December 05, 2021

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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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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.

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.

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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.

August 10, 2021

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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.

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.  

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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.

April 04, 2021

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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.

March 01, 2021

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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.

February 23, 2021

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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.

February 16, 2021

In just under a year, sweeping changes to the tax treatment of Research and Experimentation (R&E) expenditures will go into effect as a delayed provision of the Tax Cuts and Jobs Act (TCJA). While no new guidance from the Department of the Treasury has been released on how to implement these measures, for tax years beginning after Dec. 31, 2021, taxpayers face required capitalization of R&D expenditures.

Historically, taxpayers have been afforded significant flexibility in choosing whether to immediately deduct, capitalize/amortize or indefinitely capitalize R&E expenditures under section 174. Moreover, as a method of accounting, taxpayers have also had the option to change these methods over time as business or project needs change. However, under the TCJA, these options have been removed, forcing capitalization and amortization of items classified under section 174 under a five- or fifteen-year period for domestic or foreign incurred expenditures, respectively.

This creates a potentially significant administrative burden for taxpayers, particularly from a cash tax position.

Identifying section 174 expenditures

Taxpayers must first be able to identify what a section 174 R&E expenditure is. Quite commonly, taxpayers only identify R&E expenditures to the extent that they are also R&D credit eligible under section 41, even though 174 is a much broader provision. Section 174 encompasses foreign-incurred R&E, overhead and utilities, and certain post-development items such as patent application costs.

Even for taxpayers who have already been electively capitalizing/amortizing R&E, the broader definition could require them to look into other accounts or cost centers that are currently being deducted and pull more expenditures into required capitalization.

Cash flow/cash tax burden

In the following example, a domestic product development company is shown under both a pre- and post-Dec. 31, 2021 R&E world, assuming consistent operations from year to year. The difference in methodology is glaring: there is significantly less above-the-line current deduction for the company and a sizeable increase to net cash tax due. You will note that the R&D tax credit under section 41 remains undisturbed, as the credit is typically generated based on the year expenditures were paid or incurred and used or consumed in the R&D process. 

Although uncertainty in the practical application of these provisions will remain until the Department of the Treasury or the IRS issue further guidance, taxpayers should begin to evaluate the potential impacts of these delayed provisions. It is unclear whether Congress aims to change these outcomes: With a split Senate and section 174 generally considered a “pay for” provision for certain tax cuts, a future administration may not be incentivized to unwind this revenue generator. In the meantime, with the amount of work required to prepare for this change, taxpayers cannot afford to wait to see if Congress decides to take action. Thus, we recommend taking steps now to address the process and system changes to identifying and accounting for R&E costs under the new rules taking effect next January.

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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.

January 07, 2021

Application of the Employee Retention Tax Credit (ERTC) was significantly expanded by the federal relief and stimulus package finalized Dec. 27, 2020. The ERTC is a refundable payroll tax credit for employers that meet certain criteria and continued to incur payroll and related costs during the COVID-19 pandemic. The changes to the ERTC could result in payroll tax refund opportunities and prospective savings—including for those companies that obtained Paycheck Protection Program (PPP) loans.

Anne Bushman, leader of RSM’s Washington National Tax compensation and benefits practice, detailed the game-changing, taxpayer-friendly revisions to the ERTC in a discussion with Matt Talcoff, RSM’s national tax industry leader. Here’s a transcript of their conversation, edited for clarity:

Matt: Let’s start with the basics: What is the Employee Retention Credit?

Anne:  It is a refundable payroll tax credit that was enacted as part of the CARES Act in March of 2020.  Companies qualified for the credit if they were either fully or partially shut down due to governmental orders, or if they had a significant decline in quarterly revenue. The credit from the CARES Act is equal to 50% of payroll-related costs over a certain period of time up to a maximum of $5,000 per employee for 2020.

Matt: Perfect. I understand that the legislation enacted late last year, the Consolidated Appropriations Act, made major changes to the ERTC.  What are the big changes that we can look forward to?

Anne: That’s right, Matt. The new legislation gave us some very taxpayer-favorable changes that many companies will benefit from. The first, and maybe the biggest, change is the fact that companies that received PPP loans may also benefit from the ERTC now. Prior to this legislation, companies were not permitted to benefit from both the PPP and the ERTC.

Second, they expanded the allowable size of a company that will have wages that qualify for the credit. Under the original law, companies with 100 employees or less could include all wages paid to employees during their eligible period, but companies over that size were more limited in identifying the wages that would qualify. The recent changes increase that employee limit up to 500 employees, which dramatically expands the number of companies that will benefit from this credit.

Third, the legislation also extended and liberalized nearly every aspect of the credit for the first six months of 2021. The credit as a percentage of payroll and the definition of a significant revenue decline are both more generous now. Another big change is the maximum for wages that can be used for the credit was also increased.

Matt: That’s great, Anne. OK, let’s talk dollars, then. In 2020, there was a possible $5,000 credit per employee. How does this change with the new act?

