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IRS extends safe harbor timeline for renewable energy projects

07.21.21

Read this if you are a solar investor, developer, or installer.

The IRS recently released Notice 2021-41 that extends the Continuity Safe Harbor requirements for the production tax credit for qualified facilities under I.R.C. Section 45 (the “PTC”) and the investment tax credit for energy property under I.R.C. Section 48 (the “ITC”). The extension is in recognition of the supply chain delays caused by COVID-19 that are impacting completion of renewable energy projects.

In May 2020, the IRS released Notice 2020-41 to address construction delays caused by the COVID-19 pandemic. The requirements for the PTC and the ITC include provisions establishing methods to determine the beginning of construction and include a continuity requirement—that the project show continuous construction or continuous efforts. Per Notice 2020-41, the continuity requirement is deemed satisfied if the taxpayer “places an energy property in service by the end of a calendar year that is no more than four calendar years after the calendar year during which construction of the energy property began” (Continuity Safe Harbor).

The IRS recognizes that the COVID-19 pandemic has caused extraordinary delays in development of renewable energy projects. As a result, many projects would no longer satisfy the existing four calendar year Continuity Safe Harbor. Notice 2021-41 extends the original Continuity Safe Harbor based on the year the property began construction under the Physical Work Test or the Five Percent Safe Harbor as follows:

  • Any property that began construction in calendar year 2016, 2017, 2018, or 2019 will satisfy the Continuity Safe Harbor if the taxpayer “places an energy property in service by the end of a calendar year that is no more than six calendar years after the calendar year during which construction of the energy property began.”
  • Any property that began construction in calendar year 2020 will satisfy the Continuity Safe Harbor if the taxpayer “places an energy property in service by the end of a calendar year that is no more than five calendar years after the calendar year during which construction of the energy property began.”

If you have questions about your specific situation, please don’t hesitate to contact the Renewable Energy team. We’re here to help.
 

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  • Kathy Parker
    Principal
    Real Estate, Renewable Energy, Technology
    T 857.255.2035

BerryDunn experts and consultants

Read this if you are a solar investor, developer, or installer.

The Investment Tax Credit and Residential Energy Credit were originally established to promote investment in renewable energies. These credits are available to taxpayers who install solar equipment to generate electricity for either a commercial or residential property. The credits have different origins within the Internal Revenue Code but are very similar with respect to how they are calculated. 

The starting point is to determine what property is eligible, typically by reviewing the equipment, materials, and labor costs. Qualified property is defined within the Code and while there are several years of judicial history further clarifying what is eligible, there is one unsettled question routinely asked: Can we include the entire cost of a roof replacement?

To answer that question, we look to each of the separate Code sections establishing the credits, Section 48–Commercial Energy Credit and Section 25D–Residential Energy Credit. The credits afforded by these sections are available for a variety of renewable energy properties, but for this discussion we will focus specifically on the solar property provisions.

Solar property provisions

The Section 48 definition of qualified property includes “equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat….” The regulations further define solar energy property as “equipment that uses solar energy to generate electricity, and includes storage devices, power conditioning equipment, transfer equipment, and parts relating to the functioning of those items.” 

Essentially, all costs to acquire and install the equipment used to generate electricity to the point of either transmitting it or consuming it would be eligible for the credit.

Section 48 Regulations state that building and structural components generally are not qualified property for the credit. An exception was provided by Revenue Ruling 79-183, allowing structural components to the extent that they are specifically engineered to be part of the machinery and equipment. Two significant private letter rulings have also been issued to address whether a roof would be treated as qualified solar property based on these limitations, and to what extent.

In PLR 201121005, issued in May 2011, the IRS ruled that the roof was qualified property but the qualified cost did not include the portion that performs the normal functions of a roof. This follows Regulation Section 1.48-9(k) that only permits the “incremental cost” over what would have been spent if the roof were replaced with no qualified property. The facts in this ruling did not include the type of solar power system and how it was integrated with the roof which left many questions unanswered until PLR 201523014 was issued in June 2015.

The 2015 ruling addressed solar property that included a reflective roof membrane to generate electricity from the underside of the roof mounted solar panels. The reflective roof was clearly integrated to the solar power system and the process of generating electricity. The IRS again ruled that qualified property included only the portion of the reflective roof that exceeded the cost of reroofing the building with a non-reflective roof.

The IRS has consistently held that only the “incremental cost” of the roof installation may qualify as solar energy property if it is integrated with the machinery and equipment. 

