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Maine's new earned paid leave law―What employers need to know

12.07.20

Read this if you are an employer with more than 10 employees in Maine.

With 2020 quickly coming to an end, employers must be prepared to implement the new Maine Earned Paid Leave Law (EPL), effective January 1, 2021. The EPL law requires employers with more than 10 employees in Maine, for more than 120 days in any calendar year, to permit eligible employees to earn one (1) hour of earned time for every 40 hours worked, up to a maximum of 40 hours per year. 

A notable highlight of Maine’s EPL law, is that leave may be taken for any reason, making it the first law of its kind in the country. EPL may be taken for, but not limited to, an emergency, illness, sudden necessity, and planned vacation. Employees are required to notify employers as soon as practicable if EPL is to be taken for an emergency, illness, or sudden necessity. For any other reason, an employer may require that employees give up to four (4) weeks advance notice.

Covered employees and base rate of pay

The EPL law applies to all full-time, part-time, and per diem employees. Generally, seasonal employees, including summer interns and international workers, are exempt from the EPL rules. A determination of whether a business is seasonal and/or has a seasonal period must be made considering the rules defined by 26 M.R.S.A. § 1043, subsections 9 and 11, and § 1251 before seasonal employees can be excluded.

Employers are required to pay EPL at least at the same “base rate of pay” that an employee received in the week prior to taking leave. The base rate of pay is calculated by dividing total earnings from the week immediately prior by the total hours worked during the same period. Important to note, earnings for this purpose include bonuses, commissions, and other compensation as provided in 26 M.R.S. §664(3). This means that an employer will need to consider overtime and/or other special payments received by the employee during the week prior to the week leave is taken. Employers may need to make adjustments to existing policies and procedures to incorporate the definition of “base rate of pay” for the leave earned under the EPL. If an employer offers more than 40 hours of leave to an employee annually, the first 40 hours of leave available each year must be paid at the employee’s “base rate of pay”.

Additionally, employees must receive the same benefits as those provided under other established employer policies pertaining to other types of paid leave.

Timing & accrual

EPL accrual begins on an employee’s first day of employment. However, an employer may require that new employees wait for a period of up to 120 calendar days during a one-year period before taking EPL. For example, an employee who begins work on November 1st, 2020 would be eligible to use accrued leave after March 1st, 2021, if an employer elected to use the 120-day waiting period. Those employees who have been employed for at least 120 days during a one-year period prior to January 1, 2021, may use their leave as soon as it is earned.

Should an employer allow employees to take EPL before it has been earned, any unearned amount may be withheld from an employee’s final paycheck in the event of separation from employment. Additionally, an employer may elect to provide additional leave above and beyond the 40-hour maximum, at its discretion.

Employees may earn and take up to 40 hours of EPL in any defined year, and can carry over up to 40 hours of accrued and unused EPL from one defined year to the next. For this purpose, a defined year, as stated by the employer, may include, but is not limited to, a calendar year or an employee’s anniversary date. If an employee rolls over 40 hours of unused accrued EPL from one year to the next, the employee will not accrue any additional hours until the following year. If an employee rolls over less than 40 hours, the employee will only accrue hours until the 40-hour maximum is met. For example, if an employee rolls over eight (8) hours of unused accrued EPL from the previous year the employee is only entitled to accrue up to 32 additional hours of EPL in the present year, regardless of how much leave the employee uses in the current year. Employers may require  EPL to be taken in increments of one hour or less. However, an employer may not require EPL to be taken in larger than one-hour increments. 

The EPL law does not address the treatment of any earned paid leave remaining upon an employee’s separation from employment. However, the relevant guidance indicates an employer should honor its written policy or established practice in this area. This means if an employer typically pays out unused vacation/earned benefit/paid time off then unused EPL must be paid out when an employee’s employment ends. If an employer does not compensate an employee for the unused balance of EPL when employment ends, based on its policy and practice, then it will need to make the leave available to the employee if they return to work for that employer within a one-year period.

