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Business highlights in the new American Rescue Plan Act

President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) on March 11. While the new law is best known for the provisions providing relief to individuals, there are also several tax breaks and financial benefits for businesses.

Here are some of the tax highlights of the ARPA.

The Employee Retention Credit (ERC). This valuable tax credit is extended from June 30 until December 31, 2021. The ARPA continues the ERC rate of credit at 70% for this extended period of time. It also continues to allow for up to $10,000 in qualified wages for any calendar quarter. Taking into account the Consolidated Appropriations Act extension and the ARPA extension, this means an employer can potentially have up to $40,000 in qualified wages per employee through 2021.

Employer-Provided Dependent Care Assistance. In general, an eligible employee’s gross income doesn’t include amounts paid or incurred by an employer for dependent care assistance provided to the employee under a qualified dependent care assistance program (DCAP).

Previously, the amount that could be excluded from an employee’s gross income under a DCAP during a tax year wasn’t more than $5,000 ($2,500 for married individuals filing separately), subject to certain limitations. However, any contribution made by an employer to a DCAP can’t exceed the employee’s earned income or, if married, the lesser of employee’s or spouse’s earned income.

Under the ARPA, for 2021 only, the exclusion for employer-provided dependent care assistance is increased from $5,000 to $10,500 (from $2,500 to $5,250 for married individuals filing separately).

This provision is effective for tax years beginning after December 31, 2020.

Paid Sick and Family Leave Credits. Changes under the ARPA apply to amounts paid with respect to calendar quarters beginning after March 31, 2021. Among other changes, the law extends the paid sick time and paid family leave credits under the Families First Coronavirus Response Act from March 31, 2021, through September 30, 2021. It also provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.

Grants to restaurants. Under the ARPA, eligible restaurants, food trucks, and similar businesses that provide food and drinks may receive restaurant revitalization grants from the Small Business Administration. For tax purposes, amounts received as restaurant revitalization grants aren’t included in the gross income of the person who receives the money.

Much more

These are only some of the provisions in the ARPA. There are many others that may be beneficial to your business. Contact us for more information about your situation.

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Analytical procedures can help make your audit more efficient

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The use of audit analytics can help during the planning and review stages of the audit. But analytics can have an even bigger impact when these procedures are used to supplement substantive testing during fieldwork.

Definition of “analytics”

Auditors use analytical procedures to evaluate financial information by assessing relationships among financial and nonfinancial data. Examples of analytical tests include:

  • Trend analysis,
  • Ratio analysis,
  • Reasonableness testing, and
  • Regression analysis.

Significant fluctuations or relationships that are materially inconsistent with other relevant information or that differ from expected values require additional investigation.

4 steps

Auditors generally follow this four-step process when performing analytical procedures:

1. Form an independent expectation. The auditor develops an expectation of an account balance or financial relationship. Expectations are based on the auditor’s understanding of the company and its industry. Examples of data used to develop expectations include prior-period information (adjusted for expected changes), management’s budgets or forecasts, and ratios published in trade journals.

2. Identify differences between expected and reported amounts. The auditor must compare his or her expectation with the amount recorded in the company’s accounting system. Then, any difference is compared to the auditor’s threshold for analytical testing. If the difference is less than the threshold, the auditor generally accepts the recorded amount without further investigation and the analytical procedure is complete. If not, the auditor moves to the next step.

3. Investigate the reason. The auditor brainstorms all possible causes and then determines the most probable cause(s) for the discrepancy. Sometimes, the analytical test or the data itself is problematic, and the auditor needs to apply additional analytical procedures with more precise data. Other times, the discrepancy has a “plausible” explanation, usually related to unusual transactions or events, or accounting or business changes.

4. Evaluate differences. The auditor evaluates the likelihood of material misstatement and then determines the nature and extent of any additional auditing procedures. Plausible explanations require corroborating audit evidence.