The Section 25D definition of qualified expenses includes “property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.” The Section identifies qualified costs for labor and solar panels and specifically states, “no expenditure relating to a solar panel or other property installed as a roof (or portion thereof) shall fail to be treated as qualified property solely because it constitutes a structural component…”

Unlike the Section 48 Commercial Energy Credit, the Section 25D Residential Energy Credit has little guidance on whether the entire cost of a roof would be allowed as qualified solar property. If the IRS were consistent in application, they would follow the “incremental cost” regulations that apply to non-residential projects.

Determining qualifying machinery and equipment costs is critical to maximizing the commercial or residential energy credit. 

BerryDunn has the expertise to review the project costs and provide a cost certification for what qualifies. We can identify any portion of the roof that may be eligible. If you have questions or would like to discuss whether there may be an opportunity for your project, please don’t hesitate to call us.
 

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The Investment Tax Credit and roof replacement

Read this if you are a plan sponsor of employee benefit plans.

This article is the eleventh in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here.

Most employee benefit plans have outsourced a significant portion of the internal controls to a service organization, such as a third-party administrator. The plan administrator has a fiduciary responsibility to monitor the internal controls of the service organization and to determine if the outsourced controls are suitably designed and effective.

SOC 1 reports: Internal controls and financial reporting

Generally, the most efficient way to obtain an understanding of the outsourced controls is to obtain a report on controls issued by the service organization’s auditor. Commonly referred to as a System and Organization Controls (SOC) report, the SOC report should be based on the American Institute of Certified Public Accountants’ (AICPA) attestation standards and should cover internal controls relevant to financial reporting, also known as a SOC 1 report (the “1” indicating it covers internal controls over financial reporting).

Plan sponsors should perform a documented review of the SOC 1 report for each of the plan’s significant service organizations. The documented review should include the plan sponsor’s assessment of the complementary user entity controls outlined in the SOC 1 report. The complementary user entity controls are internal control activities that should be in place at the plan sponsor to provide reasonable assurance that the controls tested at the service organization are operating effectively at your plan. If a service organization’s internal controls are operating effectively, but complementary user entity controls are not in place at your organization, the effectiveness of the service organization’s internal controls may not transfer to your plan’s operations.

Creditability and CPA firms: Considerations

Creditability of the CPA firm completing the SOC 1 report examination may impact the reliability of the CPA firm’s opinion and thus your reliability on the service organization’s internal controls. Unfamiliarity with the service auditor’s qualifications may be mitigated through additional research. Items to consider are: 

  • The firm’s expertise in SOC 1 reporting
    • Are they familiar with the service organization’s industry?
    • How many professionals do they have that perform SOC 1 examination services?
  • The evaluation of AICPA peer reviews 
    Audit firms are required to have a periodic peer review conducted. The results of the peer review are public knowledge and can be found on the AICPA’s website.
    • Did the service auditor receive a “pass” rating during their most recent peer review?
    • Did the peer review cover SOC 1 examination services?
  • Evaluation of the service organization’s due diligence procedures surrounding the selection of an auditor

Some of this information may be readily available via the service auditor’s website, while other information may need to be gathered through direct communication with the service organization. A qualified service auditor should be able to provide a SOC 1 report that contains sufficient detail, relevant transactional activity, relevant control objectives, and a timely reporting period.

SOC 1 reports may contain an unqualified, qualified, adverse, or disclaimer of opinion. The report determines if the controls in place are adequate for complete and accurate financial reporting. Report qualifications may affect the risk of relying on the service organization and may result in the need for additional procedures or safeguards to help ensure the plan’s financial statements are presented fairly. Even if the SOC 1 report received an unqualified opinion, you should review the controls tested by the service auditor and the results of such testing for any exceptions. Exceptions, even if they don’t result in a qualified opinion, may have an impact on the plan’s control environment. 

You should also review the scope of the audit to check that all significant transaction cycles, processes, and IT applications were properly assessed for their impact on the plan’s financial statements. Areas outside the scope of the SOC 1 report may require additional consideration, including the possibility of obtaining more than one SOC 1 report for subservice organizations whose functions were carved out from the service organization’s SOC 1 report.

Subservice organizations

Subservice organizations are frequently utilized to process certain transactions or perform certain functions at the service organization. Management of the service organization may identify certain transaction cycles and processes that are performed by a subservice organization and choose to exclude relevant control objectives and related controls from the SOC 1 report description and the scope of the auditor’s engagement. In such cases, multiple SOC 1 reports may need to be acquired to gain adequate coverage of all controls and objectives relevant to your plan. 

