Key Changes to the Employee Retention Credit

On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA) into law. A recent article from JD Supra outlines two key provisions included in the act that make changes to the employee retention credit.

Established by the CARES Act, the employee retention credit was designed to incentivize employers to maintain their staff in the midst of the coronavirus pandemic. For the period from March 13, 2020 to December 31, 2020, eligible employers could claim a 50% retention credit for qualified wages, capping out at $5,000 per employee.

The CAA both extends and expands the employee retention credit, including making retroactive changes to it for 2020. It does so via two provisions:

Section 206 – This provision makes retroactive changes back to March 13, 2020, when the ERC was established. Firstly, the ERC is now eligible for recipients of loans through the Paycheck Protection Program (PPP). Previously, PPP participants were barred from claiming the ERC. Employers should note that they may not claim the ERC on wages paid with forgiven PPP loan funds.

Secondly, Section 206 offers clarification regarding “qualified health plan expenses” and the ERC. It explains that these expenses are, indeed, eligible for the ERC, even when they are attributable to a furloughed employee who is not receiving any other compensation at the time.

The third change—another clarification—is in regard to the “gross receipts” test for tax-exempt organizations. In determining their eligibility for the ERC, tax-exempt organizations must account for all gross receipts, not just those from unrelated trade or business activities.

Lastly, Section 206 offers employers a means for catching up on unclaimed ERC for 2020. Employers should claim the additional ERC on their fourth quarter Form 941, which is due by January 31, 2021. Further guidance in this area is expected this month.

Section 207 – This second provision includes an extension of the ERC for the period from January 1, 2021 to June 30, 2021. Additionally, it expands the ERC in the following ways:

  • Increases the credit from 50% to 70%, for the portion of 2021 that the ERC covers.
  • Adjusts the per-employee cap on the ERC to $7,000 per quarter.
  • Decreases the eligibility threshold from a 50% decline in gross receipts to a 20% decline.
  • Expands eligibility for the ERC from employers with up to 100 employees to employers with up to 500 employees.
  • Eliminates the qualified wages cap for employee pay increases.
  • Eliminates the option to receive advance payment of the ERC via IRS Form 7200 and/or IRS Form 941 for employers with more than 500 employees.
  • Expands the availability of advance payments of the ERC for employers with 500 or fewer employees.
  • Creates a process for repaying advance payments of the ERC, in the event of excess payments.
  • Makes some governmental employers eligible for the ERC in 2021.
  • Maintains the non-eligibility of the ERC for wages accounted for under IRC Section 45S and expands the non-eligibility to also cover wages accounted for under IRC Section 41, IRC Section 45A, IRC Section 45P, IRC Section 51, and IRC Section 1396.
  • Requires the U.S. Small Business Administration and the IRS to coordinate in a public awareness campaign targeting employers eligible for the ERC.

For further details, click here to read the article in full at JD Supra.

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IRS Issues New Guidance Regarding COBRA Changes Implemented by the ARPA

The Internal Revenue Service (IRS) recently issued new guidance in an effort to clarify the COBRA premium assistance and credit available under the American Rescue Plan Act (ARPA).

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) established continued health coverage for employees experiencing a reduction in hours or involuntary termination. Under the ARPA, eligible employees can temporarily claim a 100% reduction in COBRA premiums.

According to a recent article from Accounting Today, IRS Notice 2021-31 contains the following:

  • Information for administering the new credit for employers, plan administrators, and health insurers.
  • Guidelines pertaining to calculation, eligibility, and length of availability of the credit.
  • Information regarding the corresponding tax credit for groups that use group health plans.

For more details, visit Accounting Today to read the article in full.

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Paid Sick Leave vs. Vacation vs. PTO: What You Need to Know

More and more jurisdictions are passing laws requiring employers to provide paid leave to employees, and the COVID-19 pandemic has only accelerated this trend. When new laws are enacted, employers often have questions about the impact on their existing policies. Here are answers to some frequently asked questions on paid sick leave, vacation, and paid time off.

