Payroll Tax Credits May Be Available to Businesses That Paid Emergency Leave

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If your business paid for emergency leave during the COVID-19 pandemic, you may be eligible for certain payroll tax credits.

Billions of dollars in aid resulted from a series of laws passed around March 2020. These laws were intended to offset the financial burden from small business owners who continued to pay employees wages and paid emergency leave during the pandemic. Now that the national health emergency is over, businesses must be vigilant and claim any rightful tax credits that remain from the pandemic-era laws.

Family First Coronavirus Response Act and Tax Credits

Under the Families First Coronavirus Response Act (FFCRA), private American employers with fewer than 500 employees could receive payroll tax credits to offset the costs of the requirement to provide employees with qualifying paid leave for specified reasons related to COVID-19.

The mandate ended in 2020. However, the American Rescue Plan Act (ARPA) extended and expanded the payroll tax credits, allowing covered employers to take the credits until Sept. 30, 2021, if they voluntarily provided employee paid leave under the FFCRA framework. Keep in mind that the credit could be affected by local and state COVID-19 leave requirements and the interaction with the requirements under FFCRA. Another caveat is that an employer could only qualify for the federal tax credit if the leave met the requirement of the original FFCRA mandate.

What You Need to Know About FFCR Act

From April 1, 2020, through March 31, 2021, American private employers with fewer than 500 employees and self-employed individuals could claim certain COVID-19-related leave credits. The maximum leave days varied based on the situation and the calculation was dependent on regular work hours. Qualifying reasons for leave during this period included various COVID-19-related circumstances, and part-time employees received leave equivalent to their regular hours.

From April 1, 2021, through September 30, 2021, healthcare providers and certain governmental employers became eligible for the credits, and the limit on self-employed family leave credit increased. Non-discrimination rules were also established. Also, during this period, more reasons for leave were added, including COVID-19 testing and vaccination-related leave.

Wage calculations for paid sick leave depended on the reason for the leave, with varying pay rates.

The American Rescue Plan Act (ARPA) introduced changes in the Emergency Paid Sick Leave Act (EPSLA) and Emergency Family and Medical Leave Expansion Act (EFMLEA), affecting the refundable portion of credits and other details.

Under EFMLEA, the maximum leave amount and eligibility were modified, allowing for an increase in the aggregate amount and extending eligibility to healthcare workers and emergency responders.

Organized Recordkeeping Is Critical for Compliance and Reimbursement

Regardless of whether you granted leave, you must keep all the requests and time tracking information for up to four years. The Department of Labor requires employers to maintain the following documentation for four years:

  • Documentation demonstrating how the employer determined how much paid leave an employee was eligible for
  • Documentation showing how the employer determined the amount of qualified health plan expenses that were allocated to wages
  • Copies of completed IRS Forms 7200 and 941 that employers submitted to the IRS (If you use a third-party payer to meet employment tax obligations, you’ll need a copy of their records to meet this requirement).

Although the pandemic may be over, many of the record-keeping and reporting requirements for businesses will carry over for several years as the reconciliation between applications for tax credits and reimbursements continues. It is always a good idea to maintain clear, consistent records, in an organized fashion, for the required time so that you can back up any claims when needed.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Do You Use Payment Apps? If So – Important Update on Form 1099-K

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Does your organization accept donations or payments through popular apps such as Zelle, Venmo, or PayPal? Do you pay invoices or freelancers using these apps? If so, then it is important that you know about the new changes signed into law this year concerning how payments are reported through these apps.

Changes for Third Party Settlement Organizations Effective January 1, 2023

Effective January 1, 2023, a new law signed into effect requires all third-party settlement organizations (TPSOs) to report payments exceeding $600 total. The previous law required reporting only for payments exceeding $20,000, so the new law will require all TPSOs to report many more transactions.

Organizations that have received more than $600 total during 2023 through these types of payment apps will receive a form 1099-K from the TPSO. The form is intended to help improve reporting accuracy.

Business Impacts of the Reporting Change

The threshold changes from $20,000 to $600 means that all organizations must now keep careful track of payments received through popular payment apps and report them accurately. Entities are responsible for tracking their payments and reconciling them against forms 1099-K received from TPSOs.

Why Did the Law Change?