Furthermore, you need to consider the time period the SOC 1 report covers. Coverage should be obtained for your plan’s full fiscal year. For SOC 1 reports that lack coverage of your plan’s full fiscal year, a bridge letter should be obtained to help ensure that no significant changes in controls occurred between the SOC 1 report examination period and the end of your plan’s fiscal year.

Although plans commonly outsource a significant portion of their day-to-day operations to service organizations, plan fiduciaries cannot outsource their responsibilities surrounding the maintenance of a sound control environment. SOC 1 reports are a great resource to assess the control environments of service organizations. However, such reports can be lengthy and daunting to review. We hope this article provides some best practices in reviewing SOC 1 reports. If you have any questions, or would like to receive a copy of our SOC 1 report review template, please don’t hesitate to reach out to our Employee Benefits Audit team.

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Service organizations and review of SOC 1 reports: Considerations and recommendations

Read this if you use QuickBooks online.

The money you spend to run your business must be recorded conscientiously for your taxes and reports. Here’s how to do it.

You undoubtedly keep a very close watch on the money coming into your business. You record payments as soon as they come in and deposit them in your company’s bank account. But are you as careful about your purchases?

It’s easy to go out to lunch with a client and forget to save the receipt. You figure it’s not that much money, anyway. Or you pick up a ream of printing paper and a cartridge at the office supply store and neglect to record the purchase. When you disregard even small expenses, you can have two problems. One, your books won’t be accurate. And two, you never know how an extra $42.21 under Meals and Entertainment might affect your income taxes.

QuickBooks Online provides two ways to enter expenses. You can create a record on the site itself. Or you can snap a photo with your phone using the QuickBooks Online mobile app to document the money spent. Here’s how these two methods work.

Documenting at your desk

Let’s say you just had lunch with a vendor to discuss some products you’re planning to buy for a project you’re doing for a customer. You charged it to your company credit card, which you track in QuickBooks Online. You still have to enter it as an expense on the site so that when your credit card statement comes, you can match the credit card transaction to the expense you recorded.

Hover over Expenses in the navigation toolbar and click on Expenses. Click the down arrow in the New transaction button and select Expense. Fill in the fields at the top of the screen with details like Payee, Payment date, and any Tags you want to specify. Under Category details, select the correct category from the drop-down list and enter a Description and Amount

QuickBooks Online allows you to thoroughly document expenses. You can attach a picture of a receipt if you’d like.

Since you’re going to bill this to the customer as a part of your project fee, click in the Billable box to create a checkmark. Select the Customer/Project. Add a Memo to remind yourself of the reason for the lunch (very important!) and attach a photo of the receipt if you take one. Click Save. Your record of the lunch will now appear on the Expense Transactions screen. It will also show up in the Expenses by Vendor Summary and Unbilled Charges reports, among others.

Recording with QuickBooks Online on the road

In the example we just went through, attaching a photo of the receipt was the last thing we did to record an expense in QuickBooks Online. There’s another way to document a purchase that starts with a photo of a receipt and should save you a bit of data entry: using the QuickBooks Online mobile app. The app uses Optical Character Recognition (OCR) to “read” the receipt and transfer some of its data to fields on an expense record. (If you haven’t installed the QBO app on your smartphone, you should. You can do a lot of your accounting work that synchronizes automatically with QBO. It’s free, too.)

Open the app and log in. On the opening screen, you’ll see an icon labeled Snap Receipt. Click on it, and your phone’s camera will open (you’ll be asked for permission to use it). Position your phone over the receipt and move it around until you see the blue box covering the content of the receipt.  Take the picture. You’ll see it displayed on the phone with a message saying, “Use this photo.” If it seems OK, click the link. 

A message on the screen will tell you that the upload is complete and that the app is extracting the information from it. Click “Got it!” It should only take about a minute for your receipt to appear in the list on the Receipt snap screen. You’ll see the details that the app has pulled from your receipt. Tap the matching expense and click Done on the next screen.

You can snap a photo of the receipt in the QuickBooks Online mobile app, and some fields will be automatically entered on a receipt form in QBO.

When you’re back at your computer, open QuickBooks Online and go to Transactions | Receipts. At the end of the row that contains your receipt, click the down arrow next to Delete and select Review. QBO will display the partially-completed receipt form next to the photo you took of the receipt. Fill in any missing fields and save the transaction. Click Create expense on the screen that opens. Then open the Expenses menu and select Expenses, and there should be an entry for the receipt you just added.

This tool isn’t perfect, of course. Every receipt has different fields in different places, and sometimes they’re just not very readable. But in our tests, the app picked up an average of four fields.