Anne: Well, this was part of the prospective change for the first two quarters of 2021. Rather than a $5,000 maximum per employee, you can possibly get up to $7,000 per employee in both of the first two quarters of 2021. So that would be $14,000 per employee in 2021. Plus, you still have that $5,000 that applied to 2020. So now the maximum credit per employee could be as much as $19,000.

Matt: Wow. Those are certainly some terrific changes for taxpayers. What about businesses that have more than 500 employees—does that mean they’re not eligible for the credit?

Anne: Not necessarily. The types of wages eligible for the credit are reduced, but employers with more than 500 employees can still take advantage of the ERTC if they have employees that are being paid but are not yet working or if they are working reduced hours.

Matt: OK. So, Anne, you mentioned earlier that a business can qualify if they were affected by shutdown orders or if they had a significant decline in gross revenues. We have seen many sectors that have been impacted by shutdowns. How should a taxpayer think about that shutdown rule?

Anne: Well, this one isn’t always as straightforward as it might seem. It’s either being fully or partially affected by a government shutdown order, which sometimes is easy to see if your business wasn’t allowed to be open for a period of time under a state or local order. But you may still be partially affected even if you were an essential business.

One example that helps people think about this is a bank. We’ve talked to some banks that were considered essential and stayed open, but they were limited by the number of people that they could have in the lobby. For the purposes of the credit, you’re not allowed to look at customers not showing up just because they chose to stay home. But in many cases, there are orders that prevented at least some amount of business from occurring. Businesses need to consider whether those shutdown orders affected them for purposes of this credit.

Matt: It sounds like it’s complicated, but it certainly could impact a number of different sectors through the industries that we see out there. That’s great.

Now, let me ask you about the PPP. As we know, a lot of taxpayers borrowed money through the Paycheck Protection Program. What should they be thinking about in terms of this Employee Retention Credit?

Anne: This is a big one, Matt. Again, since PPP borrowers knew since the enactment of the CARES Act that they were not eligible for this credit, they likely have not evaluated whether they met the criteria. While the liberalization of some of those rules that we went through applies only to the first two quarters in 2021, this change for PPP borrowers to be able to take the credit is retroactive back to the passing of the CARES Act (on March 27, 2020).

Companies really need to work with their advisors and figure out the impact on their business of any revenue decline and government orders. If they meet the requirements, they could be eligible for the credits in 2020 that can still be claimed.

Matt: Wow, this retroactivity is big news. Are there any strategies on the application for PPP forgiveness related to the eligibility for ERTCs?

Anne: Yes, because you still can’t use the same wages for both the ERTC and for PPP forgiveness. Technically, the credit gets precedence. Obviously, getting a full-dollar PPP forgiveness is better than a partial-dollar credit, so some strategy and calculations will be helpful.

Setting aside that the definition of wages is different for both purposes, you have to think about time periods. You have flexibility in your PPP forgiveness period, so you need consider in which quarters might you have qualified for the payroll credit first—either from a shutdown or gross receipts decline—and use those periods for the ERTC.

Also, you might have more than enough wages for PPP forgiveness even when using the same periods, so you have to carefully account for that and have documentation that the wages used for the ERTC are not the same wages used on your PPP forgiveness application.                                             

Matt: It sounds like there’s a lot of interaction here, a lot of modeling that needs to be done. That’s very helpful.

Everyone is talking about adding liquidity, and a lot of businesses struggled in 2020 and have tax losses. Is this ERTC available to them? What if a company met all of the requirements for an ERTC but had tax losses?

Anne: Great question. Since this is a payroll tax credit, even companies with tax losses can still get some cash flow from the credit, and it’s refundable. For the 2020 year, it is possible to amend prior payroll tax filings to generate those refunds. And with the extension of the credit into 2021, companies can even apply for advance payments of their expected future credits.

Matt: So this is a nice cash flow opportunity in terms of both getting a refund from before, as well as prospective savings?

Anne: Exactly. Plus, many businesses are more focused on “above the line” or EBITDA savings—and as a payroll tax credit, that’s an added benefit here as well.

Matt: Great point. Changing gears a bit, I know some of the credit programs are fairly burdensome in terms of the information-gathering process and documentation that needs to be provided. We know that the PPP has a lot of documentation required, and it was complex. How challenging might it be to capture these benefits for these credits?

Anne: While many businesses were ineligible for the original credit due to taking a PPP loan, we still had a large number that did qualify, so we have plenty of experience in capturing the credit—and the information-gathering process is not a walk in the park. But it’s fairly straightforward for many companies.

In essence, there is the first step of determining eligibility, which you want to have documentation of. And then the second step isof identifying the wages that will qualify. The math from there is simple, and then actually claiming the credit is not very burdensome either.

Matt: Anne, this terrific news. This adds liquidity and cash flow. Any closing thoughts?

Anne: I just recommend that every company revisit this program. Regardless of whether you received a PPP loan or not, the continuation and expansion of the ERTC definitely warrants some consideration. In the right fact pattern, these credits can be hundreds of thousands or even millions of dollars. We would hate to see companies miss out on any opportunities there.

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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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September 30, 2020

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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.