There are several tax credits and incentives that could lead to an increased cash flow for your company. For businesses experiencing hardship due to the COVID-19 pandemic, many of these opportunities could provide much needed refunds to improve your company’s cash position.
Below are six significant areas of opportunity to consider:
Employee Retention Tax Credit
Introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERTC is a refundable tax credit used to offset businesses’ employment and withholding taxes paid on Form 941.
The credit intends to support businesses during the COVID-19 pandemic. Employers whose business was or is currently fully or partially suspended due to emergency orders from a government authority that limited commerce, travel, or group meetings may qualify.
A business can also qualify if it experienced a reduction in gross receipts during a quarter after the pandemic started in 2020 if gross receipts during that calendar quarter compared to that of the same calendar quarter in 2019—a 50% reduction in gross receipts between March 13, 2020, and December 31, 2020, and for calendar quarters in 2021 a 20% reduction in gross receipts between January 1, 2021, and December 31, 2021.
A qualified small employer may claim credits on all their wages, whereas larger employers can only claim a credit for employees who are being paid and not performing services.
Qualified small employers for 2020 are measured as having 100 or fewer full-time employees (FTE) in 2019. For 2021, they’re measured as having 500 or fewer FTE in 2019.
Paycheck Protection Program Recipients
Qualified employers may claim the ERTC if they also received a Paycheck Protection Program (PPP) loan due to the business experiencing a partial suspension of operations—or if they met the 50% reduction in gross receipts test—for the eligible calendar quarters in 2020.
PPP recipients may also qualify during the eligible 2021 quarters if they continue to experience a partial suspension of operations or meet the 20% reduction in gross receipts test.
Qualified wages for the ERTC don’t include wages paid from forgiven PPP proceeds.
Benefits of the ETRC
Depending on the period when you’re calculating a credit, the credit can equal 50% or 70% of qualified wages paid to an employee in each qualifying calendar quarter, up to a total of $10,000 per employee for all quarters in 2020 and $10,000 for each of the first two quarters in 2021.
The credit may be worth up to $5,000 per employee for 2020 wages and up to $14,000 per eligible employee in 2021.
How to File for the ERTC
Employers who didn’t claim the ERTC on their originally filed Forms 941 may retroactively claim the credits using the Form 941-X.
Small employers may also file the Form 7200 for an advance of the credit during the current quarter prior to filing an original Form 941.
For more information, see our Alert on credits expanded in the CARES Act.
Federal Wage-Based Incentives
Employer Credit for Paid Family and Medical Leave
This credit is for eligible employers that voluntarily offer up to 12 weeks of paid family and medical leave annually to qualifying employees. It’s available for an employer’s tax year that begins in 2018.
The credit program was recently extended through 2025 and is part of the general business credit reflected on Form 3800 that reduces a taxpayer’s income tax liability.
Benefits of the Employer Credit for Paid Family and Medical Leave
Depending on the percent of leave wages paid to a qualifying employee, the credit allowed could range from 12.5% to 25% of those eligible wages.
Calculating the Employer Credit for Paid Family and Medical Leave
The credit is nonrefundable and could be used to offset federal income tax. However, determining whether the company’s policy meets the minimum requirements for eligibility, analyzing the eligible wages for qualified employees, and calculating the credit can be complicated and time consuming.
Review and determine if your paid leave policies qualify for the program with your tax advisor. If they qualify, your tax advisor can help you calculate the credit amount and draft a detailed report for your federal income tax return.
To learn more details about how this credit is calculated, please visit our employer credit services page.
Work Opportunity Tax Credit
The WOTC is a federal credit administered at the state level. It’s designed to encourage businesses to hire individuals receiving government assistance and encourage them to become more self-sufficient.
The WOTC program was extended through 2025.
Employers may be eligible for the WOTC if they hire employees who meet any of the following criteria:
- Individuals who receive Supplemental Nutrition Assistance Program benefits, also known as food stamps
- Individuals who receive short- or long-term Temporary Assistance to Needy Families or Aid to Families with Dependent Children, also known as welfare
- Unemployed or disabled veterans
- Qualified ex-felons or pardoned, paroled, or work-release individuals
- Individuals who have completed or are completing vocational rehabilitation programs
- Qualified 16 or 17-year-olds living in an empowerment zone
- Individuals receiving Supplemental Security Income
- Individuals living within a rural renewal county
- Individuals who were unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law during this period
Benefits of WOTC
Depending on which target group the individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600.
The value of the credit is determined by the target group the employee qualifies under, the number of hours worked, and the wages earned during the first year period of employment.
How Employers Can Claim WOTC
The WOTC is a prospective program with a 28-day statutory filing window to apply for the credit.
It’s important for employers to implement a process sooner rather than later to help increase their tax credit potential. This can include talking to a tax advisor and setting deadlines to verify applications are filed on time.
A tax advisor can perform any necessary denial appeals and work with the WOTC coordinators to obtain certifications and subsequently calculate the available credit.
Learn more about the WOTC program.
To learn more about hiring and zone-based tax credits that can be particularly valuable, see our federal and state hiring credits page.
