Employee Retention Credit

The recently signed stimulus package included considerable enhancements to the Employee Retention Credit (ERC). The new law, known as the Consolidated Appropriations Act (CAA) expands the ERC under the CARES Act that went into effect January 1, 2021, with the covered wage period extended until June 20, 2021. The new legislation is also retroactive to wages paid after March 12, 2020; so, employers who took Paycheck Protection Program (PPP) loans in 2020 are now eligible to take the ERC, provided these wages are not used for both the credit and PPP loan forgiveness.

 Tax Changes Under CAA 2021

The good news for employers who continued to pay their employees, despite being forced to close their business either fully or partially by a COVID-19 lockdown, is they are now eligible for an ERC refund.

Period of availability: For qualified wages paid after March 12, 2020, and before July 1, 2021, extending availability of the credit to the first two quarters of 2021. These periods may be outside the covered period for many PPP loan borrowers, and the employee retention tax credit is likely available.

Credit amount: The credit amount increased from 50% to 70% of qualified wages, for 2021, which is amended to include the cost to continue providing health benefits.

Maximum credit amount: The credit cap is increased to $7,000 for each of the first two quarters of 2021 ($10,000 in qualified wages X 70% tax credit rate), so that the maximum credit for 2021 will be $14,000. This aggregate $14,000 per employee maximum credit for the first two quarters of 2021 is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.

Credit eligibility requirements: The applicable number of employees increased from 100 to 500. This allows employers who had 500 or fewer full-time in 2019 to be eligible for the credit, even if employees are working, provided they meet other requirements. Note that in calculating this 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated.

Effective January 1, 2021, business operations that are either fully or partially suspended by a COVID-19 lockdown order, or for a quarter in 2021, if gross receipts are less than 80% of gross receipts for the same quarter in 2019. This differs from the original law in 2020 that stipulated gross receipts of less than 50% qualified.

Because the ERC credit can apply to wages already paid after March 12, 2020, many struggling employers can access this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19 (per IRS website).

Advance payment clause: Advance payment of the credit is allowed for businesses with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. Companies may be allowed to collect the payment prior to the payment of wages. However, if the advance payment is larger than the actual credit calculated, the company will need to repay the excess.

Please contact the Spiegel team for advice and any updates on this new legislation.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

Economic Recovery and Stimulus

President Donald Trump signed into law the Consolidated Appropriations Act, 2021 (“the Act”). The Act is made up of the Additional Coronavirus Response and Relief Act (ACRRA) and the Taxpayer Certainty and Disaster Relief Act of 2020. The approximately $900 billion of pandemic stimulus provides emergency relief for both individuals and businesses, and consists of a multitude of items, including PPP loans, EIDL grants, employee retention credits, economic impact payments, unemployment benefits, the addition of new tax provisions, and the extension of expiring provisions.

The Act’s most notable item is the reopened Paycheck Protection Program (PPP), providing a second round of additional funding for struggling businesses through March 31, 2021. The Act creates “second draw” loans for the smaller, harder-hit businesses, and simplifies the loan forgiveness application process. Perhaps the largest win for businesses was resolving the conflict between Congress and the IRS on the deductibility of expenses funding forgiven PPP loans. While Congress had intended for the PPP loans not to be taxable, the IRS had issued revenue rulings maintaining the position that expenses related to forgiven PPP loans would not be deductible. The Act clarified Congress’ position overriding the IRS, allowing the expenses to be tax-deductible.

Additional Coronavirus Response and Relief Act

The ACRRA was designed to assist individuals and businesses during the pandemic and help the economy recover. While a full summary of the Act is not feasible in this briefing, a summary of key items includes:

  • Economic Impact Payments – a second round of one-time economic stimulus payments of up to $600 per taxpayer, or $1,200 for married filing jointly, plus $600 per dependent under age 17 at the end of 2020. The payments begin phasing out for taxpayers with AGI over $75,000 Single, $150,000 married filing jointly, or $112,000 head of household.
  • Unemployment benefits – extends federal pandemic unemployment compensation by $300 a week for individuals from December 26, 2020 to March 14, 2021.
  • Deductibility of PPP expenses – overrides the IRS position on taxability of PPP loans by clarifying that business expenses used in obtaining Paycheck Protection Program (PPP) loans are tax-deductible.
  • Small business loans – more than $284 billion for additional PPP loans for small businesses.
  • Eviction moratorium, rental assistance – extends the temporary eviction moratorium through January 31, 2021, and provides $25 billion in tax-free rental assistance.
  • Tax credits – tax credits for companies offering paid sick leave.
  • Child care assistance – $10 billion to state revenue funds to supplement child care assistance for low-income families.
  • Broadband – several billion dollars to fund increased broadband access to assist employees in working remotely.
  • Transportation – support for transportation services, including $2 billion for airports and $16 billion in payroll support for airline workers and contractors.
  • Vaccine distribution – over $8 billion for activities to plan, prepare for, promote, distribute, administer, monitor, and track coronavirus vaccines to ensure broad-based distribution, access, and vaccine coverage.
  • Vaccine development – over $22 billion shall remain to develop and purchase vaccines, therapeutics, diagnostics, and necessary medical supplies.
  • COVID testing – $22.4 billion for expenses related to testing, contact tracing, surveillance, containment, and mitigation to monitor and suppress COVID-19.
  • Clinical research – over $1 billion for research and clinical trials related to long-term studies of COVID-19.
  • Health care reimbursement – $3 billion to reimburse, through grants or other mechanisms, eligible health care providers for healthcare-related expenses or lost revenues attributable to the coronavirus.
  • Mental health services – over $4 billion for mental health services and substance abuse and mental health services and suicide prevention programs.

Taxpayer Certainty and Disaster Tax Relief ACT of 2020

Included in the Consolidated Appropriations Act, 2021 is the Taxpayer Certainty and Disaster Relief Act of 2020 (TCDTRA). Several new provisions were added in the TCDTRA, and certain Internal Revenue Code provisions were extended either through 2021, or 2025, while other provisions were made permanent. Key tax items of interest are summarized below:

Full Deduction for Business Meals

Businesses may now claim a 100% deduction instead of 50% for food or beverages provided by restaurants. The meals may be for dine-in, delivery or takeout, for purchases paid or incurred between January 1, 2021, through December 31, 2022.

Charitable Contributions

Individuals may claim a $300 above-the-line deduction ($600 married filing joint) for cash contributions made to qualified organizations for 2021. A 50% accuracy-related penalty will be imposed on an underpayment of tax arising from an overstatement of the deduction.

The AGI limitation on charitable contributions was increased to 100% and extended to include the 2021 tax year.

Contributions must be made in cash to qualified organizations. Contributions cannot be made in property or be paid to private foundations or donor-advised funds.

Retirement Plan Relief

Individuals may take penalty-free withdrawals up to $100,000 from qualified retirement accounts, reduced by other amounts treated as qualified disaster distributions for prior taxable years. The $100,000 limitation is applied separately for individuals affected by more than one disaster. The amount withdrawn is recognized in gross income ratably over a three-year period beginning with the year of withdrawal, unless the taxpayer elects to have it recognized in the year of the withdrawal. The distributions are not subject to withholding.

Individuals with plans accepting rollover contributions may repay the distributed amounts within a three-year period, beginning on the date on which the distribution was received. The distribution repayment will not be counted against the one rollover per year limitation.

Flexible Spending Account Carryovers

The “use it or lose it” nature of health and dependent care plans were temporarily modified. Individuals may carry over unused 2020 benefits remaining in health and dependent care FSA accounts to their 2021 accounts without disqualifying their cafeteria plan. Unused 2021 benefits may be carried over to 2022. Health care FSA will provide post-termination reimbursements for persons terminated in 2020 or 2021 throughout the end of the plan year, including the 12 month grace period.

The age limit on dependent care FSA accounts was increased from 13 to 14 years old during the plan year if there were unused amounts from the preceding year.

Participants in health care and dependent care flexible spending plans may prospectively modify their employee contribution amounts for the 2021 plan year. Employers may retroactively amend their cafeteria plans to the beginning of the previous calendar year.

Employee Retention Credit

The TCDTRA retroactively amended the CARES Act to allow previously ineligible PPP loan recipients the ability to claim the employee retention credit. The eligibility period was extended by six months to qualified wages paid before July 1, 2021. In addition, the allowable percentage increased from 50% to 70% of qualifying wages. The maximum allowable credit per employee was increased from $10,000 qualified wages annually to $10,000 per quarter.

Taxpayers may not receive a double tax benefit. Wages used to determine Work Opportunity Credits, Empowerment Zone Employment Credits, and Employer Credits for Paid Family and Medical Leave, and other credits, may not also be used to claim the employee retention credit.

Disaster-Related Employee Retention Credit

Eligible employers in qualified disaster zones whose businesses were inoperable during the disaster period ending on December 27, 2020, may claim a disaster-related employee retention credit. The credit amount is equal to 40% of the qualified wages paid to each employee, capped at $6,000 per year, per employee, such that the maximum credit amount is $2,400 per employee.

The disaster-related employee retention credit is separate from and not related to the employee retention credit in the previous section, but similarly may not receive a double tax benefit on wages used to determine other credits.