Documenting your expenses using one of these two methods is so important. It will help you remember why you stored the receipt and make your reports more accurate. As long as you’re categorizing each transaction correctly, it will also make your tax preparation easier and faster and ensure that you’re charging customers for billable expenses. And if you’re ever audited, your careful work will come in handy.

QuickBooks Online does expense management well, but there are enough moving parts in these recording tools that you may have some questions. Please contact our Outsourced Accounting team. We're here to help. 

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Record expenses in QuickBooks Online and on your phone

Read this if you are a renewable energy developer, installer, or investor.

After months of back-and-forth negotiations, renewable energy incentives remain in the November 3, 2021 version of the Build Back Better Act (Act). For renewable energy companies, that’s good news. In summary, Subtitle F – Green Energy of the Act, includes the proposal to extend and expand existing clean energy tax incentives included in Section 45 and Section 48 for renewable energy facilities that begin construction between 2021 and 2027. Here are current regulations and proposed changes:

Renewable Energy Investment Credit (IRC SEC 48)

  • Under current regulations the Investment Tax Credit (ITC) program, set to expire in 2024, offers a 26% tax credit for systems installed between 2020 and 2022 and a 22% credit for those installed in 2023.
  • The proposed regulation is to reinstate the 30% credit through year 2026 for the majority of the current green energy sources covered AND expand credit to include energy storage technology.
  • The rate phase down in 2027 & 2028 is a 2% base rate or a bonus rate of 10% thereafter.
  • Additionally, Section 48 is amended to include interconnection property in connection with the installation of energy property which has a maximum net output of not greater than 5 megawatts.

Renewable Energy Production Credit (IRC SEC 45)

  • Under the current regulations the Production Tax Credit (PTC) for wind facilities is 2.5 cents per kilowatt-hour and is due to expire on January 1, 2022. 
  • The proposed regulation for facilities with a maximum output of less than one megawatt of electricity, extends the section 45 credit for electricity produced from certain renewable resources, through December 31, 2026, phasing down to 80% of the applicable rate in 2027, & 60% of the applicable rate in 2028.

Details on the rates for projects placed in service after December 31, 2021 through the end of 2026.  

For the ITC, the provision provides a base credit rate of 6% of the basis of energy property or a bonus credit rate of 30% of the basis of energy property. Regarding the PTC, for most facilities the Act provides a base credit rate of 0.5 cents/kilowatt hour, or a bonus credit rate of 2.5 cents/kilowatt hour. In order to claim the credit at the bonus credit rate, taxpayers must satisfy:

  1. prevailing wage requirements for the duration of the construction of the project and for five years after the project is placed into service, and
  2. apprenticeship requirements during the construction of the project.

It is important to note that the prevailing wage rate must remain in effect throughout the construction period and for five years after the project is placed in service. The apprenticeship requirement only applies during the construction period.

Failure to satisfy requirements: Penalties

There are significant penalties in the event the taxpayer uses the bonus rate and fails to satisfy the prevailing wage and apprenticeship requirements. The taxpayer must make a payment to each laborer for the difference between the wages paid and the prevailing wage plus 3% interest. Additionally the taxpayer must pay the Secretary of Agriculture (Secretary) a penalty of $5,000 for each laborer paid below the prevailing wage rate. If it is found that the taxpayer intentionally used a wage rate below the prevailing rate the penalty increases to $10,000 per laborer paid below the prevailing rate.

The Act also provides for a 10% increase in the energy credit for solar and wind facilities placed in service in a low-income community (as defined in the New Markets Tax Credit program under section 45D). The 10% increase is subject to an annual capacity limitation of 1.8 gigawatts for each calendar year 2022 through 2026. 

An additional 20% credit for the solar ITC for a solar facility placed in service in as part of a low-income economic benefit project installed on a residential rental building, if at least 50% of the financial benefits of the electricity produced by such facility are provided to households with income of less than 200% of the poverty line.

Each credit would include a direct pay option, allowing the credit to be treated as equivalent to a payment of a tax refundable if it exceeds taxes otherwise payable. This ensures that the taxpayer does not need a tax liability to benefit from the credit currently.

The taxpayer must elect to treat the applicable credit as tax payments for the taxable year in which the qualified facility is originally placed in service after December 31, 2021. The election must be made by the taxpayer no later than the due date of the return, including properly filed extensions, but not earlier than 270 days after enactment. Once the election is made it is irrevocable. 

However, it remains unclear whether the direct pay amount would be equal to the full amount of the credit otherwise claimable or whether it would be “hair cut” in a way similar to the proposed Growing Renewable Energy and Efficiency Now Act (GREEN Act), H.R. 848. Ideally, if the direct pay is “hair cut,” the direct payment due would be 85% of the total credit otherwise claimable. Certain developers would be able to forego tax equity investments and instead settle on self-funding or debt financing, including short-term bridge financing secured by the future tax refund and/or long-term project financing.