For differences that are due to misstatement (rather than a plausible explanation), the auditor must decide whether the misstatement is material (individually or in the aggregate). Material misstatements typically require adjustments to the amounts reported and may also necessitate additional audit procedures to determine the scope of a misstatement.

A win-win for everyone

Done right, analytical procedures can help make your audit less time-consuming, less expensive and more effective at detecting errors and omissions. Analytics also may be easier to perform remotely than traditional, manual audit testing procedures — a major upside during the COVID-19 pandemic. To avoid surprises in the coming audit season, notify us about any major changes to your operations, accounting methods or market conditions that occurred during the reporting period.

© 2021

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Work Opportunity Tax Credit extended through 2025

Are you a business owner thinking about hiring? Be aware that a recent law extended a credit for hiring individuals from one or more targeted groups. Employers can qualify for a tax credit known as the Work Opportunity Tax Credit (WOTC) that’s worth as much as $2,400 for each eligible employee ($4,800, $5,600 and $9,600 for certain veterans and $9,000 for “long-term family assistance recipients”). The credit is generally limited to eligible employees who began work for the employer before January 1, 2026.

Generally, an employer is eligible for the credit only for qualified wages paid to members of a targeted group. These groups are:

  1. Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
  2. Qualified veterans,
  3. Qualified ex-felons,
  4. Designated community residents,
  5. Vocational rehabilitation referrals,
  6. Qualified summer youth employees,
  7. Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
  8. Qualified Supplemental Security Income recipients,
  9. Long-term family assistance recipients, and
  10. Long-term unemployed individuals.

You must meet certain requirements

There are a number of requirements to qualify for the credit. For example, for each employee, there’s also a minimum requirement that the employee must have completed at least 120 hours of service for the employer. Also, the credit isn’t available for certain employees who are related to or who previously worked for the employer.

There are different rules and credit amounts for certain employees. The maximum credit available for the first-year wages is $2,400 for each employee, $4,000 for long-term family assistance recipients, and $4,800, $5,600 or $9,600 for certain veterans. Additionally, for long-term family assistance recipients, there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000.

For summer youth employees, the wages must be paid for services performed during any 90-day period between May 1 and September 15. The maximum WOTC credit available for summer youth employees is $1,200 per employee.

A valuable credit

There are additional rules and requirements. In some cases, employers may elect not to claim the WOTC. And in limited circumstances, the rules may prohibit the credit or require an allocation of it. However, for most employers hiring from targeted groups, the credit can be valuable. Contact us with questions or for more information about your situation.

© 2021

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How to compute your company’s breakeven point

Break-even point word with green checkmark, 3D rendering

Breakeven analysis can be useful when investing in new equipment, launching a new product or analyzing the effects of a cost reduction plan. During the COVID-19 pandemic, however, many struggling companies are using it to evaluate how much longer they can afford to keep their doors open.

Fixed vs. variable costs

Breakeven can be explained in a few different ways using information from your company’s income statement. It’s the point at which total sales are equal to total expenses. More specifically, it’s where net income is equal to zero and sales are equal to variable costs plus fixed costs.

To calculate your breakeven point, you need to understand a few terms:

Fixed expenses. These are the expenses that remain relatively unchanged with changes in your business volume. Examples include rent, property taxes, salaries and insurance.

Variable/semi-fixed expenses. Your sales volume determines the ebb and flow of these expenses. If you had no sales revenue, you’d have no variable expenses and your semifixed expenses would be lower. Examples are shipping costs, materials, supplies and independent contractor fees.

Breakeven formula

The basic formula for calculating the breakeven point is:

Breakeven = fixed expenses / [1 – (variable expenses / sales)]

Breakeven can be computed on various levels. For example, you can estimate it for your company overall or by product line or division, as long as you have requisite sales and cost data broken down.

