Pending Changes in Tax Legislation
By Paul Impellicceiri, CPA, Partner
A.F. McGervey & Co., LLC
Uncertainty in the economy, as well as pending changes in tax legislation continue to cause concern for business owners and individuals. Congress has passed an infrastructure bill, but a much larger package of tax legislation and social programs is working its way through Congress. It continues to be very difficult to keep up with the changing landscape.
- The Payroll Protection Program continued in 2021, with many businesses eligible for a second-round of funding under this program. To be eligible, a business must have incurred a 20% decrease in revenues in any quarter in 2020, when compared to the same quarter in 2019. There also are provisions for start-up entities and companies not in business for a full year in 2019.
To obtain forgiveness for these advances, companies must spend at least 60% of the funds on payroll and payroll related costs during a specified time period, generally either 8 or 24 weeks. The program has expanded the eligible costs to include certain additional operating expenses directed at protecting employees and allowing them to work remotely.
The IRS has clarified that the proceeds of these loans, if properly forgiven, will not be included in taxable income, and the related expenses are
The SBA, that administers this program, has provided a streamlined process for those entities who received less than $150,000 in loan proceeds.
- At this time, many companies will be requesting loan forgiveness under the Payroll Protection Program. These entities may want to review the provisions of the Employee Retention Credit, which is another part of the CARES Act implemented in 2020 but expanded in 2021.
Under this program, if a company experiences a 20% (down from 50% in 2020) decrease in revenues in a given quarter in 2021, when compared to the same quarter in 2019, it may be entitled to a credit for wages paid to retain employees. The credit is equal to 70% of qualified wages paid during the quarter in which it experienced the decrease in revenues. The maximum amount of wages that may be taken into account in a given quarter is $10,000, per employee.
Unlike 2020, the credit is calculated based on wages paid during each qualifying quarter, and does not have an annual limit. Any wages utilized to claim loan forgiveness under the Payroll Protection Program are not eligible for the employee retention credit. In accordance with the passing of the recent infrastructure bill, this credit is only available through the third quarter of 2021.
- Legislation continues to evolve affecting employers and employees related to the on-going pandemic. These programs are designed to compensate employees for absences related to COVID-19 for either illness or taking care of an affected family member. Tax credits have been made available in an effort to mitigate the costs to employers. Employers are encouraged to review the various provisions and work with their payroll and tax advisors to stay up to date on the legislation.
- As a boost to the restaurant and hospitality industry, meals in connection with business meetings are 100% deductible in 2021. Entertainment expenses, such as tickets to a sporting event or concert, continue to be 100% non-deductible.
- It was anticipated, with the change in administration, that corporate tax rates would increase moving forward. At this point, it does not appear that changes will be enacted in 2021 and it is unclear what will happen in 2022, and future years. Business owners will again have to consider possible increases in tax rates, moving forward, and continue to review their operating and compensation structures.
- As part of the CARES Act, the Treasury provided stimulus checks in 2020. A third-round of stimulus payments of $1,400 per individual were issued in 2021. These payments were again income based, and largely contingent on the income reported on a prior year tax return. If a taxpayer did not receive this third payment, they may still be able to claim a credit on their 2021 tax return, if taxable income does not exceed the prescribed thresholds.
- Tax brackets and standard deductions have been indexed for inflation, however there were no major legislative changes made to the reporting of income and deductions.
- Required minimum distributions that were suspended for 2020 are again required in 2021.
- The Child Tax Credit and Dependent Care Credit have been expanded. In some cases, families have begun receiving advance checks on the anticipated Child Tax Credit.
- Taxpayers who received an early distribution from an IRA or retirement account related to the corona virus may need to continue to follow the reporting guidelines to avoid the penalties on these withdrawals.
Current Changes Being Discussed
- An increase in the corporate tax rate from the current 21% to 25–27%.
- A further limitation on the Qualified Business Income deduction for high-income earners.
- An increase in the SALT (State and Local tax) deduction from the current $10,000 to $80,000.
- An extension of the expanded Child Tax Credit and Earned Income Credit.
- A change that would impose the 3.8% investment tax surcharge to income earned through a trade or business on high income earners.
Paul Impellicceiri is a partner at Pittsburgh-based accounting/auditing firm, A. F. McGervey & Company, LLC, and can be reached for comment at email@example.com or (412) 653-6101.