Other Provisions

Highlights of other new provisions included from the TCDTRA include:

  • Pension plans are permitted to make distributions to employees who reached age 59 1/2 and are still working.
  • Allows earned income credit and child tax credit to be based on 2019 earned income rather than 2020 earned income.
  • Taxpayers electing real property trades or businesses under the business interest limitation rules may depreciate the pre-2018 residential rental property over 30 years, regardless of when the property was placed in service.
  • Minimum 4% of low-income housing credit.

Provisions Made Permanent

The following key tax provisions were made permanent through the TCDTRA:

  • Reduces the medical expenses deduction from 10% to 7.5% of AGI.
  • Repeals the deduction of qualified tuition and related expenses, and transitions to an increased income limitation on lifetime learning credits.
  • Section 179D energy-efficient commercial building deduction, with modifications.
  • Excludes benefits provided to volunteer firefighters and emergency medical responders from income.

Provisions Extended Through 2025

The following key tax provisions were extended through the 2025 tax year by the TCDTRA:

  • New markets tax credit.
  • Work opportunity credit.
  • Empowerment zone tax incentives.
  • Employer credit for paid family and medical leave.
  • Exclusion from gross income of discharge of qualified principal residence indebtedness, with a modification reducing the maximum amount from $2 million to $750,000.
  • Exclusion for certain employer payments of student loans.

Provisions Extended Through 2021

The following key tax provisions were extended through the 2021 tax year by the TCDTRA:

  • Treatment of mortgage insurance premiums as qualified residence interest.
  • Credit for health insurance costs of eligible individuals.
  • Nonbusiness energy property.
  • Credit for new qualified fuel cell motor vehicles.
  • Credit for alternative fuel refueling property credit
  • Two-wheeled plug-in electric vehicle credit
  • Energy-efficient homes credit
  • Extension of excise tax credits relating to alternative fuels


Author, Beeta Lecha

Principal, Spiegel Accountancy Corp

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

Guidance for PPP 2.0

The latest stimulus bill passed by Congress allocates $284 billion to small businesses through the Paycheck Protection Program (PPP). This new legislation is said to have tighter requirements with more relaxed tax regulations. PPP round two reopens the program for first-time borrowers provides better flexibility for spending PPP funds, and, under certain conditions, allows prior loan recipients to apply for a second loan.

Who Qualifies?

For borrowers to be eligible this round, their business must have operated before February of 2020 and must have fewer than 300 employees, which is down from the previous requirement of 500. Qualified borrowers will have loans capped at $2 million, which is down from the $10 million cap in the first round. The lending guidelines for requested funds still have the amount set at 2.5 times monthly payroll, with restaurants and hotels allowed to request 3.5 times their average monthly payroll. Designed to support employees and prevent layoffs, this new bill requires 60% of the loan be used for salaries.

The first round of PPP loans established the covered period for the borrower, depending on when they received their loans. PPP 2.0 allows borrowers to choose between an 8-week or 24-week covered period. This slight change offers borrowers more control over the handling of potential workforce reductions once the PPP funds are depleted.

Chance for Second Loan?

 A recent study by the National Federation of Independent Business (NFIB) reported one-in-four small business owners reported they will soon be closing their doors if current economic conditions do not improve. The NFIB also stated that the majority of PPP borrowers (91%) have spent all their loan funds. Fortunately, these business owners may apply for a second loan also known as a “second draw.” To qualify, these borrowers must have depleted their first round of PPP and show a 25% reduction in revenue in at least one quarter of 2020 compared to the same in 2019.

Eligibility for Non-profits

Stimulus round two made provisions for 501(c)(6) not-for-profit organizations eligibility for PPP loans. These previously forgotten non-profits are often professional organizations, such as chambers of commerce, boards of trade, small business associations, tourism and hospitality coalitions, and social welfare groups. Such organizations can apply for PPP provided they do not receive more than 15 percent of their revenue from lobbying activities and have fewer than 300 employees.

 Spending Allowances & Tax Breaks

 PPP 2.0 allows for funds to be spent on business expenditures other than wages and rent, unlike the first pass. Borrowers are permitted to pay for supplies, software, accounting expenses, and personal protection equipment. Also covered are costs related to property damage or vandalism, which occurred in 2020, due to looting or public disturbances that were not covered by insurance.

Similar to prior legislation, PPP funds will be tax-exempt. Furthermore, the new legislation also stipulates that expenses paid with proceeds of a PPP loan that is forgiven to be considered tax-deductible. This applies to both new and existing former PPP loans. This reverses IRS and Treasury guidance issued this past November that declared borrowers could not deduct PPP expenses if the loan had been forgiven.