Exceptions

The EPL law does not apply to an employee covered by a collective bargaining agreement during the period between January 1, 2021 and the expiration of the agreement. Any subsequent agreement would be required to comply with the EPL law.

Compliance

Employers are not required to, but it is recommended that they create a written policy to clearly communicate restrictions and to avoid any misunderstandings. For example, there may be planning opportunities with identifying times of the year, month, or week that leave may be restricted due to operational needs, other than leave for an emergency, illness, or sudden necessity. In doing so, employers must be able to prove undue hardship if they deny the use of EPL for any reason. Considerations for determining undue hardship could include significant expenses, financial resources available, and the size of the workforce, among others. 

A written policy should also help to ensure compliance with the EPL rules. Failure to do so may result in penalties being assessed of up to $1,000 per violation, where each denial of paid leave constitutes a separate violation. For more information, employers may visit the ME DOL's website, which includes a link to its Frequently Asked Questions.

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Read this if you are an employer looking for more information on the Employee Retention Credit (ERC).

The Coronavirus Disease 2019 (COVID-19) stimulus package signed into law by President Trump on December 27 makes very favorable enhancements to the Employee Retention Credit (ERC) enacted under the Coronavirus Aid, Relief and Economic Security (CARES) Act. 

Background

The CARES Act passed in March 2020 provided certain employers with the opportunity to receive a refundable tax credit equal to 50 percent of the qualified wages (including allocable qualified health plan expenses) an eligible employer paid to its employees. This tax credit applied to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to each eligible employee for all calendar quarters in 2020 is $10,000, so that the maximum credit an eligible employer can receive in 2020 on qualified wages paid to any eligible employee is $5,000.

The ERC was for eligible employers who carried on a trade or business during calendar year 2020, including certain tax-exempt organizations, that either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
  • Experienced a significant decline in gross receipts during the calendar quarter.

If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages were limited to wages paid to an employee for time that the employee was not providing services due to an economic hardship described above. If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described above.

Updated guidance: ERC changes

The bill makes the following changes to the ERC, which will apply from January 1 to June 30, 2021:

  • The credit rate increases from 50% to 70% of qualified wages and the limit on per-employee wages increases from $10,000 per year to $10,000 per quarter.
  • The gross receipts eligibility threshold for employers changes from a more than 50% decline to a more than 20% decline in gross receipts for the same calendar quarter in 2019. A safe harbor is provided, allowing employers that were not in existence during any quarter in 2019 to use prior quarter gross receipts to determine eligibility and the ERC. 
  • The 100-employee threshold for determining “qualified wages” based on all wages increases to 500 or fewer employees.
  • The credit is available to state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress (including organizations such as Fannie Mae, FDIC, Federal Home Loan Banks, and Federal Credit Unions). 
  • New, expansive provisions regarding advance payments of the ERC to small employers are included, including special rules for seasonal employers and employers that were not in existence in 2019. The bill also provides reconciliation rules and provides that excess advance payments of the credit during a calendar quarter will be subject to tax that is the amount of the excess.
  • Employers who received PPP loans may still qualify for the ERC with respect to wages that are not paid for with proceeds from a forgiven PPP loan. This change is retroactive to March 12, 2020. Treasury and the SBA will issue guidance providing that payroll costs paid during the PPP covered period can be treated as qualified wages to the extent that such wages were not paid from the proceeds of a forgiven PPP loan.
  • Removal of the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).

Takeaways

For most employers, the ERC has been difficult to use due to original requirements that prevented employers who received a PPP loan from ERC eligibility and, for those employers who did not receive a PPP loan, the requirement that there be a more than 50% decline in gross receipts. In addition, those employers who qualified for the ERC and had more than 100 employees could only receive the credit for wages paid to employees who did not perform services.

It is important to note that most of the new rules are prospective only and do not change the rules that applied in 2020. The new guidance should make it easier for more employers to utilize the ERC for the first two quarters of 2021. The following types of employers should evaluate the ability to receive the ERC during the first and/or second quarter of 2021:

  • Those that used the ERC in 2020 (the wage limit for the credit is now based on wages paid each quarter and the credit is 70% of eligible wages);
  • Those that previously received a PPP loan;
  • Those that have a more than 20% reduction in gross receipts in 2021 over the same calendar quarter in 2019;
  • Those employers with more than 100 but less than 500 employees who have had a significant reduction in gross receipts (i.e., more than 20%)1

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.

