Author: Leon Clinton

It’s hard to imagine that a small business does not qualify for some or all of the employee retention credit (ERC). 

And remember, this is a tax credit—one of the very best things that tax law has to offer. True, it’s not as valuable as some other tax credits, because you have to reduce your payroll income tax deductions for the credits, but the ERC certainly puts you money ahead.

And you can be looking at big bucks. The possible ERC is $5,000 per employee for 2020 and $28,000 per employee for 2021. That’s $33,000 per employee.

For 2020, you have two ways to qualify:

1. You had a gross receipts drop during a calendar quarter of more than 50 percent when compared to the same calendar quarter of 2019. The 50 percent test is the trigger for the ERC and you automatically qualify in the following 2020 quarter.
2. You suffered from a federal, state, or local government order that fully or partially suspended your operations.

For 2021, you have three ways to qualify:

1. You suffered a federal, state, or local government order that fully or partially suspended your operations (under this rule, you qualify for the ERC on the days you suffered the full or partial suspension, even if you did not lose any money).
2. Your gross receipts for a 2021 calendar quarter are less than 80 percent of gross receipts from the same quarter in calendar year 2019.
3. As an alternative to number 2 above, using the preceding quarter to your 2021 calendar quarter, your gross receipts are less than the comparable quarter in 2019.

You can see by the rules that the government wants to help your small business. Take advantage.

One final note. You may not double dip. Wages you use for the ERC may not be used for the PPP, family leave credit, or similar COVID-19 programs.

If you would like to discuss the ERC, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 14, 2021

The Tax Cuts and Jobs Act (TCJA) ugly net operating loss rules, which were laid dormant by the CARES Act, reappear in tax year 2021 to limit your tax loss benefits.

You’ll most often see an NOL when you have a net business loss for the tax year.

You are now stuck with the TCJA rules for NOLs starting in tax year 2021.

The TCJA rules are not in your favor:

• You cannot carry back your NOL, but you can carry it forward an indefinite number of years, and
• Your NOL can offset only up to 80 percent of your taxable income before your 20 percent Section 199A deduction.

The TCJA changes take away your ability to get immediate tax savings from your business losses.

Since you can’t carry back your NOL, you must be proactive to get immediate value from your loss. Consider these five strategies to create taxable income and lock in your loss immediately:

1. Convert your traditional IRA to a Roth.
2. Take a taxable traditional IRA distribution if you are not subject to penalties for early withdrawal.
3. Offset depreciation recapture on the sale of vehicles and other equipment.
4. Accelerate income into 2021.
5. Fix depreciation errors that increase your taxable income.

If you are looking at a business loss this year and would like to see if you can take advantage of it now, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 8, 2021

If you are married, you need to know three special rules that can benefit your Section 179 deductions:

1. The Section 179 business income limit includes W-2 income earned by both you and your spouse.
2. Section 179 expensing treats you and your spouse as one taxpayer.
3. If you and your spouse file separate returns, you need to make an overt election of how you are going to share your Section 179 deductions.

The W-2

For Section 179, among other purposes, employees are engaged in the active conduct of the trade or business of their employment. Thus, wages, salaries, tips, and other compensation derived by a taxpayer as an employee count as income for the business income limit on Section 179 expensing.

Example. You have business income of $10,000 and qualifying Section 179 expenses of $90,000. Your spouse has W-2 income of $50,000. Your husband-and-wife business income limit for Section 179 expensing is $60,000 ($10,000 plus $50,000).

If you elect to expense the entire $90,000, you deduct $60,000 this year and carry the $30,000 excess over to next year, where it again enters into a Section 179 computation. You may carry over the excesses to any number of years, without limit.

Husband and Wife Are One Taxpayer

If you file a joint return, tax law treats you and your spouse as one taxpayer for purposes of applying the Section 179 limits.

Separate Returns

If you and your spouse file separate returns, you must first treat yourselves as one person for Section 179 ceilings and limits. This is step 1.

Step 2 triggers the need for a decision. You and your spouse may elect how you want to handle the allocations in your tax returns. If you do not make a formal election, the law makes a 50/50 allocation for you and your spouse.

Example. You are married and place in service $65,000 of qualifying Section 179 property during the year. With elections on separately filed returns, you and your spouse may choose how to allocate the $65,000. You could take it all, give it all to your spouse, or take $55,000 and give $10,000 to your spouse. If you don’t choose, the law gives each of you $32,500 (half of $65,000).

Is you have Section 179 deductions that you would like to discuss, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 4, 2021