Tax

I am writing about potential COVID-19 sick and family leave tax credits you may have overlooked on your 2020 tax return. You might be eligible for up to $15,110 in tax credits, and the good news is it’s not too late to claim them.

If you’re self-employed or running a corporation, there’s a chance you failed to claim the family leave credits on your 2020 tax return. The IRS allows amended tax returns, so you can claim the credits today. Please be aware that the timeline for submitting an amended return is limited, and it is essential to act promptly.

To realize the maximum of $15,110 in tax credits, you need to meet the following requirements:

• Adequate 2020 income ($143,866 of net income if self-employed or equivalent W-2 income if an employee of your corporation).
• An inability to work in 2020 due to COVID-19.
• A son or daughter either under age 18 or incapable of self-care because of a mental or physical disability.

The law divides the credits into two categories:

• Up to $5,110 for individuals unable to work due to COVID-19-related reasons.
• Up to $10,000 for individuals who cared for a child due to COVID-19.

If you are self-employed and qualify, you can claim the credits by amending your 2020 tax return and filing a completed 2020 Form 7202 (Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals) along with IRS Form 1040-X.

For corporation owners, if your corporation paid you while you were not working due to COVID-19, your corporation may qualify for sick or family leave tax credits. If your corporation has not claimed the credits in its 2020 returns, it can amend its payroll tax returns using Form 941-X. Please note that there’s a three-year statute of limitations for correcting payroll tax overpayments on Form 941-X, which for 2020 expires on April 15, 2024.

Also, please be aware that you cannot receive double benefits. If you received assistance through the Paycheck Protection Program (PPP), the Employee Retention Credit (ERC), or similar programs, you cannot claim the same self-employed income or employee wages for the COVID-19 sick and family leave credits.

If you believe you qualify for the credits or have any questions regarding your eligibility or the amendment process, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 26, 2023

I am writing with some thoughts about your approaching corporate liquidation. There are several tax implications that you need to be aware of.

Complete liquidation of a C corporation is when it ceases to be a going concern, winds up its affairs, pays its debts, and distributes its remaining assets to the shareholder(s). In tax terms, the corporation redeems all its stock, and during the redemption, there can be one or more distributions pursuant to a plan.

Though not mandatory, it’s prudent to have a written plan that establishes a precise date for the start of the liquidation process, marking the difference between regular dividends and liquidating distributions.

Your corporation can achieve liquidation in three ways:

1. Distribute all of the corporation’s assets to the shareholder(s).
2. Sell all its assets and distribute the proceeds.
3. Sell some assets and distribute the resulting sales proceeds and unsold assets.

The bottom-line federal income tax results for all these options are similar for the corporation and the shareholders.

If your corporation distributes property other than cash during liquidation, it must recognize taxable gain or loss as if the distributed property had been sold for its fair market value (FMV).

For you as a shareholder, you treat the liquidating corporate distribution as payment in exchange for your stock. You recognize taxable capital gain or loss equal to the difference between the FMV of the assets received and the adjusted basis of the stock you surrender.

The complete liquidation of a C corporation with appreciated assets often results in double taxation—once at the corporate level and again at the shareholder level. Hence, the timing could be critical depending on your situation and future changes in tax rates. As of 2023, the maximum individual federal income tax rate on long-term gains from a corporate liquidation is 20 percent or 23.8 percent if the 3.8 percent net investment income tax applies.

Once you decide on a complete corporate liquidation, the Board of Directors should adopt a plan and file Form 966 (Corporate Dissolution or Liquidation) with the IRS within 30 days after adopting the liquidation plan. The corporation should then file its final tax returns.

Please note that the above-described tax implications of liquidation are complex and dependent on your situation. I recommend we schedule a meeting to discuss these points in more detail. If you agree, please call me on my direct line (408-778-9651).

• By Leon Clinton
• June 21, 2023

I am writing about a significant opportunity for your business to qualify for the Employee Retention Credit (ERC).

As we are in 2023, you still have the chance to qualify for the ERC for the 2020 and 2021 calendar years and potentially recover a substantial amount of money.

The ERC is a refundable tax credit against certain employment taxes. To claim this credit, you must amend your 2020 and 2021 payroll tax returns, which could seem cumbersome but is well worth it considering the financial upside. For a business with a dozen employees and meeting the qualifications for maximum tax credits, you could be looking at a total of $312,000.

There are two primary routes for qualifying for the ERC:

A decline in gross receipts. The most straightforward route to the ERC is a decline in your gross receipts during 2020 and 2021. COVID-19 did not have to be the cause of the decrease in gross receipts.

Government order causing more than a nominal effect. If a government order caused your business to fully or partially shut down, you might qualify for the ERC for the wages paid during the shutdown period.

The deadline to claim the ERC for 2020—April 15, 2024—is just a little over 10 months away. I strongly recommend that you act promptly to maximize your potential benefits from this program.

We are ready to assist you with amending your payroll tax returns and ensuring your business qualifies for maximum benefits. If you want to pursue this tax credit, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 16, 2023