January 14, 2022
As the recovery from the pandemic takes hold and life begins to return to a more recognizable form of normal, we hope you and your loved ones are safe and in good health. Throughout 2021, Congress has enacted various provisions designed to help taxpayers recover from the COVID-19 pandemic and extended previously temporary relief. The major legislation came from the American Rescue Plan (ARP) Act passed in March 2021, but the Coronavirus Aid, Relief, and Economic Security Act or “CARES Act” and the Consolidated Appropriations Act, 2021 or “CAA, 2021” both passed in 2020 will have lingering impacts on your 2021 business tax return. Highlighted below are some of the more significant changes made by this legislation and what to expect in the coming 2022 year:
Paycheck Protection Program expenses are deductible – The Paycheck Protection Program (PPP) ended on May 31st, 2021. Most eligible loans should be forgiven by now. If you need assistance feel free to contact your FRS professional. A forgiven PPP loan is not includible in income, and no deduction will be denied, no tax attribute will be reduced, and no basis increase will be denied by reason of the exclusion from gross income of a forgiven PPP loan. In addition, PPP loan recipients that did not deduct certain otherwise deductible expenses paid or incurred in 2020 based on guidance available at that time can elect to deduct these expenses on their 2021 tax return rather than by filing an amended return or administrative adjustment request.
Employee Retention Credit (ERC) — Under the CARES Act, the Employee Retention Credit or “ERC” is a refundable tax credit against certain employment taxes available to eligible employers who paid qualified wages to employees. The credit was equal to 50% of the first $10,000 of qualified wages paid to an employee after March 12, 2020 and before January 1, 2021. Eligible business included business that experienced a year-over-year gross receipts decline of 50% or a suspension of operations due to a government ordered shut-down.
CAA, 2021 extended and expanded the ERC. Beginning on January 1, 2021 and through June 30, 2021, the ERC is equal to 70% of up to $10,000 in qualified wages paid to an employee per quarter. Eligible business now includes business with year-over-year gross receipts decline of 20%, rather than 50%, and PPP loan recipients are now eligible effective March 31, 2020.
The ARP extended the ERC through December 2021, but the Infrastructure Investment and Jobs Act, which was enacted on November 15th, 2021 amended the law so the ERC applies to wages paid before October 1st, 2021 for most businesses. 4th quarter wages in 2021 for most businesses are not eligible for the ERC.
Please be aware that claiming the credit on the payroll returns has an adverse effect on businesses 2020 and 2021 income tax returns. Since you are receiving tax credits elsewhere for wages paid, the wages are not deducible for income tax purposes. Your FRSCPA tax team member will assist you in determining what additional filings may be required.
If you are eligible for the employee retention credit, we suggest contacting your payroll provider as soon as possible to file the amended payroll returns. If you have received the credits, please provide your FRSCPA team professional with copies of all payroll returns that include the credits.
100% of business meals from restaurants are deductible – Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees on work travel. The deduction is generally limited to 50% of the cost. Effective January 1, 2021 through December 31, 2022, CAA, 2021 removed this limit for food or beverages provided by restaurants. In other words, businesses may now deduct 100% of business meals and beverages purchased from restaurants.
NOL Carryback/Carryforward Period – For the tax year beginning after January 1, 2021, net operating loss (NOL) may not be carried back and must be carried forward. Therefore this includes 2022 and years going forward. Under the CARES Act, NOLs arising in years beginning 2018 through 2020 may be carried back five years and the 80% NOL deduction limit was temporarily lifted for NOL carryforwards to years beginning before January 1, 2021.
Excess Business Losses (EBL) – In 2022, noncorporate taxpayers may be subject to excess business loss limitations. For taxable years beginning in 2021, the threshold amount is $262,000 (or $524,000 in the case of a joint return). Under the CARES Act EBL’s were repealed for 2018, 2019, and 2020.
State tax obligations related to teleworking arrangements – The pandemic has changed how people work, and more people are permanently working from home (i.e., teleworking). Such remote working arrangements could potentially have state tax implications that should be considered. We can help you determine any filing or payment obligations.
Pass-Through Tax Treatment for state and local tax workaround – A major component of the 2017 Tax Cuts and Jobs Act (TCJA) was the $10,000 limit on the state tax deduction for individual income tax return purposes. Since the TCJA’s passing, states have been looking for workarounds to provide income tax relief for individuals. For the state PTE, pass-through entity taxpayers, such as partnerships and S corporations, can elect to pay state income taxes at the entity-level return rather than on the personal income tax returns of the individual partners and owners. Please note that not all states have enacted a pass-through tax and individual circumstances may vary depending on the taxpayers situation due to ability to use state credits, higher tax rate, repeal/replacement of state tax deduction, and more.
We encourage you to contact our office should you have any questions concerning your business.