Q: Where is paid vacation required?

A: No federal, state, or local law requires employers to provide paid vacation. However, some jurisdictions have enacted laws requiring employers to provide paid leave that employees can use for any purpose, including vacation. For example, Maine requires employers with more than 10 employees to provide paid time off that can be used for any reason. Nevada has a similar law that applies to employers with 50 or more employees.

Despite the absence in laws requiring paid vacation, it remains one of the most common employee benefits. More than 90 percent of full-time employees receive paid vacation time, according to the Bureau of Labor Statistics (BLS). Providing paid vacation, and developing a culture that encourages employees to use their time, can help attract and retain employees and bolster productivity, particularly in these unprecedented times.

Q: Where is paid sick leave required?

A: Currently, the following jurisdictions require employers to provide paid sick leave to employees:

States:

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Other Jurisdictions:

  • Chicago 
  • Cook County, Illinois 
  • District of Columbia 
  • Cities in California: Berkeley, Emeryville, Oakland, San Francisco, Santa Monica, San Diego, Long Beach (hotels with 100 or more rooms), and Los Angeles 
  • Cities in Minnesota: Duluth, Minneapolis, and St. Paul 
  • Montgomery County, Maryland 
  • New York City 
  • Cities in Pennsylvania: Philadelphia and Pittsburgh 
  • Cities in Washington: Seattle, Tacoma, and SeaTac (hospitality and transportation industries)

Q: Do we have to provide paid leave to employees if they miss work due to COVID-19?

A: Effective April 1, 2020, the Families First Coronavirus Response Act (FFCRA) required employers with fewer than 500 employees to provide emergency paid sick leave (up to 80 hours) and public health emergency leave (up to 12 weeks) to employees and established tax credits for employers that do so. The FFCRA's leave requirements expired on December 31, 2020. However, the tax credit portion of the law was extended through September 30, 2021 for employers that voluntarily offer either type of leave.

While the FFCRA's leave requirements ended, some states and local jurisdictions have stepped in with their own leave requirements. For instance, as of January 1, 2021, all Colorado employers must provide up to 80 hours of public health emergency leave to employees. On March 19, 2021, California enacted a law requiring employers with more than 25 employees to provide COVID-19 supplemental paid sick leave. The law applies retroactively to January 1, 2021 and will remain in effect through September 30, 2021. This leave is in addition to any paid sick leave to which the employee is entitled under state law. Employers had until March 29, 2021 to start providing the leave. However, since the law applies retroactively to January 1, 2021, if an employee took qualifying leave from January 1, 2021 through the current date and makes a request for retroactive payment, the employer must provide it. A number of cities in California and Pennsylvania have also extended their COVID-19 related leave laws beyond December 31, 2020 or enacted new requirements for 2021. Also, New York recently enacted a law requiring employers to provide paid leave for employees to receive a COVID-19 vaccination.

Keep in mind that states and local jurisdictions may have paid sick leave laws that were enacted prior to the pandemic (see the answer above) that may cover situations related to COVID-19. Additionally, if you require the COVID-19 vaccine, you would generally be required to pay employees for the time spent meeting the requirement. Check your state and local laws to ensure compliance with all applicable laws.

Even in the absence of a requirement to provide paid leave to employees for reasons related to COVID-19, many employers do so to encourage sick workers to stay home and prevent the spread of the illness.

Q: What is the difference between a paid vacation policy, paid sick leave policy, and a paid time off (PTO) policy?

A: Instead of having separate policies for vacation, sick, and other types of leave, many employers offer a single PTO policy under which employees can use accrued time off for any purpose. For example, you may offer 14 days of PTO per year that employees can use for any reason. Under this policy, one employee could use 10 days for a vacation, another three days when they get sick later in the year, and the remaining time off to care for their child, whose school was closed due to a snowstorm. Other employees may use the time differently to meet their specific needs and circumstances.

Q: Can I adopt a use-it-or-lose-it vacation policy?

