This past year was relatively quiet on the tax legislation front. Over the past couple of years, several tax acts were enacted to assist in the taxpayer recovery from the COVID-19 pandemic. Most of the tax legislation from the American Rescue Plan (ARP) Act, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act, 2021 (CAA 2021) have sunset provisions that ended in 2021. Below highlights some of the changes/reversions for 2022 and 2023.
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 have received the credit and refunds, please provide your FRSCPA team professional with copies of all payroll returns that include the credits.
Even though the ERTC program has officially sunset, this does not impact the ability of a taxpayer’s to claim ERTC retroactively. If you are eligible for the employee retention credit, we suggest contacting your payroll provider as soon as possible to calculate the credit and file the amended payroll returns. Taxpayers have until April 15, 2024 to file amended 2020 payroll returns and until April 15, 2025 to file amended 2021 payroll returns.
100% of business meals from restaurants are still deductible in 2022 – Taxpayers may generally deduct the ordinary and necessary food and beverage expenses associated with operating a trade or business, including meals consumed by employees or work travel. The deduction is generally limited to 50% of the cost. For 2021 and 2022, 100% of food and beverages purchased from restaurants are deductible. Please note that for 2023, this reverts back to 50%.
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.
Retirement Plans Startup Costs Tax Credit – Eligible employers may be able to claim a tax credit up to $5,000, for three years, for 50% of costs of starting a retirement plan. Qualifications include you had 100 or fewer employees that received a minimum of $5,000 in compensation in the preceding year, you had a minimum of one participant who was non-highly compensated, and in the prior 3 years your employees weren’t substantially the same employees in another plan sponsored by you.
Please note that the SECURE 2.0 Act, assuming it is signed by the President, will increase the 50% of startup costs to 100% for employers with up to 50 employees. The Act also provides a credit for employer contributions for the first five years. The applicable percentage is 100% for years 1 & 2, 75% in year 3, 50% in year 4, and 25% in year 5. There is a per-employee cap of $1,000. This will be effective beginning 2023.