To illustrate how this formula works, let’s suppose ABC Company generates $24 million in revenue, has fixed costs of $2 million and variable costs of $21.6 million. Here’s how those numbers fit into the breakeven formula:

Annual breakeven = $2 million / [1 – ($21.6 million / $24 million)] = $20 million

Monthly breakeven = $20 million / 12 = $1,666,667

As long as expenses stay within budget, the breakeven point will be reliable. In the example, variable expenses must remain at 90% of revenue and fixed expenses must stay at $2 million. If either of these variables changes, the breakeven point will change.

Lowering your breakeven

During the COVID-19 pandemic, distressed companies may have taken measures to reduce their breakeven points. One solution is to convert as many fixed costs into variable costs as possible. Another solution involves cost cutting measures, such as carrying less inventory and furloughing workers. You also might consider refinancing debt to take advantage of today’s low interest rates and renegotiating key contracts with lessors, insurance providers and suppliers. Contact us to help you work through the calculations and find a balance between variable and fixed costs that suits your company’s current needs.

© 2021

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March 2021 Short Bits

FAST STIMULUS PAYMENTS

The IRS successfully delivered millions of stimulus payments during the COVID-19 pandemic last year. Within two weeks of the passage of the CARES Act, the IRS distributed $147 billion to more than 81 million people. By comparison, in 2008, the last time stimulus payments were issued by the IRS, it took 75 days to get the first payments out. With the launch of the Get My Payment tool, an additional 16.6 million requests for payment were received. By the end of October 2020, the IRS had delivered approximately $270 billion in stimulus relief to taxpayers.

SOCIAL SECURITY INCREASES

Approximately 70 million Americans are seeing a 1.3% increase in their Social Security benefit payments in 2021. Federal benefit rates increase when the cost-of-living rises, as measured by the Department of Labor’s Consumer Price Index. These cost of living adjustments were first enacted in 1972 and automatic annual adjustments began in 1975. The year that saw the highest adjustment was 1980 with a 14.3% increase, while there have been several years with no adjustment, most recently 2016.

WOMEN’S HISTORY

National Women’s History Month goes back to 1857 but wasn’t officially recognized by Congress until 1981. According to the U.S. Census Bureau, women age 85 and older outnumber men in the same age bracket two to one. And overall, there are slightly more females than males in the U.S. In 2018, there were 166 million women compared with only 161 million males and earnings difference still exist. While 58% of women, age 16 and older, participate in the workforce they only earn 82% of what males earn for similar work.

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March 2021 Questions and Answers

Question:

I will claim an automobile deduction on my tax return and have used the standard mileage rate in previous years. However, in 2020 I incurred significant car expenses that will outweigh the standard mileage deduction. Can I switch to deducting actual costs for 2020?

Answer:

Yes, you’ll be able to switch to the actual expenses method if you own your car and you used the standard mileage rate in the first year that you used your vehicle for business. The rules are different though if you lease your car. If you’re leasing your car, you’ll need to take the standard rate for the entire lease term.

Question:

I’ve heard that I should have errors and omissions insurance, but I’m not sure what it is and why would my business need it?

Answer:

Generally, errors and omissions (E&O) insurance protects against litigation claiming you made a mistake while providing a professional service. Some of the common types of claims that E&O insurance covers include: negligence, errors, omissions, misrepresentation, and inaccurate advice. This type of insurance usually covers court costs and settlement amounts, which can quickly add up. If your business is vulnerable to such lawsuits, then you should consider carrying E&O insurance.

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Flexible Work Arrangements

Offering the right benefits to your employees keeps them engaged and motivated. Besides monetary benefits like a competitive salary or health insurance, consider non-financial perks like flexible work arrangements.

FLEXIBLE LOCATIONS

Telecommuting or remote working are two options for flexible locations. With telecommuting, employees usually work in the office certain days and work outside the office the other days. Remote employees work outside the office all the time. The benefit of offering flexible locations is that you can recruit talent from all areas, rather than just locally.

FLEXIBLE SCHEDULES

Instead of employees working 9-5 Monday through Friday, consider letting them choose the schedule that works best for them. Night owls may be more productive working from 2 pm to 10 pm. You could offer a compressed work week that allows employees to work four 10 hour days. You’ll want to ensure you have proper employee coverage and have employees commit to their chosen schedule.