A: Some states explicitly prohibit policies that force employees to forfeit accrued, unused vacation (also known as use-it-or-lose-it policies). In these cases, employers must generally allow employees to carry over accrued but unused vacation from year to year, or pay employees for the unused time at the end of the year. Similarly, in these states, employers are required to pay out any accrued, unused vacation at the time of separation.

States generally handle unused vacation in one of three ways:

  • Expressly prohibit use-it-or-lose-it policies. These states require carryover from year to year and payout at separation; 
  • Permit use-it-or-lose-it policies but only if the employer has a written policy that explicitly states it will not carry over accrued, unused vacation to the following year and won't pay employees for accrued, unused time at separation; or 
  • Don't require employers to carry over accrued, unused vacation to the following year or pay employees for unused time at separation unless they have a policy that says otherwise. 

Note: In some of the states that prohibit use-it-or-lose-it policies, a reasonable cap on accruals may be permitted. In such cases, employees have to "use" some of their time in order to earn any additional time.

Q: My state requires me to provide paid sick leave to employees. Can I keep my current PTO policy?

A: Under many of the paid sick leave laws, if you have a PTO policy, you generally don't have to provide additional paid sick days to employees if the policy:

  • Allows employees to use the same amount of leave for the same purposes and under the same conditions as required by the sick leave law; and 
  • Satisfies the accrual, carry over, and use requirements of the sick leave law. 

Check your applicable law to ensure compliance. 

Note: State and local paid COVID-19 leave laws may have different rules.

Q: My state paid sick leave law allows me to provide leave through a PTO policy. One of my employees just requested sick leave, but they've exhausted all their PTO for the year on vacation. Do I have to offer additional paid leave to this employee?

A: Under many of the paid sick leave laws, no additional leave would be required if the PTO policy met the requirements listed in the answer above. When implementing your PTO policy, to help your employees manage their time off, clearly communicate what they can use PTO for, how it accrues, available balances, and the other requirements of your plan. Depending on the circumstances, the employee here may qualify for sick leave (typically unpaid) under a different law. For example, the federal Family and Medical Leave Act requires employers with 50 or more employees to provide unpaid leave to eligible employees for specified family, medical, and military reasons. Many states have similar laws that cover employers with fewer employees. Check your applicable laws to ensure compliance.

Note: The employee may also be entitled to paid COVID-19 leave under state and/or local law.

Q: What are some advantages and disadvantages of having a PTO policy instead of a standalone paid sick leave policy or vacation policy?

A: In general, PTO policies give workers more flexibility to use their leave to fit their needs. For employers with employees in multiple jurisdictions with differing paid sick leave requirements, a PTO policy can be an attractive option because a single policy (and the same amount of leave) can generally be offered across jurisdictions, provided it meets the requirements of the most generous paid sick leave law.

Another advantage of a PTO policy is that it can ease the administrative burden of tracking precisely how the leave was used. However, you should still familiarize yourself with your obligations under applicable paid sick leave laws, since many have specific recordkeeping requirements.

Sick leave laws don't typically require that employers pay for unused sick leave when an employee leaves the company. However, if you use your PTO policy to meet sick leave requirements, in some states, such as California, you would be required to pay out all unused PTO at the time of separation. This could mean you would face additional costs paying for unused sick time if you bundled your sick leave into your PTO rather than if you offered separate sick leave. In some states, this may also be true if the employer uses a vacation policy to satisfy the sick leave law.

Note: Seattle's paid sick leave law requires employers with 250 or more full-time equivalent employees to carry over more time off if they maintain a PTO policy instead of a standalone sick leave policy (108 hours versus 72 hours).

Conclusion:
Make sure your vacation, sick leave, COVID-19 leave, and PTO policies comply with applicable state and local laws.

This story originally published on HR Tip of the Week – a blog providing practical information on hiring, benefits, pay, and more – by ADP®. Learn more about how ADP’s small business expertise and easy-to-use tools can simplify payroll & HR at adp.com.