Should the direct pay option include a “haircut,” the more practical choice would be tax equity, especially if the developer cannot otherwise currently utilize depreciation deductions from the project or interest deductions from the debt.

If you have any questions, please contact the Renewable Energy team. We’re here to help.

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Current Build Back Better Act and incentives for renewable energy

Read this if you are not familiar with the expansion of eligibility for employee retention credits (ERC).

Are you familiar with the IRS’ recent additional, taxpayer-friendly guidance that provides some clarity in claiming the employee retention credit (ERC)? 

Employee Retention Credits in the CARES Act: Background

Congress originally enacted the ERC in the CARES Act in March of 2020 to encourage employers to hire and retain employees during the pandemic. At that time, the ERC applied to wages paid after March 12, 2020 and before January 1, 2021. However, Congress later modified and extended the ERC to apply to wages paid before July 1, 2021. Then with the American Rescue Plan Act (ARPA) signed into law on March 11, 2021, the ERC was modified to apply to wages paid through December 31, 2021. The recently passed infrastructure bill eliminates the ERC the quarter ending December 31, 2021.

The rules are complex but there may be some limited ability for your organization to benefit, based on some late changes to the rules. Originally, taxpayers who received PPP loans were not eligible, but the rules changed and now provide that employers who received PPP loans may qualify for the ERC with respect to wages that were not paid for with proceeds from a forgiven PPP loan. This change is retroactive to March 12, 2020. 

The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to COVID-related governmental order or that experienced a significant reduction in gross receipts.  

Regarding the reduction in gross receipts, for any quarter in 2020, a greater than 50% reduction in gross receipts is required during the calendar quarter compared to the same quarter of 2019 in order to qualify. For 2021, the eligibility threshold for employers is reduced from a greater than 50% to a greater than 20% decline in gross receipts for the same quarter of 2019 in order to qualify for the ERC for any quarter. There is an alternative quarter election for 2021 that allows employers to use prior quarter gross receipts compared to the same quarter for 2019 to determine eligibility. For example, for the first calendar quarter of 2021, an employer may elect to use its gross receipts for the fourth quarter of 2020 compared to those for the fourth calendar quarter of 2019 to determine if the decline in gross receipts test is met.

The IRS recently clarified that in determining gross receipts an employer does not need to include forgiven PPP loans, shuttered venue operator grants, or restaurant revitalization grants as gross receipts. Gross receipts for exempt organizations are calculated in the same manner as gross receipts on page 1 of Form 990 in Box G, which includes proceeds from the sales of investments as well as all contribution, program and investment revenue.

The amount of the credit can be substantial. For 2020, the credit is 50% of the first $10,000 of qualified wages per employee for the qualifying period beginning as early as March 12, 2020 and ending December 31, 2020 (thus the max credit per employee is $5,000 in 2020). For 2021, the credit is 70% of the first $10,000 of qualified wages per employee, per qualifying quarter (thus the potential max credit is $21,000 per employee in 2021).  

For 2021, employers with 500 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages. For 2020, employers with 100 or fewer full-time employees in 2019 may include all wages and health plan expenses as qualified wages while employers with more than 100 full-time employees in 2019 may only claim the credit for qualified wages paid to employees who did not provide services. For purposes of determining full-time employees, an employer only needs to include those that work 30 hours a week or 130 hours a month in the calculation. Part-time employees working less than this would not be considered in the employee count.

There is additional interplay between claiming the ERC and the wages used for PPP loan forgiveness that will need to be considered.  

What should you do now? 

It makes sense to determine your eligibility for the ERC. We recommend that you compile your business gross receipts by calendar quarter for 2019, 2020, and the first three quarters of 2021. Let us know if you want a template to do this. We can then help you evaluate whether you have any quarters where you might qualify for the ERC.  

Keep in mind that if your business operations were either fully or partially suspended due to a COVID-related government order then you will likely already qualify for that quarter but the eligible wages will only be for the wages paid during the shutdown period.  

Please let us know if you have any questions or need any assistance.

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CARES Act: Eligibility for employee retention credits

Read this if you are a plan sponsor of employee benefit plans.

