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In the past year, legislators enacted many tax breaks for companies due to the coronavirus pandemic.
Now the Biden administration is encouraging the hardest hit companies to take advantage of a particularly large tax break, the employee loyalty loan.
The tax break was first introduced in the CARES Act in March 2020 and has since been expanded in the December relief package and March under the American Rescue Plan Act.
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More than 30,000 small businesses have drawn more than $ 1 billion on the loan this year, the White House said Monday. Still, the Biden administration wants to raise awareness of the program, saying the finance department will release more guidance on credit this week.
Here’s what companies need to know.
How the loan works
The 2020 Employee Loyalty Credit will provide qualifying businesses with a 50% refundable tax credit of up to $ 10,000 in qualifying wages paid per employee in 2020. This means Eligible Companies can receive up to $ 5,000 in credit per employee for the final year.
The American Rescue Plan Act, which went into effect in March, expanded the credit even further, making more businesses potentially eligible and pushing back when they could draw on the credit by the end of the year. In 2021, Eligible Companies will be able to deduct up to 70% of Qualifying Wages of up to $ 10,000 paid per employee per quarter. This brings the total annual potential loan amount to $ 28,000 per employee this year.
This is a significant bonus for certain companies. In addition to reducing the wage taxes companies have to pay, companies with fewer than 500 employees can apply for a prepayment of the loan with the IRS and receive it in cash if the loan is greater than what they would owe for labor taxes.
“We find it can be damn significant,” said Tony Nitti, CPA and partner with RubinBrown Tax Services Group. “Many companies can reduce their payroll requirements to next to nothing, or even negative numbers, if they receive a reimbursement from the federal government.”
Who is eligible
Of course, there are strict eligibility rules that companies can take out the loan for. These are designed to focus on those hardest hit by the pandemic.
For the 2020 loan, businesses must have experienced a total or partial business interruption during the year due to a government regulation restricting trade, travel, or gatherings due to the pandemic, or a quarterly decline in gross revenues of more than 50%. according to the IRS.
The rules for the 2021 loan have been expanded to include companies that have either closed completely or partially, or whose gross earnings have decreased by more than 20% quarterly.
“You may not have qualified in 2020, but you may have qualified in 2021,” said Erin Vukelich, an accountant at JCCS Certified Public Accountants in Whitefish, Montana.
The numbers for 2021 are simply enormous.
Tony Nitti
CPA and partner in RubinBrown’s Tax Services Group
In addition, the law passed in December made it clear that if you received a loan for the paycheck protection program, you can apply for the credit. However, you can’t double-dip, so to speak, so you need to clarify which wages were covered by PPP and which are applied to the loan.
According to experts, this made the program more complex. Still, the added benefits are significant – for some companies that have received PPP loans and are eligible, the amount they received from the 2021 loan doubled the overall benefits.
“The numbers for 2021 are just enormous,” said Nitti.
The size of companies that can claim wages for all employees – compared to those who worked during the quarter – also changed for 2021. In 2020, companies with an average of more than 100 employees generally could not all Claim wages, however, in 2021 that number rose to an average of 500 employees.
Additional complexity
Due to the complexity of the program and the rules that changed between 2020 and 2021, companies should ensure that they work with an expert to apply for the credit for their labor taxes.
“It’s very complicated, even though it’s very cheap,” said Mark Steber, chief tax officer at Jackson Hewitt Tax Services. “Do not wade into this program without competent help.”
This is especially true if companies had a PPP loan and are also entitled to apply for the employee loyalty credit. To maximize both benefits, you will likely need the help of a tax professional who can work with both credit and payroll documents.
According to Vukelich, companies will still be able to claim the 2020 Employee Loyalty Credit even if they have already filed their tax returns for that year.
To go back and get the loan they have to change their returns for 2020, which some companies are doing to get the advantage, she said.
Going forward, companies should keep track of all the records they need to prove eligibility, especially if they are eligible through an order from the local government to cease operations, Vukelich said.
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