Alexis Long, Author at ATA 2.0

Can your business benefit from the enhanced Employee Retention Tax Credit?

COVID-19 has shut down many businesses, causing widespread furloughs and layoffs. Fortunately, employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.

Background on the credit

The CARES Act, enacted in March of 2020, created the ERTC. The credit: Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter, Was subject to an overall wage cap of $10,000 per eligible employee, and Was available to eligible large and small employers.

The Consolidated Appropriations Act, enacted December 27, 2020, extends and greatly enhances the ERTC. Under the CARES Act rules, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law now extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021. In addition, for the first two quarters of 2021 ending on June 30, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). And it increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules).

Interaction with the PPP

In a change retroactive to March 12, 2020, the new law also stipulates that the employee retention credit can be claimed for qualified wages paid with proceeds from Paycheck Protection Program (PPP) loans that aren’t forgiven. What’s more, the new law liberalizes an eligibility rule. Specifically, it expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.

We can help

These are just some of the changes made to the ERTC, which rewards employers that can afford to keep workers on the payroll during the COVID-19 crisis. Contact us for more information about this tax-saving opportunity. © 2021

Taxpayer Opportunity to Accelerate Depreciation Expense Relating to RPTOB Election for Residential Rental Property

The December 27, 2020 emergency coronavirus relief package introduced a taxpayer-favorable change related to the real property trade or business (RPTOB) election made by taxpayers that own residential rental property. As a refresher, taxpayers that make the RPTOB election are exempt from the Section 163(j) business interest expense deduction limitation, but must depreciate nonresidential real property, residential rental property and qualified improvement property over longer recovery periods under the alternative depreciation system (ADS).

Prior to the amendment made by the Consolidated Appropriations Act, 2021, taxpayers making the RPTOB election were required to use an ADS recovery period of 40 years with respect to residential rental property placed in service before January 1, 2018, and 30 years for residential rental property placed in service after December 31, 2017. The Act changed the recovery period for residential rental property placed in service before 2018 to 30 years, thereby making the ADS life consistent for all residential rental property for an electing RPTOB, regardless of the placed-in-service date. Note that this modification only affects taxpayers that made (or will make) the RPTOB election, and only with respect to residential rental property placed in service before 2018. Accordingly, taxpayers that elect or are required to use ADS for reasons other than making the RPTOB election will continue to amortize pre-2018 residential rental property using a 40-year recovery period.

As the amendment applies retroactively to taxable years beginning after December 31, 2017, taxpayers that made the RPTOB election on their 2018 or 2019 tax returns and depreciated residential rental property using the 40-year recovery period are now considered to be on an impermissible method of accounting. To correct this issue, Rev. Proc. 2019-8 indicates that an electing RPTOB that fails to depreciate its nonresidential real property, residential rental property and qualified improvement correctly under the ADS (including using an impermissible recovery period) must file an automatic Form 3115 (DCN #88) with a timely filed (including extensions) federal income tax return for the year of change and a copy of the Form 3115 must be filed with the IRS Ogden, UT office no later than the filing date of that return. Thus, it is not necessary to amend prior year tax returns. The additional depreciation allowed as a result of the modification will be reflected entirely on the tax return for the year of change as a favorable Section 481(a) adjustment. As it is possible that the IRS will issue new procedural guidance to address this specific fact pattern in the near future, taxpayers should check for any additional updates before they begin preparing method changes.