This article is the tenth in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with Employee Retirement Income Security Act (ERISA) requirements. You can read the previous articles here

ERISA bonding requirements

Generally, every fiduciary of a plan and every person who handles funds or other property of the plan must be bonded. ERISA's bonding requirements are intended to protect employee benefit plans from risk of loss due to fraud or dishonesty on the part of persons who handle plan funds or other property. ERISA refers to persons who handle funds or other property of an employee benefit plan as plan officials. A plan official must be bonded for at least 10% of the amount of funds he or she handles, subject to a minimum bond amount of $1,000 per plan with respect to which the plan official has handling functions. In most instances, the maximum bond amount that can be required under ERISA with respect to any one plan official is $500,000 per plan. If the plan holds employer securities, the maximum required bond amount increases to $1,000,000. The bond must be fixed or estimated at the beginning of the plan's reporting year; that is, as soon after the date when such year begins as the necessary information from the preceding reporting year can practicably be ascertained. The amount of the bond must be based on the highest amount of funds handled by the person in the preceding plan year. Bonds must be placed with a surety or reinsurer that is named on the Department of the Treasury's Listing of Approved Sureties, Department Circular 570.

The US Department of Labor Field Assistance Bulletin No. 2008-04 provides answers to a number of questions that have been raised concerning the bonding rules.

Compliance testing

The Internal Revenue Code requires retirement plans to undergo certain non-discrimination and compliance testing on an annual basis to ensure contributions or benefits do not discriminate in favor of highly compensated employees and contributions are not in excess of amounts prescribed by the Internal Revenue Service (IRS).

The tests the plan should perform varies based on the plan’s provisions. However, some of the more common tests for defined contribution plans are:

Actual Deferral Percentage (ADP) Test: This test ensures employee salary deferrals made to the plan do not disproportionately benefit highly compensated employees (HCEs). If this test is failed, the most common correction method is distributing excess contributions to HCEs in the amount necessary to make the test pass. Corrections should be made no later than two-and-a-half months following the close of the plan year to avoid a 10% excise tax. The final deadline is 12 months following the close of the plan year.

Actual Contribution Percentage (ACP) Test: This test ensures the matching and voluntary employer contributions made to the plan do not disproportionately benefit HCEs. If this test is failed, the most common correction method is removing excess contributions from HCE’s accounts in the amount necessary to make the test pass. These excess contributions do not leave the plan. Rather, they are transferred into the forfeiture account of the plan, typically to be used to pay plan expenses or fund future employer contributions. Corrections should be made no later than two-and-a-half months following the close of the plan year to avoid a 10% excise tax. The final deadline is 12 months following the close of the plan year.

416 Top Heavy Test: This test ensures key employees do not represent a disproportionate percentage of plan assets. If this test is failed, the most common correction method is to allocate a 3% top heavy minimum contribution to non-key participants (any participant that is not a key employee). Other employer contributions can be used to offset the 3% contribution. Corrections should be made no later than 12 months following the close of the plan year in which the plan is top heavy.

The ADP, ACP, and Top Heavy Tests can be forgone if the plan qualifies for safe harbor status. Also, 403(b) plans are not required to perform the ADP nor the top-heavy test.

410(b) Minimum Coverage Test: This test ensures each contribution made to the plan benefits a sufficient percentage of non-HCEs. This test is performed for each different contribution type offered within the plan. If this test is failed, the most common correction method is to retroactively amend the plan to benefit more non-HCEs until the test passes. Corrections should be made no later than nine-and-a-half months following the close of the plan year in which the failure occurred.

402(g) Elective Deferral Limit: Participants are limited in the amount of elective deferrals they may contribute to qualified plans and thus exclude from taxable income each calendar year. If a participant contributes in excess of this limit, the most common correction method is to distribute the excess contribution amount. In 2021, the 402(g) Elective Deferral Limit is $19,500. Corrections should be made no later than April 15th following the close of the calendar year during which the excess deferral was made.

415(c) Annual Addition Limit: Participants are also limited in the amount of total contributions that can be credited to their account each limitation year (usually the plan year). If a participant receives total contributions in excess of this limit, the most common correction method is to first distribute elective contributions in excess of the limit. If an excess still remains, employer contributions should then be transferred to the plan’s forfeiture account. In 2021, the 415(c) Annual Addition Limit is $58,000. Corrections should be made no later than nine-and-a-half months following the close of the limitation year in which the failure occurred.

ERISA bonding requirements and compliance testing, although not necessarily related, are two of the compliance matters we, as auditors, commonly look at during our audits. For ERISA bonding requirements, we review to make sure the plan had adequate coverage and the bond is with an approved surety. For compliance testing, we look to make sure the testing has been performed and failed tests, if any, have been appropriately and timely resolved. Plan fiduciaries are not alone in addressing these matters—insurance carriers can help guide plan management in finding a fidelity bond appropriate for their plan and third-party administrators will typically perform compliance testing on behalf of the plan and guide plan management through any necessary corrections. However, it is still important for plan fiduciaries to be aware of the overall purpose of the bonding requirements and the compliance tests and be familiar with the correction methods and deadlines.