Article
Stimulus bill extends and expands the Employee Retention Credit

Read this if you are an employer.

Note: The tax deferral situation is very fluid, and information may change frequently. Please check back for updates.

The Treasury Department and Internal Revenue Service released Notice 2020-65 on August 28th, addressing the following questions highlighted in our earlier payroll tax deferral article.

Does the employer or the employee elect to defer taxes?

Notice 2020-65 provides that Affected Taxpayers are defined for purposes of the Notice as the employer, not employee. Therefore, employers will have to choose whether or not to opt-in and defer taxes. Important to note: while the notice doesn’t specifically state that deferral is optional, the IRS press release implies that it is. 

It is unclear if an employee can elect out of the payroll tax deferral, if their employer elects to defer taxes. Absent guidance, it seems that an employer who elects to defer the payroll tax should apply the payroll tax deferral to all employees and not permit an employee to elect out of the deferral. 

The other question for an employer is whether the payroll software will be able to accommodate the deferral feature as of September 1st. It seems highly unlikely that payroll software will be ready for the September 1st effective date. Employers should reach out to their payroll vendor to determine when the system/software will be ready.

How do bonuses, commissions, or other irregular payroll items impact the $4,000/biweekly compensation limit?

Per the Notice, Applicable Wages include wages as defined in Internal Revenue Code (“Code”) Section 3121(a) (i.e., wages for withholding FICA taxes) or compensation as defined in Code Section 3231(e) (i.e., wages for the Railroad Retirement tax) only if the amount of such wages or compensation paid for a bi-weekly pay period is less than the threshold amount of $4,000, or the equivalent threshold amount with respect to other pay periods. Additionally, the Notice states that the determination of Applicable Wages is made on a "pay-period-by-pay period" basis. Therefore, Applicable Wages would include items such as bonuses and commissions. For example, if a bonus of $2,000 caused an employee’s total Applicable Wages to exceed the $4,000 bi-weekly threshold for the respective pay period to which it relates, deferral would not be required for that pay period. In other words, payroll tax deferral applies to Applicable Wages of $4,000 or less for any bi-weekly pay period (or the equivalent threshold for other pay periods) irrespective of amounts paid in other pay periods.

Based on the guidance, an employer’s payroll system will need to be programmed to automatically monitor the $4,000 bi-weekly threshold and accumulate the tax deferral for each employee.

When and how are amounts deferred due to be paid by the employee?

An employer must withhold and pay the deferred taxes ratably from wages and compensation paid between January 1, 2021 and April 30, 2021. Interest, penalties, and additions to tax will begin to accrue on May 1, 2021 with respect to any unpaid taxes.

This means that employers who elect to initiate the payroll tax deferral will double the Social Security tax withholding during the first four months of 2021. The President’s memorandum issued on August 8th states that Secretary of the Treasury shall explore avenues, including legislation, to eliminate the obligation to pay the taxes deferred pursuant to the implementation of this memorandum. However, only Congress can pass legislation to forgive the uncollected taxes, and has thus far been unwilling to do so.

What happens if an employee who is deferring taxes stops working for the employer? Is the employer responsible for collecting the taxes that were deferred?

This question is not addressed; however, the Notice does provide that an employer may make arrangements to otherwise collect the total taxes from the employee, if other than ratably from wages and compensation.

Employers electing to implement the payroll tax deferral may be assuming unnecessary financial risk related to employees who terminate employment during the period of deferral or during the period of repayment. Prior to initiating the payroll tax deferral, an employer will need to determine (and communicate to employees) how it will collect any unpaid tax deferrals when an employee terminates employment. For example, an employer could decide to withhold the deferred taxes from the employee’s final paycheck, if it can do so legally. Further guidance is necessary so an employer can determine the appropriate way to receive payment from employees who terminate employment.

