Author: Leon Clinton

First, say thanks to the Consolidated Appropriations Act, 2021 (CAA), enacted December 27, 2020. It opened the door (retroactively and going forward) for Paycheck Protection Program (PPP) participants to also claim the employee retention credit (ERC).

Reminder. Tax credits are the best. They usually reduce taxes dollar-for-dollar. 

(The ERC is not quite as good as the usual tax credit because you increase taxable income by the amount of the credit. But it’s still good—very good.)

The CARES Act, enacted on March 27, 2020, created the PPP money, but it prohibited you from getting both PPP money and tax credits from the ERC; you had to choose one benefit or the other. Now, thanks to the new December law, you can have both tax-free PPP money and tax credits from the ERC.

And perhaps the best news of all comes from the IRS in its recently released, business-friendly guidance on how the rules work when you want to claim both PPP and ERC benefits.

How the Law Changed

The CAA made four important changes retroactive to 2020:

1. You may now qualify (yes, retroactively) to claim the ERC for 2020 wages even though you had a 2020 PPP loan.
2. You may not claim the ERC on PPP wages used for PPP loan forgiveness.
3. You can elect not to claim the ERC, so as to increase your tax-free PPP monies.
4. If your lender denies your PPP loan forgiveness, you can claim the ERC for the qualified wages even when you made the election not to claim the ERC for those wages.

Congress made the changes retroactive to March 13, 2020, allowing you to now amend your 2020 payroll tax returns to claim the employee tax credits for which you are eligible.

You likely hadn’t thought of amending payroll tax returns, because it’s not often done. But you have the three-year statute of limitations for amending payroll taxes just as you have it for your income tax returns. 

If you would like to discuss how the new law changes the ERC and intertwines with the PPP, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 12, 2021

If you are married, most likely you’ve always filed a joint tax return with your spouse.

Most of the time, a joint return shows less overall tax than two separate tax returns do, because the married-filing-separately status has many tax disadvantages.

Fast-forward to the 2020 tax filing season, however—and nothing is as it was.

This year, four tax provisions will be key to determining whether you’ll be better off filing a joint tax return or separate tax returns for tax year 2020:

• Tax-free unemployment
• Recovery rebate, round 1
• Recovery rebate, round 2
• Recovery rebate, round 3

Tax-Free Unemployment

The American Rescue Plan Act of 2021, which was signed into law on March 11, 2021, excludes from tax the first $10,200 of 2020 unemployment benefits paid to an individual with 2020 modified adjusted gross income (MAGI) of less than $150,000.

Recovery Rebate, Round 1

The recovery rebate, round 1, is a refundable tax credit on the 2020 tax return, equal to

• $1,200 ($2,400 on a joint return), plus
• $500 for each dependent under age 17.

Your credit decreases by 5 percent of the amount your adjusted gross income (AGI) exceeds

• $150,000 if married, filing a joint return;
• $112,500 if head of household; or
• $75,000 if single or if married, filing separately.

The IRS gave you an advance payment of this credit based on either your 2018 or 2019 AGI and dependents. And now the IRS looks at your 2020 tax return and does the following:

• Smiles on you if the tax credit based on your 2020 tax return exceeds the advance payment. What do we mean by “smiles on you”? You get the additional amount as a refundable tax credit.
• Smiles on you (again!) if your actual credit is less than the advance payment. You keep the money. You don’t have to pay back any excess received.

Recovery Rebate, Round 2

This is a refundable tax credit on the 2020 tax return, equal to

• $600 ($1,200 on a joint return), plus
• $600 for each dependent under age 17.

Your credit decreases by 5 percent of the amount your AGI exceeds

• $150,000 if married, filing jointly;
• $112,500 if head of household; or
• $75,000 if single or if married, filing separately.

The IRS gave you an advance payment of this credit based on your 2019 AGI and dependents. And now the IRS looks at your 2020 tax return and

• Smiles on you if the tax credit based on your 2020 tax return exceeds the advance payment. What do we mean by smiles on you? Once again, you get the additional amount as a refundable tax credit.
• Smiles on you (again!) if your actual credit is less than the advance payment. You keep the money. You don’t have to pay back any excess received.

Recovery Rebate, Round 3

This is a refundable tax credit on the 2021 tax return, equal to

• $1,400 ($2,800 on a joint return), plus
• $1,400 for each dependent, regardless of age.

Your credit phases out over the following AGI ranges:

• $150,000 to $160,000 if married, filing jointly;
• $112,500 to $120,000 if head of household; or
• $75,000 to $80,000 if single or if married, filing separately.

The IRS will give you an advance payment of this credit based on your 2019 or 2020 AGI and dependents. If your first advance payment used your 2019 return information, then the IRS will send an additional payment based on your 2020 tax return if the IRS processes your 2020 tax return by August 15, 2021.

You then reconcile your advance payment(s) on your 2021 tax return:

• If your actual credit amount exceeds the advance payment, you get the difference as a refundable credit.
• If your actual credit is less than the advance payment, you keep what you have. You don’t have to pay back the excess benefit.

Why Separate Returns Could Be Better

There are two main reasons you may have net lower federal tax with separate returns versus a joint return.

First, if your MAGI is $150,000 or more on a joint return, but the spouse who received the unemployment compensation earns under $150,000 on a separate return, then that spouse can take the full exclusion up to $10,200 (except possibly in a community property state).

Second, if one spouse has AGI of $75,000 or less, but your joint AGI is over $150,000, then that spouse can claim the dependents and get all the available round 1 and round 2 credits on the 2020 tax return as well as the entire round 3 advance payment.

When considering the above, keep two important notes in mind:

1. For a couple that got joint advance payment(s), the law says you allocate 50 percent of the payment to each spouse. The higher-earning spouse doesn’t pay back any of his or her allocated advance payment, while the lower-income spouse will get the difference as a refundable tax credit.
2. Married taxpayers who agree how to allocate dependents on separate returns do not have to use the “tiebreaker” rules and can choose who claims which dependents. 

Important note. You may lose other deductions and credits on a separate return. The only way to know which is better in light of these temporary provisions is to run your tax returns both ways and see which puts you ahead. For example, separate returns can change your health insurance premium tax credit and perhaps some non-tax items such as your Medicare premiums.

As you can see there’s much to consider. If you would like me to check this out for you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 9, 2021

Members of the tax community struggle with the “solo corporate owner” qualification for the employee retention credit (ERC).

The IRS in one of its answers to frequently asked questions explains the rule as follows:

59. Are wages paid by an employer to employees who are related individuals considered qualified wages?

No. Wages paid to related individuals, as defined by section 51(i)(1) of the Internal Revenue Code (the “Code”), are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has any of the following relationships to the employee’s employer who is an individual:

• A child or a descendant of a child;
• A brother, sister, stepbrother, or stepsister;
• The father or mother, or an ancestor of either;
• A stepfather or stepmother;
• A niece or nephew;
• An aunt or uncle;
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation.

If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.

If the Eligible Employer is an estate or trust, then a related individual includes a grantor, beneficiary, or fiduciary of the estate or trust, or any person that bears a relationship described above with an individual who is a grantor, beneficiary, or fiduciary of the estate or trust.

Our take. Since the corporation is not going to have a daughter-in-law, the IRS created a reference to the individual who owns more than 50 percent of the corporation. The IRS does not single out the corporate owner and makes no reference to the spouse. Using this information, the solo corporate owner qualifies for the ERC.

If you have questions on qualifying for the ERC, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• April 9, 2021