Although the provisions are significant, I think you can see these provisions won't have a significant impact on most taxpayers' income tax returns, possibly with the exception of the expanded premium tax credit.
According to 2020 FTB Publication 1001 (Revised November, 2021), page 13, the federal reduction of wages doesn't apply on the California income tax return.
According to the Notice, whether wages of controlling owners of a business and their spouses qualify for the employee retention credit depends on whether they have certain relatives.
Most significantly for individuals who are small business owners and investors, the extension doesn't apply to the first estimated tax payment for 2021
The Consolidated Appropriations Act (CAA), 2021 enacted on December 27, 2020 included some great tax breaks. Some of them are retroactive and will result in delays when preparing 2020 income tax returns, especially when a business had a Paycheck Protection Program (PPP) loan during 2020.
For example, the Employee Retention Credit (ERC) applies to employees retained by employers impacted by the COVID-19 pandemic.
In order to qualify to claim the credit, an employer must have carried on a trade or business during calendar year 2020 and EITHER
- the operation of the employer’s trade or business was fully or partially suspended during a calendar quarter in 2020 under orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 (note: reducing inside dining of a restaurant to 25% of capacity qualifies as a partial suspension), OR
- The employer’s calendar quarter is within a period during which the employer is experiencing a significant decline in gross receipts. The period of significant decline in gross receipts (a) begins with the first calendar quarter beginning after December 31, 2019 for which the employer’s gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year; and (b) ends with the first subsequent calendar quarter for which the employers gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year.
In the CARES Act, enacted on March 27, 2020, any business that had a PPP loan was ineligible for the Employee Retention Credit (ERC).
The CAA changed that rule and allows PPP loan borrowers to claim the ERC, retroactively effective March 13, 2020. Instead, any wages that qualified for PPP loan forgiveness aren’t eligible as payroll costs for computing the ERC.
The IRS is directed to issue regulations for how a taxpayer elects to exclude wages when computing the ERC, so the wages may be used to qualify for a PPP loan exclusion. That guidance hasn’t been issued as a I write this alert.
The CAA also modifies how health plan expenses are added to employee wages for computing the ERC, making more employers eligible to include them.
For 2020, the ERC is 50% of up to $10,000 wages for each employee, or a maximum of $5,000 per employee.
The credit is refundable and is claimed on Form 941, the quarterly Federal payroll tax return. The first payroll tax return on which it could be claimed was for the second quarter, 2020.
The ERC is subtracted from the tax deduction for wages on the federal income tax return. For example, if the employer only had one employee with $10,000 of wages, the deduction for wages would be $10,000 – $5,000 = $5,000.
Some banks haven’t issued procedures for applying for cancelling a PPP loan yet.
In order to have the information to prepare an employer’s or owner’s income tax return the following things will be required.
- The bank that processed the PPP loan will have to issue the procedures to apply for loan cancellation.
- The employer will have to determine which wages will be used to qualify for PPP loan cancellation.
- The IRS will have to issue guidance on how to elect to exclude wages when computing the ERC and possibly issue guidance allowing the entire credit for 2020 to be claimed on the fourth quarter federal payroll tax return.
- The employer will have to submit amended 2020 Federal payroll tax returns (Form 941X) to claim the credit, and elect for wages used to qualify for PPP loan exclusion to not be used for computing the ERC.
- The employer will have to apply for PPP loan cancellation.
- The employer and/or the employer’s owners should then have this part of the information needed to prepare 2020 federal income tax returns.
For employers that file California income tax returns, there is also an issue about which expenses to reduce for cancellation of a PPP loan. Legislation has been introduced to conform to the federal rule allowing the deduction of those expenses, but whether it will pass is uncertain.
Many businesses have been suffering during the pandemic and are anxious to file net operating loss carryback claims. Tax return preparers might decide to file preliminary income tax returns and net operating loss carryback claims and correct them later. This will probably result in additional expense and inconvenience for their clients, and potential fee collection problems. There might not be much choice under the circumstances.
I’ve intentionally left many details out of this explanation for brevity, including which payroll expenses qualify for the credit for employers with more than 100 full-time employees. Employers will probably need professional help preparing amended payroll tax returns to claim additional Employee Retention Credits.
If your business received a Paycheck Protection Plan loan during 2020 that you expect to be cancelled, discuss this issue with your tax consultant.
Section 278 of Subtitle B, COVID-related Tax Relief Act of 2020, clarifies that otherwise deductible expenses paid with proceeds of a PPP loan that is forgiven remain tax deductible.
the IRS clarifies that when a taxpayer satisfies all of the requirements (having qualified expenses during 2020) and expects to apply for forgiveness of the related PPP loan, those expenses aren't tax-deductible for 2020, even when the application for forgiveness isn't made until 2021.
Here are some of the most significant changes, with suggested year-end tax planning moves for 2020, assuming the proposals are enacted.
Taxpayers located in California wildfire counties get tax return due date extension.
The SBA has issued new forms and updated its Paycheck Protection Program loan “final rules” for the Paycheck Protection Program Flexibility Act of 2020, enacted on June 5, 2020.
One of the forms is a new one, simplified Form 3805EZ.
Here are URLs for the final rules and forms.
Under the Act, the “covered period” was extended from the eight-week period beginning on the date of the origination of a covered loan to 24 weeks. Borrowers that received PPP loans before June 5, 2020 may elect to use the original eight-week period.
The forgiveness requirement to use at least 75% of loan proceeds for payroll costs was reduced to 60%.
The forms reflect that a pro-rated forgiveness can apply if there is a reduction of the employee count by the end of the covered period.
The maximum payroll costs, including salary, wages and tips, eligible for the forgiveness for an employee is $46,154 with the 24-week covered period and $15,385 with the eight-week covered period.
The owner compensation replacement is calculated based on 2019 net profit. The amounts are 2.5/12 of 2019 net profit, up to $20,833, for a 24-week covered period and 8/52 of 2019 net profit, up to $15,385, for an eight-week covered period. Amounts for which a credit is claimed for qualified sick leave equivalent amount and qualified family leave equivalent amount aren’t eligible for forgiveness.
Remember up to 25% of loan proceeds used to pay otherwise tax deductible interest on mortgage obligations or personal property incurred before February 15, 2020, otherwise tax deductible rent payments on lease agreements in force before February 15, 2020 and otherwise tax deductible utility payments under service agreements dated before February 15, 2020 is eligible for forgiveness under the eight-week covered period scenario. Up to 40% of loan proceeds used to pay the same expenses is eligible for forgiveness under the 24-week covered period scenario.
Many more borrowers should be able to qualify for exclusion of their PPP loans under the new rules.