Notice 2020-65 leaves many questions still unanswered.

Most notably, who is responsible for the taxes if an employer is unable to withhold due to an employee terminating employment? The IRS issued a draft version of a revised Form 941 to take into account the deferred payroll taxes.

Additional guidance will hopefully be forthcoming. Until further guidance is issued and payroll systems are updated, it is difficult for an employer to initiate the payroll tax deferral. 
 
 

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Payroll tax deferral update

Read this if your company would like to request an advance payment of the tax credits.

In response to the paid sick and family medical leave credit provisions enacted by the Families First Coronavirus Response Act (FFCRA) and the employee retention credit enacted by the CARES Act, the IRS has issued Form 7200 to request an advance payment of the tax credits.

Who may file Form 7200?

Employers that file Form(s) 941, 943, 944, or CT-1 may file Form 7200 to request an advance payment of the tax credit for qualified sick and family leave wages and the employee retention credit.

Eligible employers who pay qualified sick and family leave wages or qualified wages eligible for the employee retention credit should retain the amounts qualified for either credit rather than depositing these amounts with the IRS.

With respect to the sick and family leave payments, the credit includes amounts paid for qualified sick and family leave wages, related health plan expenses, and the employer’s share of the Medicare taxes on the qualified wages.

With respect to the employee retention credit, the credit equals 50% of the qualified wages, including certain health plan expense allocable to the wages, and may not exceed $5,000 per qualifying employee. Of note:

  • Employment taxes available for the credits include withheld federal income tax, the employee's share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes with respect to all employees.
  • If there aren’t sufficient employment taxes to cover the cost of qualified sick and family leave wages (plus the qualified health expenses and the employer share of Medicare tax on the qualified leave wages) and the employee retention credit, employers can file Form 7200 to request an advance payment from the IRS.
  • The IRS instructs employers not to reduce their deposits and request advance credit payments for the same expected credit. Rather, an employer will need to reconcile any advance credit payments and reduced deposits on its applicable employment tax return.

Examples

If an employer is entitled to a credit of $5,000 for qualified sick leave, certain related health plan expenses, and the employer’s share of Medicare tax on the leave wages and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date.

If an employer is entitled to an employee retention credit of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.

When to file

Form 7200 can be filed at any time before the end of the month following the quarter in which qualified wages were paid, and may be filed several times during each quarter, if needed. The form cannot be filed after an employer has filed its last employment tax return for 2020.

Please note that Form 7200 cannot be corrected. Any error made on Form 7200 will be corrected when the employer files its employment tax form.

How to file

Fax Form 7200, which you can access here, to 855-248-0552. Form 7200 instructions.

If you need more information, or have any questions, please contact a BerryDunn tax professional. We’re here to help.

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IRS releases Form 7200: Advance payment of employer credits due to COVID-19

Read this if you are at a rural health clinic or are considering developing one.

Section 130 of H.R. 133, the Consolidated Appropriations Act of 2021 (Covid Relief Package) has become law. The law includes the most comprehensive reforms of the Medicare RHC payment methodology since the mid-1990s. Aimed at providing a long-overdue payment increase to capped RHCs (freestanding and provider-based RHCs attached to hospitals greater than 50 beds), the provisions will simultaneously narrow the payment gap between capped and non-capped RHCs.

This will not obtain full “site neutrality” in payment as was a goal of CMS and the Trump administration, but the new provisions will help maintain budget neutrality with savings derived from previously uncapped RHCs funding the increase to capped providers and other Medicare payment mechanisms.

Highlights of the Section 130 provision:

  • The limit paid to freestanding RHCs and those attached to hospitals greater than 50 beds will increase to $100 beginning April 1, 2021 and escalate to $190 by 2028.
  • Any RHC, both freestanding and provider-based, will be deemed “new” if certified after 12/31/19 and subject to the new per-visit cap.
  • The above in effect eliminates uncapped cost-based reimbursement for provider-based RHCs certified subsequent to 12/31/19.
  • Grandfathering would be in place for uncapped provider-based RHCs in existence as of 12/31/19. These providers would receive their current All-Inclusive Rate (AIR) adjusted annually for MEI (Medicare Economic Index) or their actual costs for the year.