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How Biden's Proposed American Families Plan Might Affect You

President Biden presented his proposed American Families Plan (AFP) during his Joint Session of Congress address on April 29, 2021. What follows is an overview of what is included in the plan. But this is only his wish list; Congress will need to draft proposed legislation that will have to pass in both the House of Representatives and the Senate before becoming law. With a price tag of more than $1.8 trillion, many on both sides of the political aisle think the plan is too expensive. As with virtually all legislation, the provisions will be debated, altered and deleted during Congressional negotiations. The final bill, if passed, may be quite different than the original proposed version.

BENEFITS

Education Benefits – The AFP primarily incorporates education benefits that, if passed, would add four years of free public education and provide federal funds to certain higher education institutions. More specifically, it would address:

  • Pre-Kindergarten Education – Provide free universal preschool to all three- and four- year-olds. 
  • Community College Education – Provide two years of tuition-free community college education, including for DREAMers. 
  • Pell Grants – Increase Pell Grants by approximately $1,400 to assist low-income families and DREAMers. 
  • College Retention and Completion Rates – Include a $62 billion grant program to invest in completion and retention activities at colleges and universities (particularly community colleges) that serve high numbers of low-income students. States, territories and tribes will receive grants to provide funding to colleges that adopt innovative, proven solutions for student success. 
  • Subsidized Tuition – For families earning less than $125,000, provide two years of subsidized tuition at historically black colleges and universities and other minority-serving institutions. The plan would expand and create additional grants for these schools to strengthen their academic, administrative and fiscal capabilities, including by creating or expanding educational programs in high-demand fields such as STEM, computer sciences, nursing and related health care. 

Education, Teachers and Educators – The AFP includes several provisions to increase college retention and completion rates, address teacher shortages, improve teacher preparation and strengthen pipelines for teachers of color. It would double scholarships for future teachers from $4,000 to $8,000 per year while they are earning their degree and would also help current teachers earn in-demand credentials.

Child Tax Credit – The President is proposing that the Child Tax Credit increases included in the American Rescue Plan Act (ARPA) be made permanent. The ARPA increased the Child Tax Credit from $2,000 per child to $3,000 per child six years old and above and $3,600 per child under six years old. It also made 17-year-olds eligible children for the credit and made the credit fully refundable and payable periodically during the year. These changes were for 2021 only. The AFP proposal would extend the ARPA increases through 2025 and make the refundability permanent.

Child & Dependent Care Tax Credit – The ARPA, for 2021 only, made this credit fully refundable and provided a credit equal to 50% of the expenses before phaseout. The maximum amount of expenses that can be used to compute the credit was increased to $8,000 for one qualified individual and $16,000 for two or more qualified individuals. As under prior law, a dependent child qualifies if they are under the age 13. The maximum credit is $4,000 (50% of $8,000) for one eligible individual and $8,000 (50% of $16,000) for two or more eligible individuals. The AFP would make these changes permanent.

Earned Income Tax Credit (EITC) for Childless Workers – The ARPA essentially tripled the EITC for childless workers for 2021 only. The one-year change increased the maximum credit from $543 to $1,502. Biden is asking Congress to make this increase permanent.

Paid Family Leave – The AFP would create a program that would ensure workers receive partial wage replacement to take time to bond with a new child, care for a seriously ill loved one, deal with a loved one’s military deployment, find safety from sexual assault, stalking or domestic violence, heal from a serious illness of their own or take time to deal with the death of a loved one. It would guarantee twelve weeks of paid parental, family and personal illness/safe leave by year 10 of the program and also ensure that workers get three days of bereavement leave per year starting in year one. The program would provide workers up to $4,000 a month, with a minimum of two-thirds of average weekly wages being replaced, rising to 80 percent of average weekly wages for the lowest-wage workers.

Health Insurance – The AFP would extend the expanded ACA health insurance premium tax credits included in the ARPA that lowered health insurance costs by an average of $50 per person per month for nine million people, and it would enable four million uninsured people to gain coverage. In addition to other provisions, individuals would be able to enroll in Medicare at age 60.