If you would like more information, or have specific questions about your specific situation, please contact our Employee Benefits Audit team.

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Other ERISA compliance matters: ERISA bonding requirements and compliance testing

Read this if you are a solar developer, installer or investor.

Much of the focus in the renewable energy space has been on the commercial Investment Tax Credit (ITC), due to the size of the projects and the money involved. Certainly the nuances of passive vs. active income and basis limitations drive a lot of the conversation about investing in a large scale project. But what about the residential credit? In some ways the residential credit is simpler, but many questions remain. Here we explain some of the differences and things unique to the residential credit to hopefully clear up some of your questions.

Where can the project be located?

Per the regulations for the residential ITC, the solar-energy producing equipment needs to be located on a “home” owned by the taxpayer. This is important because it does not say “primary residence”, but “home”. So the project could be on your primary residence, or it could be on your vacation home on Cape Cod. The important thing here is that the property is used as a “home”, or residence. If you are putting the solar project on a rental property then that would fall into the commercial ITC category, not the residential.

When can I claim the credit?

The credit is claimed on the tax return for the year the project is placed in service. Being placed in service is defined as being operational for its intended purpose—so in other words, not only does it need to be installed, it has to be turned on and operating. Some projects get stuck in the inspection queue at year end and don’t get approved until after the first of the next year. If that happens to you, unfortunately your credit will need to be claimed on the next tax return. Unlike the commercial ITC, there is no provision for a safe harbor for the credit. If you don’t reach full installation and operation by December 31, 2022 then you are only eligible for the 22% credit instead of the 26% credit you would have gotten if the project was completed in 2022. 

What costs qualify?

Only the costs for equipment that is integral to the production of energy qualify for the credit. This includes panels, racking, and inverters, but can also include some other costs, depending on the circumstances. It does not include improvements and enhancements to your roof that are not directly related to the production of energy. This tends to be a bigger issue on commercial projects where the added weight of the equipment and the slope of the roof require additional work to be done. However, a skylight added to your roof is not part of the solar energy equipment, and the cost of that addition should be excluded from your total cost, even though it may be helping to make your home more energy efficient. The cost of replacing a roof does not qualify, but in certain cases upgrades to the roof can be included.

What about depreciation?

Depreciation is the annual expensing of a commercial asset. Since the project is on your home, there is no depreciation expense to claim. Instead, the cost of the energy equipment installed on your house becomes part of your cost basis, or original purchase value, of your house. In the future if the house is sold, this cost will help reduce the amount of taxable gain on the sale.

What about storage?

Battery storage has been a part of renewable energy projects for years, but as the technology gets better and more cost effective it is becoming a bigger part of project offerings. Currently, a battery storage system is only eligible for the residential ITC if it is installed at the same time as the energy-producing equipment. This is the same for both the residential and commercial credit. In addition to being installed as part of the original project cost, the battery must also be charged by the renewable energy-producing equipment. If it draws a charge from the grid or from another non-renewable energy source, it will not qualify for the ITC.

We have been watching the activity in Washington, D.C. carefully since President Biden took office. One of the items in the proposed tax bill is an expansion of the Investment Tax Credit to allow for stand-alone energy storage equipment to qualify. While this is still in discussion and no legislation has passed yet, this change to the rules could potentially allow for battery storage to be added to existing projects, and the taxpayer taking the ITC on the cost of adding the battery storage equipment. 

Every project, home, and taxpayer’s situation is different, so it is important to discuss your individual project and tax situation with your tax advisor. As we have described here, the residential and commercial ITCs are similar, but not the same. However, both have the potential of being beneficial to the taxpayer, and perhaps at a greater level to environment.

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Residential Investment Tax Credits: Answers to some common questions 

Read this if you paid wages for qualified sick and family leave in 2021.

The IRS has issued guidance to employers on year-end reporting for sick and family leave wages that were paid in 2021 to eligible employees under recent federal legislation.

IRS Notice 2021-53, issued on September 7, 2021, provides that employers must report “qualified leave wages” either on a 2021 Form W-2 or on a separate statement, including:

  • Qualified leave wages paid from January 1, 2021 through March 31, 2021 (Q1) under the Families First Coronavirus Response Act (FFCRA), as amended by the Consolidated Appropriations Act, 2021 (CAA).
  • Qualified leave wages paid from April 1, 2021 through September 30, 2021 (Q2 and Q3) under the American Rescue Plan Act of 2021 (ARPA).