If you have any questions about your specific situation, please contact us. We’re here to help.

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Section 130 Rural Health Clinic (RHC) modernization: Highlights

This article is the first in a series to help employee benefit plan fiduciaries better understand their responsibilities and manage the risks of non-compliance with ERISA requirements.

On Labor Day, 1974, President Gerald Ford signed the Employee Retirement Income Security Act, commonly known as ERISA, into law. Prior to ERISA, employee pensions had scant protections under the law, a problem made clear when the Studebaker automobile company closed its South Bend, Indiana production plant in 1963. Upon the plant’s closing, some 4,000 employees—whose average age was 52 and average length of service with the company was 23 years—received approximately 15 cents for each dollar of benefit they were owed. Nearly 3,000 additional employees, all of whom had less than 10 years of service with the company, received nothing.

A decade later, ERISA established statutory requirements to preserve and protect the rights of employees to their pensions upon retirement. Among other things, ERISA defines what a plan fiduciary is and sets standards for their conduct.

Who is—and who isn’t—a plan fiduciary?
ERISA defines a fiduciary as a person who:

  1. Exercises discretionary authority or control over the management of an employee benefit plan or the disposition of its assets,
  2. Gives investment advice about plan funds or property for a fee or compensation or has the authority to do so,
  3. Has discretionary authority or responsibility in plan administration, or
  4. Is designated by a named fiduciary to carry out fiduciary responsibility. (ERISA requires the naming of one or more fiduciaries to be responsible for managing the plan's administration, usually a plan administrator or administrative committee, though the plan administrator may engage others to perform some administrative duties).

If you’re still unsure about exactly who is and isn’t a plan fiduciary, don’t worry, you’re not alone. Disagreements over whether or not a person acting in a certain capacity and in a specific situation is a fiduciary have sometimes required legal proceedings to resolve them. Here are some real-world examples.

Employers who maintain employee benefit plans are typically considered fiduciaries by virtue of being named fiduciaries or by acting as a functional fiduciary. Accordingly, employer decisions on how to execute the intent of the plan are subject to ERISA’s fiduciary standards.

Similarly, based on case law, lawyers and consultants who effectually manage an employee benefit plan are also generally considered fiduciaries.

A person or company that performs purely administrative duties within the framework, rules, and procedures established by others is not a fiduciary. Examples of such duties include collecting contributions, maintaining participants' service and employment records, calculating benefits, processing claims, and preparing government reports and employee communications.

What are a fiduciary’s responsibilities?
ERISA requires fiduciaries to discharge their duties solely in the interest of plan participants and beneficiaries, and for the exclusive purpose of providing benefits for them and defraying reasonable plan administrative expenses. Specifically, fiduciaries must perform their duties as follows:

  1. With the care, skill, prudence, and diligence of a prudent person under the circumstances;
  2. In accordance with plan documents and instruments, insofar as they are consistent with the provisions of ERISA; and
  3. By diversifying plan investments so as to minimize risk of loss under the circumstances, unless it is clearly prudent not to do so.

A fiduciary is personally liable to the plan for losses resulting from a breach of their fiduciary responsibility, and must restore to the plan any profits realized on misuse of plan assets. Not only is a fiduciary liable for their own breaches, but also if they have knowledge of another fiduciary's breach and either conceals it or does not make reasonable efforts to remedy it.

ERISA provides for a mandatory civil penalty against a fiduciary who breaches a fiduciary responsibility under ERISA or commits a violation, or against any other person who knowingly participates in such breach or violation. That penalty is equal to 20 percent of the "applicable recovery amount" paid pursuant to any settlement agreement with ERISA or ordered by a court to be paid in a judicial proceeding instituted by ERISA.

ERISA also permits a civil action to be brought by a participant, beneficiary, or other fiduciary against a fiduciary for a breach of duty. ERISA allows participants to bring suit to recover losses from fiduciary breaches that impair the value of the plan assets held in their individual accounts, even if the financial solvency of the entire plan is not threatened by the alleged fiduciary breach. Courts may require other appropriate relief, including removal of the fiduciary.