TAX INCREASES TO PAY FOR THE BENEFITS

Corporate Tax Rate – The proposal would increase the corporate tax rate from 21% to 28% (the rate was 35% before the 2018 tax reform).

Individual Marginal Tax Rates – The proposal would increase the top marginal tax rate from 37% to 39.6% for taxpayers with taxable income in excess of $400,000. That may be an oversimplification since tax rates take into account a taxpayer’s filing status. According to Jen Psaki, the White House press secretary, the 39.6% rate would apply to families with a taxable income of $509,300 or greater and single individuals with a taxable income of $452,700 or greater. Also, keep in mind that tax rates are adjusted for inflation annually.

Capital Gains Tax – The proposal would end the lower maximum capital gains rates for households making over $1 million (the top 0.3 percent of all households), thus having them pay the same 39.6% rate on all their income and equalizing the rate paid on investment returns and wages.

Basis Step-up – Currently, when assets are inherited, their basis in the hands of the beneficiary is the fair market value of the asset at the date of the decedent’s death. Taxable gain when an asset is sold is the difference between the selling price and the asset’s basis. Thus, under current law, assets can be transferred to beneficiaries without any income tax liability for the beneficiaries.

Under the AFP, any basis step-up would be eliminated for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions), ensuring the gains will be taxed if the property is not donated to charity. The reform would be designed with protections so heirs will not have to pay taxes on family-owned businesses and farms given to them if they continue to run the business.

Carried Interest – Carried interest is a share of a private equity partnership’s or fund’s profits that serves as compensation for fund managers. Because carried interest is considered a return on investment, currently it is taxed at a capital gains rate and not an ordinary income rate. The proposed tax changes would eliminate carried interest, and thus the income would be taxed at ordinary rates.

Like-kind Exchange for Real Estate – Sec 1031 of the Internal Revenue Code allows taxpayers to exchange real estate used in business or for investment for other business or investment real estate and avoid taxation by deferring the gain in the replacement property. The proposed plan would eliminate Section 1031 like-kind exchanges for real estate investors when they exchange property on gains greater than $500,000.

Excess Business Losses - An “excess business loss” is the excess (if any) of the taxpayer’s aggregate deductions for the tax year that are attributable to trades or businesses of the taxpayer (determined without regard to whether or not the deductions are disallowed for that tax year) over the sum of

(i) the taxpayer’s aggregate gross income or gain for the tax year attributable to those trades or businesses plus
(ii) $250,000 (200% of that amount for a joint return (i.e., $500,000)). This amount is adjusted for inflation.

The current limitation is through 2021. The proposed changes would permanently extend the current limitation restricting large excess business losses.

Medicare Tax – Currently there is a 2.9% Medicare surtax on earned income (wages, self-employment) for taxpayers whose earnings exceed $250,000 (joint), $125,000 (married filing separate) or $200,000 (others). When added to the regular 0.9% Medicare rate, the total paid is 3.8%. There is also a 3.8% Medicare surtax on net investment income that applies when the taxpayer’s income exceeds $250,000, $125,000 or $200,000, depending on their filing status. Biden’s plan would apply the 3.8% surtax consistently to those with income over $400,000.

Tax Preparer Regulation – The proposal would give the IRS the authority to regulate paid tax preparers. Currently, CPAs and Enrolled Agents have continuing education requirements, as do tax preparers in Oregon and California. However, in other states, individuals can prepare tax returns without any oversight, which results in high error rates. These unregulated preparers charge taxpayers large fees while exposing them to costly audits.

Compliance – The proposal would substantially raise the IRS’s budget to increase tax compliance of high-income earners and large corporations, businesses and estates.

Bank Information Reporting – The proposal would require financial institutions to report to the IRS how much money came into and out of individuals’ and businesses’ accounts each year.