The IRS claims the law is needed to ensure income and taxes are accurate. With the growing popularity of payment apps, and the rise of the gig economy, the IRS is essentially trying to track down all the small amounts moving back and forth among consumers, freelancers, nonprofits, and businesses, and ensure that everyone is paying their fair share of taxes.

Who Issues Form 1099-K?

The TPSOs are responsible for issuing form 1099-K. However, organizations must ensure they are accurately tracking the income and the payment processor. You can use any form 1099-K issued to your organization to reconcile payments received via that TPSO.

What Tax Is Payable on Form 1099-K Income?

The answer is “It depends.” Form 1099-K income is just like any other income stream into your organization. Whether or not you owe taxes depends on many factors.

Just like receiving a 1099 from a business, a 1099-K merely lists the amount of income received. It should be recorded as income and then considered as you prepare your end-of-year taxes. The form is an added measure that enables both the IRS and the receiving entity to reconcile all income during the taxation year.

Where Do I Go for More Information?

The first step is to review the IRS information on Form 1099-K. This should clarify many of the points covered above.

If you still have questions about how to account for income listed on Form 1099-K, speak with your CPA or Welter Consulting. We can help you with audit preparations, accounting questions, software consideration, migration and support, and other nonprofit accounting needs.

As with all things, this information is subject to change. As of this writing, there’s yet another bill in Congress that would reverse the $600 threshold back to the original $20,000 threshold that was in place for many years. If this bill should pass, it will not impact 2023, however, so you should watch for 1099-Ks to arrive after January 1, 2024, for the tax year ending December 31, 2023, if you use third party payment systems.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact us for more information.

Tax News for Nonprofits

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Tax law changes all the time and, with the pandemic, it’s shifting more frequently than ever. Minor changes can add up to big savings (or big mistakes if you’re unaware of them). Here’s a roundup of the latest tax news that nonprofit accounting and finance professionals need to know. Our previous tax tips update may also be helpful.

Paycheck Protection Program Loan Forgiveness Is Deductible

Originally, the IRS ruled in Notice 2020-32 and Rev. Rul. 2020-27 that Paycheck Protection Program loan recipients could not deduct expenses that are normally deductible under the extent the payment of those expenses resulted in PPP loan forgiveness. However, that ruling became obsolete with Rev. Rul. 2021-2.

Congress clarified in the Consolidated Appropriations Act, 2021 (CAA), P.L. 116-260 that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven. The tax basis and other attributes of the borrower’s assets are not reduced as a result of the loan. This was clarified in December 2020. There is now a safe harbor provision for those who filed a tax year 2020 return on or before Dec. 27, 2020, to deduct those expenses on their 2021 tax return rather than file amended returns or administrative adjustment requests if they are a “covered taxpayer” (as defined in the revenue procedure) and they satisfy all of the requirements for the time and manner of making the election to apply the safe harbor.

Food and Beverage Deductions

50% or 100%? That’s what everyone wants to know.

Typically, food and beverage deductions are 50%. A restaurant meal for business purposes, for example, counts as a 50% deduction.

However, the IRS temporarily increased it to 100%. Under Sec. 274(n)(1), a deduction for any expense for food or beverages is generally limited to 50% of the amount that would otherwise be deductible. The Consolidated Appropriations Act, 2021, P.L. 116-260 removed that limitation for amounts paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023, for food or beverages provided by a restaurant (Sec. 274(n)(2)(D)).

Now, of course, we need to define “restaurant.” According to the definition that applies here, it is any establishment that prepares and sells food or beverages for immediate consumption on or off-premises. A coffee shop that sells breakfast sandwiches and coffee drinks for consumption on-premises or take away would count for 100% deduction but a kiosk or vending machine selling the same products does not.

So, schedule those breakfast, lunch, and dinner meetings as long as it’s safe to do so in your area. Now is the time to patronize local establishments for business meetings (and save your receipts for your accountant).

American Rescue Plan Adds to Wages Qualifying for Sections 3131 and 3132 Credits

The American Rescue Plan is another economic relief package for American families adversely affected by the continuing health crisis. The IRS sent a reminder that under this plan, employers with 500 or fewer workers can take a credit equal to the wages paid to employees for a paid day off to be vaccinated.