Over the coming months, we’ll share a series of blogs for employee benefit plan fiduciaries, covering everything from common terminology to best practices for plan documentation, suggestions for navigating fiduciary risks, and more.

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What's in a name? A lot, if you manage a benefit plan.

Read this if you work at a renewable energy company, developer, or other related business. 

When entering into agreements involving tangible long-lived assets, an asset retirement obligation can arise in the form of a legal obligation to retire the asset(s) at a certain date. In the alternative/renewable energy industry, these frequently present themselves in leases for property on which equipment (i.e., solar panels) is placed. In the leases there may be a requirement, for example, that at the conclusion of the lease, the lessee remove the equipment and return to the property to its original condition.

When an asset retirement obligation is present in a contract, a company should record the liability when it has been incurred (usually in the same period the asset is installed or placed in service) and can be reasonably estimated. The fair value of the liability, typically calculated using a present value technique, is recorded along with a corresponding increase to the basis of the asset to be retired. Subsequent to the initial recognition, the liability is accreted annually up to its future value, and the asset, including the increase for the asset retirement obligation, is depreciated over its useful life.

As a company gets closer to the date the obligation is realized, the estimate of the obligation will most likely become more accurate. When revisions to the estimate are determined, the liability should be adjusted in that period.

It is important to note that this accounting does not have any income tax implications, including any potential increase to the investment tax credit (ITC).

These obligations are estimates and should be developed by your management through collaboration with companies or individuals that have performed similar projects and have insight as to the expected cost. While this is an estimate and not a perfect science, it is important information to share with investors and work into cash flow models for the project, as the cost of removing such equipment can be significant. 

Recording the liability on the balance sheet is a good reminder of the approximate cash outflow that will take place in the final year of the lease. If you have any questions or would like to discuss with us, contact a member of the renewable energy team. We’re here to help.

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Asset retirement obligations in alternative/renewable energy

Read this if you are a business owner or interested in upcoming changes to current tax law.

As Joe Biden prepares to be inaugurated as the 46th President of the United States, and Congress is now controlled by Democrats, his tax policy takes center stage.

Although the Democrats hold the presidency and both houses of Congress for the next two years, any changes in tax law may still have to be passed through budget reconciliation, because 60 votes in the Senate generally are needed to avoid that process. Both in 2017 and 2001, passing tax legislation through reconciliation meant that most of the changes were not permanent; that is, they expired within the 10-year budget window. Here is a comparison of current tax law with Biden’s proposed tax plan.

Current Tax Law
(TCJA–present)
Biden’s stated goals
Corporate tax rates and AMT

Corporations have a flat 21% tax rate and no corporate alternative minimum tax (AMT), which were both changed by the TCJA.

These do not expire.

Biden would raise the flat rate to the pre-TCJA level of 28% and reinstate the corporate AMT, requiring corporations to pay the greater of their regular corporate income tax or the 15% minimum tax (while still allowing for net operating loss (NOL) and foreign tax credits).

Capital gains and Qualified Dividend Income

The top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. There is an additional 3.8% net investment income tax.

Biden would eliminate breaks for long-term capital gains and dividends for income above $1 million. Instead, these would be taxed at ordinary rates.

Payroll taxes

The 12.4% payroll tax is divided evenly between employers and employees and applies to the first $137,700 of an individual’s income (scheduled to go up to $142,400 in 2020). There is also a 2.9% Medicare Tax which is split equally between the employer and the employee with no income limit.

Biden would maintain the 12.4% tax split between employers and employees and keep the $142,400 cap but would institute the tax on earned income above $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.

International taxes (GILTI, offshoring)

GILTI (Global Intangible Low-Tax Income): Established by the TCJA, U.S. multinationals are required to pay a foreign tax rate of between 10.5% and 13.125%.

A scheduled increase in the effective rate to 16.406% is scheduled to begin in 2026.

Offshoring taxes: The TCJA includes a tax deduction for corporations that manufacture in the U.S. and sell overseas.