 Loan Forgiveness

 Revisions to the new PPP legislation creates a more streamlined loan forgiveness process. Borrowers who receive no more than $150,000 are now offered a simple one-page application. Round one offered this process for loans up to $50k. The simplified form requires borrowers to provide a description of the number of employees the business was able to retain due to the PPP loan, along with an estimate of the total amount of PPP proceeds spent on payroll costs. Borrowers who choose to submit this simplified application should carefully check their calculations and responses due to penalties for producing false statements. It would be prudent to consult with an accounting advisor, especially considering such expenses are now tax-deductible under the new bill.

 How to Get a PPP Loan

 In an effort to address previous criticism of the PPP initiative, minority-owned or economically disadvantaged businesses will be offered the first crack at PPP loans on Monday, January 11, 2021. The SBA is seeking to ensure that small, vulnerable businesses can access this new round of money before larger businesses claim the funds as happened in the first PPP offering. So-called community financial institutions will have access to the $60 billion set aside for businesses that had been previously shut out, with an emphasis on those with 10 or fewer employees or those in low-income areas.

The second round of loan applications is scheduled to begin on January 13th with the deadline to apply on March 31st.  However, keep in mind, applications will no longer be received once the initial second round of funds is depleted.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.

IRS Changes to Schedule K-1

The Internal Revenue Service (IRS) made significant changes to the Schedule K-1 for the 2020 tax year to improve the quality of information reported by partnerships. This consists of modified instructions for partnerships required to report capital accounts to partners. All partnerships, including limited liability companies taxed as partnerships, are required to report partners’ capital in Box L on the Schedule K-1.

Prior to 2020, a partnership could report partners’ capital using one of the following methods: tax basis, GAAP basis, Section 704(b) basis, or other method. With Notice 2020-43, all partnerships, including limited liability companies taxed as partnerships, are required to report partners’ capital on a tax basis starting with the 2020 tax return. Notice 2020-43 outlines two methods of reporting tax basis capital: Modified Outside Basis Method and Modified Previously Taxed Capital Method. The preliminary instructions for the 2020 Form 1065 provide a third option under consideration: Transactional Approach.

Modified outside basis method. The amount to report as a partner’s beginning capital account under the modified outside basis method is equal to the partner’s adjusted tax basis in its partnership interest as determined under the principles and provisions of subchapter K including, for 1) the partner’s share of partnership liabilities under section 752 and (2) the sum of partner’s section 743(b) adjustments. For purposes of establishing a partner’s beginning capital account, you may rely on the adjusted tax basis information provided by your partners. .

Modified previously taxed capital method. The amount to report as a partner’s beginning capital account under the modified previously taxed capital method is equal to the following: The amount of cash the partner would receive if you liquidated after selling all of the assets in a fully taxable transaction for cash equal to the fair market value of the assets; increased by the amount of tax loss determined without taking into account any section 743(b) basis adjustments that would be allocated to the partner following such a liquidation; and decreased by the amount of tax gain determined without taking into account any section 743(b) basis that would be allocated to the partner following such a liquidation. Instead of using the assets’ fair market value, you may determine the partnership’s net liquidity value, and gain or loss, by using such assets’ bases as determined under section 704(b), as determined for financial accounting purposes, or on the basis set forth in the partnership agreement for purposes of determining what each partner would receive if the partnership were to liquidate, as determined by partnership management.

Transactional approach. The amount to report as a partner’s beginning capital account under the transactional approach is (1) increased by the amount of cash and the tax basis of property contributed by the partner to the partnership (less liabilities assumed by the partnership or to which property is subject) as well as allocations of income or gain made by the partnership to the partner, and (2) decreased by the amount of cash and the tax basis of property distributed by the partnership to the partner (less any liabilities assumed by the partner or to which the property is subject) as well as allocations of loss or deduction made by the partnership to the partner.

The partnership is required to use one of the methods, and the method selected must be used by all partners for the year. While the capital on the K-1 may look different for 2020, the change to tax basis reporting does not cause an economic consequence to the partner. This is strictly a reporting requirement. However, partnerships that do not comply with the new reporting requirements will be subject to late filing penalties for failure to show all required information. For 2020, the late filing penalty is $210 for each month or part of a month, for a maximum of 12 months, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year.

Check your 2019 K-1 statement to determine the prior method for basis reporting. Many partnerships will opt for the modified previously taxed capital method due to the availability of information. Please contact your Spiegel team with any questions or to discuss your options.


Author, Peter Lloyd

Senior Tax Manager, Spiegel Accountancy Corp

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.