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Workers’ Compensation Insurance

Workers’ compensation insurance provides benefits to employees who become ill or injured on the job and offers employers some protection from injured employees’ lawsuits. The premiums are paid by the employer.

STATE MATTERS

Workers’ compensation programs are administered at the state level and the requirements vary. Some states require insurance when you hire your first employee and some exempt certain agricultural and construction businesses.

Some states don’t require coverage for certain kinds of workers. Independent contractors, domestic home workers, volunteers, and seasonal workers are generally not required to be covered by workers’ compensation. And business owners generally can choose to be exempt from coverage.

WHAT’S COVERED

Generally, any work-related injury or illness qualifies for workers’ compensation benefits. The injury can be sudden, like a fall, or can be long-term, like carpal tunnel or lung diseases from working in coal mines or around asbestos.

NAME THE PRICE

Rates and premiums are set by the state and consider the employer’s type of business and the employee’s job classification. For example, trucking companies usually have higher premiums than an attorney’s office. Also, the volume and dollar amount of an employer’s past claims will usually increase premiums.

SHARING INFORMATION

Employers are required to post notices that inform employees of their rights and benefits that are available. And if an employee incurs an injury, the employer must provide a claim form promptly.

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March 2021 Client Profile

Beth is self-employed and preparing to file her taxes, but hasn’t received some of her 1099s. She doesn’t want to file for an extension. What should she do?

Fortunately, Beth doesn’t need her 1099s to file her tax return. Unlike W-2s, 1099s don’t need to be submitted with a tax return.

Beth has a few options. She can call her customers and ask for a duplicate 1099. However, if she earned less than $600 from her customer, they aren’t required to provide a 1099, and therefore they likely didn’t prepare one.

If she uses accounting software to track her revenue and expenses, she can use a profit and loss report to calculate her income. Alternatively, she can review the bank statements from her business bank account and track the deposits she received. Hopefully, if she received cash payments, she kept a log of them since she’ll need to include her cash payments as income on her tax return. And if Beth uses electronic methods such as PayPal to receive money from her customers, she’ll need to include these payments too.

Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you.

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Triple Tax Advantages of HSAs

Medical Tax Savings Web Header Banner – Health savings account or flexible spending account – HSA, FSA, tax-sheltered savings

If you have a high-deductible health insurance plan, you’re likely eligible to open a health savings account (HSA). Similar to flexible spending accounts, these tax-advantaged savings accounts allow you to contribute money to cover your medical expenses. But HSAs have three distinct tax advantages.

TAX-FREE CONTRIBUTIONS

Just like 401(k) contributions, you can make pre-tax payroll deductions to fund your HSA. You’ll benefit from having lower taxable income and a generous contribution limit. In 2021, a family can contribute up to $7,200 while singles enjoy a $3,600 limit.

TAX-FREE GROWTH

If your HSA funds are invested in mutual funds, stocks, or other similar vehicles the earnings are tax-free, leaving more money to cover medical expenses. Unlike a flexible spending account (FSA), where contributions don’t roll over at the end of the year, money in an HSA can be used in the future. And HSAs don’t have required minimum distributions like 401(k) or IRA plans.

TAX-FREE WITHDRAWALS

When your HSA funds are used to pay for qualified medical expenses, these withdrawals are tax-free. Qualified medical expenses include things like office visits, co-pays, dental expenses, vision care and prescription medication for you, your spouse, or your dependents. Just remember you can’t use HSA money to pay for medical expenses you incurred before establishing your HSA.

RETIREMENT PLANNING & HSAs

Using an HSA is not only a savvy way to save on taxes; it can help you in retirement. If you contribute to your HSA while not making withdrawals you could accumulate a sizeable fund to help cover your medical expenses in retirement. Medicare premiums are a qualified medical expense, so you could use your HSA funds to pay your premiums once you retire.