GILTI: Biden would double the tax rate to 21% and assess a minimum tax on a country-by-country basis.

Offshoring taxes: Biden would establish a 10% penalty surtax on profits for goods and services manufactured offshore and a 10% advanceable “Made in America” tax credit to create U.S. manufacturing jobs. Biden would also close offshoring tax loopholes in the TCJA.

Estate taxes

The estate tax exemption for 2020 is $11,580,000. Transfers of appreciated property at death get a step-up in basis.

The exemption is scheduled to revert to pre-TCJA levels.

Biden would return the estate tax to 2009 levels, eliminate the current step-up in basis on inherited assets, and eliminate the step-up at death provision for inherited property passed along by the decedent.

Individual tax rates

The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly. This was lowered from 39.6% pre-TCJA.

Biden would restore the 39.6% rate for taxable income above $400,000. This represents only the top rate.

Individual tax credits

Currently, individuals can claim a maximum of $2,000 Child Tax Credit (CTC) plus a $500 dependent credit.

Individuals may claim a maximum dependent care credit of $600 ($1,200 for two or more children).

The CTC is scheduled to revert to pre-TCJA levels ($1,000) after 2025.

Biden would expand the CTC to $3,000 for children age 17 and under and offer a $600 bonus for children age 6 and under. It would also be fully refundable.

He has also proposed increasing the child and dependent care tax credit to $8,000 ($16,000 for two or more children), and he has proposed a new tax credit of up to $5,000 for informal caregivers.

Separately, Biden has also proposed a $15,000 tax credit for first-time homebuyers.

Qualified Business Income Deduction under Section 199A

As previously discussed, many businesses qualify for a 20% qualified business income tax deduction lowering the effective rate of tax for S corporation shareholders and partners in partnerships to 29.6% for qualifying businesses.

Biden would phase out the tax benefits associated with the qualified business income deduction for those making more than $400,000 annually.

Education

Forgiven student loan debt is included in taxable income.

There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.

Biden would exclude forgiven student loan debt from taxable income.

Small businesses

There are current tax credits for some of the costs to start a retirement plan.

Biden would offer tax credits for businesses that adopt a retirement savings plan and offer most workers without a pension or 401(k) access to an “automatic 401(k)”.

Itemized deductions

For 2020, the standard deduction is $12,400 for single/married filing separately and $24,800 for married filing jointly.

After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single /married filing separately and $12,700 for married filing jointly.

The TCJA suspended the personal exemption and most individual deductions through 2025.

It also capped the SALT deduction at $10,000, which will remain in place until 2025, unless repealed.

Biden would enact a provision that would cap the tax benefit of itemized deductions at 28%.

SALT cap: Senate minority leader Charles Schumer has pledged to repeal the cap should Biden win in November (the House of Representatives has already passed legislation to repeal the SALT cap).

Opportunity Zones

Biden has proposed incentivizing - opportunity zone funds to partner with community organizations and have the Treasury Department review the program’s regulations of the tax incentives. He would also increase reporting and public disclosure requirements.
Alternative energy Biden would expand renewable energy tax credits and credits for residential energy efficiency and restore the Energy Investment Tax Credit (ITC) and the Electric Vehicle Tax Credit.


If you have questions about your specific situation, please contact us. We’re here to help.

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Biden's tax plan and what may change from current tax law

Read this if your company is seeking guidance on PPP loans.

The Consolidated Appropriations Act, 2021 (H.R. 133) was signed into law on December 27, 2020. This bill contains guidance on the existing Paycheck Protection Program (PPP) and guidelines for the next round of PPP funding.

Updates on existing PPP loans

Income and expense treatment of PPP loans. Forgiven PPP loans will not be included in taxable income and eligible expenses paid with PPP funds will be tax-deductible. This tax treatment applies to both current and future PPP loans.

Tax attributes and basis adjustments. Tax attributes such as net operating losses and passive loss carryovers, and basis increases generated from the result of the PPP loans will not be reduced if the loans are forgiven.