This material is a synopsis of key provisions of the President’s American Families Plan but does not include all proposed changes. Consult the White House fact sheet for additional provisions and details.

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How to Protect Your Data in QuickBooks

After the unprecedented year we’ve just experienced, the last thing you need is to have your accounting data compromised or stolen. It would be impossible to reconstruct your QuickBooks file from scratch, and you can’t afford to have a hacker steal any of your funds.

There are numerous steps you can take to protect yourself from threats, both internal and external. QuickBooks itself offers some safeguards. Strong company policies can also help safeguard against data theft or destruction. And some of your security guidelines should just come from using common sense.

Here’s a look at what you can do.

Keep Your Systems Safe

There are countless ways you can protect your data by maintaining the integrity of the computer that's running QuickBooks. Some involve the same steps you would take to safeguard all of the applications and information you have stored there. You should have reputable antivirus/anti-malware software installed. Use strong passwords. Keep up with system updates.

Updates and Backup

QuickBooks' own updates are critical, too. You can start these manually, but we recommend setting up automatic updates. Open the Help menu and click on Update QuickBooks Desktop. Click the Options tab to access this tool.

May 2021 QB Article 1

You can set up automatic updates in QuickBooks to download and install new functionality and bug fixes.

Frequent, safely-stored backups are another essential element of overall data security. If your system is compromised by an intruder, you’ll need to be able to restore your most recent QuickBooks file when it’s safe again. Go to File | Back Up Company to set up either a local or an online backup. Use one of these tools at the end of any day you’ve entered anything on QuickBooks. We can help you with backup if you’re not sure how to do it.

Networks and Smartphones

If you have multiple PCs that run on a network, it's important to maintain that system's health, too, since an intrusion at one workstation can affect everyone. You can do this by:

  • Discouraging employees from browsing the web excessively and downloading unnecessary software. 
  • Encouraging responsible handling of emails (no clicking on unknown attachments, no personal email on work computers, etc.) 
  • Installing network monitoring software or hiring a managed IT service that only charges when you need them.

Do your employees have company-issued smartphones? Make sure their security systems are sound. Set policies to protect them. For example, tell employees they should never use them on a public Wi-Fi network or install personal apps on them.

Internal Fraud Possible

No business owners anticipate that their own employees would steal from them. But it happens, and it can do tremendous financial damage. To minimize your chances of being victimized by limiting the access that employees have to sensitive information.

May 2021 QB Article 2

You can limit the access permissions each user has in multiple areas.

Go to Company | Set Up Users and Passwords, then click Set Up Users. You should be listed there as the Admin. Click Add User and supply a username and password. If you’re not sure how many users are supported on your license or need to add more, contact us. Click Next and then click the button in front of Selected areas of QuickBooks. Click Next again. On the next several screens, you’ll designate that user’s access in areas including Purchases and Accounts Payable and Checking and Credit Cards. When you come to the end of the wizard, click Finish.

You might consider running a background check when you hire someone who will have access to QuickBooks. It’s become a more common business practice.

QuickBooks provides additional tools that can help track down suspicious activity. You can view the Audit Trail, for one. Go to Reports | Accountant & Taxes | Audit Trail. This report displays a comprehensive list of transactions that have been entered and/or modified. Other reports may be helpful, like Missing Checks, Voided/Deleted Transactions, and Purchases By Vendor.

A Never-Ending Process

It's so easy to get caught up in the daily work of running your business that you forget to take the steps required to keep your QuickBooks data—and all of your computer hardware and software—safe. We get that.

Further, you might think that you’re an unlikely target because you’re a small business. Hackers count on you thinking that, though the reality is that you don’t have to be a big corporation to be the victim of cybercrime. Whether or not criminals get access to your funds, they can do a lot of damage that will end up costing you more time and money than you might think.

So stay vigilant. Security should be considered whenever you deal with financial transactions – especially where the internet is involved. If we can be of assistance as you set up safeguards and company policies, let us know. As always, we’re available to answer any questions you might have about QuickBooks operations in general.

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