The notice also explains how employees who are also self-employed should report such paid leave. This guidance builds on IRS Notice 2020-54, issued in July 2020, which explained the reporting requirements for 2020 qualified leave wages.

Employers should work with their IT department and/or payroll service provider as soon as possible to review the payroll system, earnings codes configuration and W-2 mapping to ensure that these paid leave wages are captured timely and accurately for year-end W-2 reporting.

FFCRA and ARPA tax credits background

In March 2020, the FFCRA imposed a federal mandate requiring eligible employers to provide paid sick and family leave from April 1, 2020 to December 31, 2020, up to specified limits, to employees unable to work due to certain COVID-related circumstances. The FFCRA provided fully refundable tax credits to cover the cost of the mandatory leave.

In December 2020, the CAA extended the FFCRA tax credits through March 31, 2021, for paid leave that would have met the FFCRA requirements (except that the leave was optional, not mandatory). The ARPA further extended the credits for paid leave through September 30, 2021, if the leave would have met the FFCRA requirements.

In addition to employer tax credits, under the CAA, a self-employed individual may claim refundable qualified sick and family leave equivalent credits if the individual was unable to work during Q1 due to certain COVID-related circumstances. The ARPA extended the availability of the credits for self-employed individuals through September 30, 2021. However, an eligible self-employed individual may have to reduce the qualified leave equivalent credits by some (or all) of the qualified leave wages the individual received as an employee from an employer.

Reporting requirements to claim the refundable tax credits

Eligible employers who claim the refundable tax credits under the FFCRA or ARPA must separately report qualified sick and family leave wages to their employees. Employers who forgo claiming such credits are not subject to the reporting requirements.

Qualified leave wages paid in 2021 under the FFCRA and ARPA must be reported in Box 1 of the employee’s 2021 Form W-2. Qualified leave wages that are Social Security wages or Medicare wages must be included in boxes 3 and 5, respectively. To the extent the qualified leave wages are compensation subject to the Railroad Retirement Tax Act (RRTA), they must also be included in box 14 under the appropriate RRTA reporting labels.

In addition, employers must report to the employee the following types and amounts of wages that were paid, with each amount separately reported either in box 14 of the 2021 Form W-2 or on a separate statement:

  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the Emergency Paid Sick Leave Act (EPSLA)1  with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), or (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the Emergency Family and Medical Leave Expansion Act (EFMLEA) with respect to leave provided to employees during the period beginning on January 1, 2021, through March 31, 2021. The following, or similar language, must be used to label this amount: “Emergency family leave wages paid for leave taken after December 31, 2020, and before April 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (1), (2), or (3) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $511 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified sick leave wages paid for reasons described in paragraphs (4), (5), and (6) of Section 5102(a) of the EPSLA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: “Sick leave wages subject to the $200 per day limit paid for leave taken after March 31, 2021, and before October 1, 2021.”
  • The total amount of qualified family leave wages paid to the employee under the EFMLEA with respect to leave provided to employees during the period beginning on April 1, 2021, through September 30, 2021. The following, or similar language, must be used to label this amount: Emergency family leave wages paid for leave taken after March 31, 2021, and before October 1, 2021.”

If an employer chooses to provide a separate statement and the employee receives a paper 2021 Form W-2, then the statement must be included with the Form W-2 sent to the employee. If the employee receives an electronic 2021 Form W-2, then the statement must be provided in the same manner and at the same time as the Form W-2.

In addition to the above required information, the notice also suggests that employers provide additional information about qualified sick and family leave wages that explains that these wages may limit the amount of the qualified sick leave equivalent or qualified family leave equivalent credits to which the employee may be entitled with respect to any self-employment income.

For more information

If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help.

 1Employees are eligible for qualified sick leave under EPSLA if the employee:

  • Was subject to a federal, state or local quarantine or isolation order related to COVID-19;
  • Had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Experienced symptoms of COVID-19 and was seeking a medical diagnosis;
  • Was caring for an individual who was subject to a quarantine order related to COVID-19, or had been advised by a health-care provider to self-quarantine due to concerns related to COVID-19;
  • Was caring for a son or daughter of such employee, if the school or place of care of the son or daughter had been closed, or the child-care provider of such son or daughter was unavailable, due to COVID-19; or
  • Was experiencing any other substantially similar condition specified by the Secretary of Health and Human Services.

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IRS guidance to employers: Year-end reporting requirements for qualified sick and family leave wages