically invited guest list, the invited list is not treated as members of the general public.

Goods or services sold to customers under section 274(e)(8) 

The final regulations adopt the interpretations that a restaurant or catering business may continue to deduct 100% of its costs for food or beverage items, purchased in connection with preparing and providing meals to its paying customers, which are also consumed at the worksite by employees who work in the employer’s restaurant or catering business. The regulations retain the examples on the application of this rule, including meals for camp counselors eating with campers, real estate agents providing food during open houses and auto service centers providing food to customers waiting for their cars to be serviced. 

 

This article was written by Karen Field , Katie Beaver and originally appeared on 2020-09-30.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2020/irs-issues-final-regulations-on-meals-and-entertainment-deductio.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

 

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Gallagher, Flynn & Company, LLP is a proud member of RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how the Gallagher, Flynn & Company, LLP can assist you, please contact us.

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