Energy Efficient Building Tax Incentives
Owning real estate represents a significant financial investment for any business or investor. When it comes to the tax benefits, it’s important to manage these assets in a way that enhances your return.
Properly classifying your fixed assets and leveraging favorable tax provisions are key to sound real estate management—and through the tax deductions and deferrals they generate, these classifications can free up cash you can reinvest immediately.
Internal Revenue Code Sections 179D and 45L are two energy efficient building incentives included in the omnibus spending bill, part of the Consolidated Appropriations Act, 2021. They provide real estate owners the ability to plan for and generate significant tax savings from their construction projects.
Section 179D Deduction
The Consolidated Appropriations Act, 2021 made the energy efficient commercial building deduction, or Section 179D, a permanent part of US tax code. Learn more about it in our article.
Qualifications for Section 179D
Owners and tenants of qualifying commercial properties who have built or installed improvements to the lighting system, HVAC system, or building envelope can claim this deduction.
Additionally, architects, engineers, or construction contractors who are the designers of government-owned, energy eﬃcient buildings can claim the deduction. The type of building construction and improvements as well as the dates of service will determine eligibility, as outlined on our Section 179D web page.
Benefits of Section 179D
This credit allows taxpayers to claim a deduction for as much as $1.80 per square foot for commercial building eﬃciency improvements above certain energy thresholds. The $1.80 per square foot deduction may be increased for inflation in future years.
The owners of these energy efficient improvements can claim the deduction related to a prior-year improvement on a current-year tax return. Section 179D deductions must be certified by a third-party advisor as required by the tax code. To realize this tax deduction, contact your tax advisor to find out if you’re eligible in the current or prior tax years.
Section 45L Deduction
The energy efficient home credit—codified in Section 45L—has been extended one year to December 31, 2021. Learn more about the law in our Alert.
Qualifications for Section 45L
Developers of single-family homes, multi-family buildings, trailer homes, and manufactured homes, may be eligible to claim this credit per dwelling unit in newly constructed or substantially renovated residential units.
Certain energy efficient standards, as described in our Alert, that are certified by a qualified third-party buildings must be met to qualify for this credit.
Benefits of Section 45L
The credit provides up to $2,000 per dwelling unit in newly constructed or substantially renovated residential buildings that qualify.
The Section 45L credit can be claimed on a lookback basis by amending prior tax returns. To see if your delivered dwelling units qualify for the energy home efficient credit, contact your tax professional.
R&D Tax Credit Payroll Election
There are often tax credits available for work your company is already doing. Federal and state R&D tax credit payroll elections are R&D credits that tends to go unnoticed.
Benefits of the R&D Tax Credit Payroll Election
This election provides an often-overlooked tax benefit for companies that aren’t profitable yet and don’t have any income tax liability. By making the payroll credit election, startups can reduce annual cash burn up to $250,000 and shorten the path to profitability.
For example, many startups focus on growth during early operations. The result is a multiyear path to profitability and no income tax liability for several years after operations begin.
Despite having no income tax liability, startups do incur tax liability in the form of payroll tax. For these companies, up to $250,000 of the R&D credit could be applied to a taxpayer’s portion of social security tax each year provided specific criteria are satisfied.
Calculating the R&D Tax Credit Payroll Election
The two biggest limitations for the payroll election are:
- The taxpayer must have no more than five years of gross receipts.
- The gross receipts must be under $5 million in the year in which the election is made.
A 2015 startup that first accrued revenue in 2016 could make a payroll election in 2020 if its revenues are still below the $5 million threshold in 2020. While many startups don’t have sufficient payroll tax liability to utilize the entire credit in a single quarter, any excess credits will rollover to future payroll liability until the credit is exhausted.
In addition, any credits in excess of the $250,000 limitation will be taken as a general business credit and can be carried forward for up to 20 years.
How to Claim the R&D Tax Credit Payroll Election
The IRS requires taxpayers to keep sufficient records to determine whether the taxpayer has adequately determined its credit for the year. Because no specific type of documentation is listed within the statute, Treasury Regulation Section 1.6001-1 provides additional guidance concerning the types of documentation that should be retained.
For taxpayers who wish to claim the R&D tax credit, the documentation may come in a variety of forms. The Audit Techniques Guide is clear that the IRS places specific emphasis on contemporaneous documentation—that is, documentation created when the activities identified as qualified were being performed.
A variety of documentation helps substantiate an R&D credit claim, including the following:
- Business and technical requirements
- Code commit logs
- Quality assurance testing plans
- Release notes
- Meeting notes and agendas
- Email correspondence
- Technical drawings and revisions
- Build of materials
- Detailed quantitative financial records
Documentation should help establish a nexus between the project, qualified activities, and the individuals that contributed to its development.
It’s important to keep your documents as organized and detailed as possible, so the credit amount can be determined.
We’re Here to Help
To learn more about tax strategies and how they might affect or benefit your company, contact your Moss Adams professional or email@example.com.
Special thanks to Roger Burggrabe, senior manager, Tax Credit & Incentive Services, and MaryCaitlin Willcuts, manager, State & Local Tax Credit Services for their contributions to this article.