Economic Injury Disaster Loans (EIDL). Any previous or future EIDL advance will not reduce PPP loan forgiveness. Any borrowers who already received forgiveness of their PPP loans and had their EIDL subtracted from the forgiveness amount will be able to file an amended forgiveness application to have their PPP forgiveness amount increased by the amount of the EIDL advance. The SBA has 15 days from the effective date of this bill to produce an amended forgiveness application. 

Simplified forgiveness application for loans under $150,000. Borrowers who received PPP loans for $150,000 or less will now be able to file a simplified one-page forgiveness application and will not be required to submit documentation with the application. The SBA has 24 days from the effective date of this bill to make this new forgiveness application available. 

Use of PPP funds. Congress expanded the types of expenses that may be paid with PPP funds. Prior eligible expenses were limited to payroll (including health benefits), rent, covered mortgage interest, and utilities. Additional expenses now include software and cloud computing services to support business operations, the purchase of essential goods from suppliers, and expenditures for complying with government guidance relating to COVID-19.

These additional expenses apply to both existing and new PPP loans, but they do not apply to existing loans if forgiveness has already been obtained.
 
In addition, the definition of "payroll costs" has been expanded to include costs for group life, disability, dental, and vision insurance. These additions also apply to both existing and new loans.

Information for new PPP loans

Application deadline. March 31, 2021 

Eligibility for first-time borrowers. A business that did not previously apply for or receive a PPP loan may apply for a new loan. The same requirements apply from the first round of loans. The business must employ fewer than 500 employees per physical location and the borrower must certify the loan is necessary due to economic uncertainty.

Eligibility for second-time borrowers. Businesses that received a prior PPP loan may apply for a second loan, however the eligibility requirements are a little more stringent. The business must have fewer than 300 employees per physical location (down from 500 previously) and it must have experienced a decline in gross revenue of at least 25% in any quarter in 2020 as compared to the same quarter in 2019. The business must have also expended (or will expend) their initial PPP loan proceeds. 

Maximum loan amount. Lesser of $2 million or 2.5x average monthly payroll for either calendar 2019 or the 12-month period prior to the date of the loan. Businesses operating in the accommodations and food service industry (NAICS code 72) can use a 3.5x average monthly payroll multiple. If the business previously received a loan less than the new amount allowed, or if it returned a portion or all of the previous loan, it can apply for additional funds up to the maximum loan amount. 

New types of businesses eligible for loans.

  • Broadcast news stations, radio stations, and newspapers that will use the proceeds to support the production and distribution of local and emergency information 
  • Certain 501(c)(6) organizations with fewer than 300 employees and that are not significantly involved in lobbying activities 
  • Housing cooperatives with fewer than 300 employees 
  • Companies in bankruptcy if the bankruptcy court approves

Ineligible businesses. A business that was ineligible to receive a PPP loan during the first round is still ineligible to receive a loan in the new round. The new legislation also prohibits the following businesses from receiving a loan in the second round:

  • Publicly traded companies 
  • Businesses owned 20% or more by a Chinese or Hong Kong entity or have a resident of China on its board 
  • Businesses engaged primarily in political or lobbying activities
  • Businesses required to register under the Foreign Agents Registration Act 
  • Businesses not in operation on February 15, 2020 

Forgiveness qualifications. New PPP loans will be eligible for forgiveness if at least 60% of the proceeds are used on payroll costs. Partial forgiveness will still be available if less than 60% of the funds are used on payroll costs. 

Covered period. The borrower may choose a covered period (i.e., the amount of time in which the PPP funds must be spent) between 8 and 24 weeks from the date of the loan disbursement.

Employee Retention Tax Credit. The CARES Act prohibited a business from claiming the Employee Retention Tax Credit if they received a PPP loan. The new legislation retroactively repeals that prohibition, although it is unclear how an employer can claim retroactive relief. The new bill also expands the tax credit for 2021. 

Additional guidance is expected from the SBA in the coming weeks on many of these items and we will provide updates when the information is released.

We’re here to help.
If you have questions about PPP loans, contact a BerryDunn professional.

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