IRS Extends E-Signature

The IRS has extended its provision to accept e-signatures on many forms until December 31, 2021. The ongoing pandemic has necessitated that not only will they extend the deadline, but they are also adding more forms. Many of these forms can now be signed remotely, then printed or scanned and sent to the IRS, making it easier to complete required paperwork during the pandemic.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Four Important Tax Matters for Nonprofits

By | Nonprofit, Tax | No Comments

While there are many tax issues that nonprofits must be aware of, these four are often misunderstood or overlooked. Between unusual circumstances and foreign income tax, how many of these tax matters does your nonprofit face?

Line Items

Recent updates from the IRS may be to your organization’s advantage.

  • IRS Announcement 2021-7 states that amounts paid for hand sanitizer, sanitizing wipes, personal protective equipment and masks by the taxpayer may be treated as paid for medical care under Sec. 213 (d). That’s if these expenses were incurred primarily to prevent the spread of COVID-19. If your organization purchased this equipment, IRS 2021-7 may apply. Unreimbursed amounts are deductible as an itemized medical expense to the extent that, along with other allowable medical expenses, they exceed 7.5% of adjusted gross income. Or they may be paid for or reimbursed from a health savings account. Check to see if your organization’s Group Medical Plan has been amended to also cover protective and sanitizing equipment.
  • The IRS also posted COVID Tax Tips which guides employers through how to pay for their portion of Social Security tax of certain employees that were deferred from Sept. 1, 2020, through Dec. 31, 2020. This information supersedes Notice 2020-65 and Notice 2021-11. According to the latest update from the IRS, employers can make the deferred payments through the Electronic Federal Tax Payment System (EFTPS) or by credit or debit card, money order, or check. The IRS asked that employers separate these payments from other tax payments and promised that an option for ‘deferral payment’ would be added to the EFTPS system to make it easier to identify the tax payment as one for the deferred Social Security tax.

T.D. 9940 issued by the IRS provides helpful information on how to correct tax funds that are misdirected or direct deposited to the wrong bank account. The procedures are mandated in Sec. 6402(n) in the Taxpayer First Act, P.L. 116-25.

Key takeaway: Nonprofits may be able to deduct the cost of sanitizing supplies to combat COVID. Guidelines are also out now to help employers pay their portion of deferred Social Security.

Charitable Bequests

For those organizations that receive charitable bequests, it is worth noting that the Tax Court has examined the issues of charitable bequests; it redetermined the value for gift and estate tax purposes of interests in limited liability companies (LLCs) holding real estate, ground leases, and leased-fee interests. The court upheld the IRS’s determination that a discount applied to property should be split between two charitable donees. The case that the court ruled on may be read in full in Tax Bulletin 2021-17.

Key takeaway: Nonprofits should check with their accountants regarding charitable bequests, especially if they involve real estate.

Gambling Losses

In another update, the Tax Court recently ruled that a taxpayer sufficiently substantiated gambling losses of at least as much as gambling winning reported for the year.

The case that brought about this ruling centered on John Coleman, an insurance agent whose compulsive gambling offset his earnings as an agent. Despite gambling winnings in excess of $350,00 in 2014, Coleman failed to file his income taxes. Typically, taxpayers who do not gamble for their trade may itemize their deductions to including gambling losses, to the extent of any gambling winnings.

Coleman, through a detailed retrace of his receipts and expert testimony, presented his evidence. The court found reasonable evidence to support Coleman’s substantiation of his losses. (The complete case may be read at TC 2020-146.)

Key takeaway: Records from the casinos, plus expert evidence on the probability of slot machines, were upheld by the court as evidence in a tax-related case. Casinos should take note that their records of patron activities might be called upon to substantiate an IRS filing.

Should You Opt-In for a PIN?

PIN numbers are ubiquitous. You’ve probably used a person identification number (PIN) in the last week or two to access your bank account or conduct other secure transactions.

Now, the IRS is offering taxpayers the option of using PINS to verify their identity online. The program is voluntary and allows taxpayers to opt-in to receive a PIN to prevent identity theft.

Key takeaway: The FTC stated that in 2020, over 167,000 people reported identity theft. It’s a continuing problem. If you were the victim of identity theft, it may be a good idea to request an IRS PIN. Or, if you feel like your organization may be open to tax refund or identity theft, talk to your tax preparer about requesting a PIN.

Keeping up-to-date with tax changes can be challenging, but following this blog makes it much easier. We hope you’ll bookmark our site to watch for future updates.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.