Getting back to business (tax)
A look back, ahead to changes
Mark Sellner, CPA, JD, LLM (taxation) | June/July 2021 Footnote
Editor's note: Updated May 27, 2021
After April 15, in the good old days, CPAs in public took some time off, completed their billing and then caught up in early May on what they missed during tax season.
Well, with the extended tax filing deadlines the last two years, and more of a year-round tax season, it is difficult to keep up on this year’s tax developments while still getting last year’s tax returns out the door.
The tax filing deadlines for most individual 2019 returns were postponed to July 15, 2020. For 2020 returns, most due dates were extended to May 17, 2021. Add on extensions and year-end planning, and tax season becomes a 12-month ordeal.
You are not alone if you are grappling with all the changes. Even the IRS is struggling to keep up. On a webpage devoted to providing information to businesses, “Coronavirus Tax Relief for Businesses and Tax-Exempt Entities,” several items carry the warning “This Page is Not Current.”
A recap of last year
It seems like a long time past, but just a year and a half ago we were getting ready for a somewhat routine 2020 tax season. Year-end closing of the books and the upcoming return filings looked to include routine consideration of business tax issues. Then, everything changed.
In March 2020, Congress passed three major bills to address the COVID-19 pandemic, including tax relief measures. A supplemental appropriation was enacted on April 24, 2020. The Paycheck Protection Program Flexibility Act of 2020 passed June 3, 2020.
Phase 1, signed March 6, 2020, provided new spending for federal agencies and testing, and small-business loan subsidies. No significant business tax items were included.
Phase 2, enacted March 18, 2020, included emergency family and medical leave expansion, emergency paid sick leave, and related business tax credits.
Phase 3, the CARES Act, enacted March 27, 2020, included Economic Impact Payment checks to individuals, an increase in unemployment benefits, Paycheck Protection Program (PPP) loans, and Economic Injury Disaster Loan (EIDL) grants and loans for small businesses. Several provisions enacted in the 2017 Tax Cuts and Jobs Act (TCJA) were modified.
On Dec. 21, 2020, Congress passed the Consolidated Appropriations Act, 2021. The act extended and clarified economic stimulus provisions originally enacted in the CARES Act and in other legislation.
Most of these bills included several tax credits and significant business tax provisions.
Employee Retention Credit
Among the highest profile credits is the Employee Retention Credit for Employers Subject to Closure Due to COVID-19. A refundable credit up to $5,000 per employee was provided against Social Security taxes equal to 50 percent of the qualified wages with respect to each employee.
The credit originally applied through Dec. 31, 2020. In IRS Notice 2021-20, the IRS provided guidance as it applies to qualified wages paid after March 12, 2020, and before Jan. 1, 2021.
Application of the employee retention credit was extended to qualified wages paid after Dec. 31, 2020, and before July 1, 2021, as described in IRS Notice 2021-23.
Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after Dec. 31, 2020, through June 30, 2021. The maximum employee retention credit available is $7,000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021.
The American Rescue Plan Act of 2021, enacted March 11, 2021, modified and extended the employee retention credit for the third and fourth quarters of 2021.
Significant business tax provisions
- The CARES Act provided that the 80% of taxable income limitation on NOL carryforwards was suspended for 2018, 2019 and 2020. Rules related to NOL carrybacks were modified. A five-year carryback was allowed for losses arising in 2018, 2019 and 2020.
- The $500,000 limitation on noncorporate losses included in the 2017 TCJA does not apply for 2018, 2019 and 2020.
- The 30% of adjusted taxable income limitation on business interest deductions was increased to 50% for 2019 and 2020.
- The CARES Act clarified that qualified improvement property is 15-year property and, therefore, eligible for bonus depreciation.
- A simplified PPP forgiveness application for loans up to $150,000 is now available. The CARES Act provision that required PPP borrowers to subtract the amount of their EIDL grants of $1,000 per employee, to a maximum of $10,000, was repealed.
- Any amount excluded from income by reason of forgiveness of a PPP loan is treated as tax-exempt income for partnership and S Corporations. This is important because such tax-exempt income increases partner and shareholder tax basis.
- Deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven or EIDL grant, and the tax basis and other attributes of the borrower’s assets will not be reduced as a result.
- A 100% deduction for food and beverages provided by a restaurant for 2021 and 2022 is allowed.
- Do you think you know what a restaurant is? Well, you may not. IRS Notice 2021-25, issued April 8, 2021, provides clarity for determining when the 100% deduction applies under the two-year expansion. The IRS explains that restaurants are businesses that prepare and sell food and beverages to retail customers for immediate consumption.
- That does not include businesses that primarily sell prepackaged food and beverages that are not designed for immediate consumption. Examples of those businesses include beer, wine or liquor stores; newsstands; drugstores; kiosks; and specialty food, grocery and convenience stores. Also, the 100% deduction is not available for meals that come from dining facilities on the business premises that are treated as de minimis fringe benefits or are provided for the convenience of the employer.
An update for this year
So far this year, another significant stimulus package has been enacted. The American Rescue Plan Act was passed March 11, 2021, to provide additional $1,400 stimulus checks to individuals.
On the business side, the Employee Retention Credit was extended from June 30, 2021, through the end of 2021. Also, the 2017 TCJA disallowance of excess business loss was extended for another year, through 2026.
A look ahead
In April 2021, President Joe Biden presented to Congress and to the American people the American Jobs Plan and, in an address to Congress, the American Families Plan.
The American Jobs Plan is intended to create millions of good jobs, rebuild the country’s physical infrastructure and workforce, and spark innovation and manufacturing domestically.
The American Families Plan is described as an investment in children and families. It touts tax cuts for America’s families and workers, and tax reform that rewards work, not wealth. The president’s tax agenda is stated not only to reverse the biggest 2017 tax law giveaways, but to reform the tax code so that the wealthy have to play by the same rules as everyone else to ensure that high-income Americans pay the tax they owe under the law.
The president’s tax agenda includes an increase in the corporate tax rate from 21% to 28%, a 15% corporate minimum tax on book income, restrictions on like-kind exchanges and stepped-up basis at death; it also increases the individual income tax and capital gain and dividend tax rates to 39.6% and 43.4%, respectively, that would impact higher income partnership, LLC and S Corporation business owners.
It remains to be seen if any of those proposals come to fruition, but in between business tax return filing deadlines, stay tuned for further developments.
Mark Sellner consults with other CPAs and their clients on business and executive tax matters, including S Corporation and partnership taxation, and the tax consequences of buying and selling a business. He is a member of the Minnesota Society of CPAs, where he has received the R. Glen Berryman Excellence in Teaching Award and the Distinguished Service Award. You may reach him at 612-508-4107 or Sellner-Tax-Consulting-LLC@outlook.com.
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