There has been an almost constant buzz over the past few weeks concerning various stimulus packages and potential tax code changes. A disciplined planning process certainly incorporates what is known, while also exploring what might be.
With the combination of President Biden’s inauguration and Democratic control of both houses of Congress, along with nearly $9 trillion of stimulus spending, most anticipate tax increases for both individuals and corporations. In this blog written prior to the election, our team provides a recap of some of the initial Biden proposals. As the elections (including Georgia runoffs) are now complete, expectations are becoming somewhat clearer. The following are being seriously evaluated:
- Expectation that the top marginal tax rate for individuals will be increased back to 39.6% (from 37%).
- The corporate tax rate is also expected to rise, with 28% (from 21%) being a possible landing spot.
- An increase to the deduction cap on state and local taxes (from $10,000 to $20,000).
- Potential to drop the estate tax exemption to the $6 million range (from $11.7 million).
- An increase to the tax rate on long-term capital gains and dividends (from 20% to 24%). A less likely outcome is to characterize capital gains in excess of $1 million to ordinary income.
It seems unlikely that these changes would be retroactive to January 1, 2021 but would more likely take effect in 2022. This leads to important planning considerations in 2021. For instance, should the capital gains rate rise, business owners contemplating a sale of their business (or property) may benefit from completing the transaction this year.
The Consolidated Appropriations Act
The Consolidated Appropriations Act was signed on December 27, 2020. This cleared the path for a second round of Paycheck Protection Program (PPP) loans. As summarized in this previous blog, first time borrowers are eligible for up to $10M, while second round borrowers’ loans are capped at $2M. The maximum amount is, again, 2.5 times average monthly payroll costs (3.5 months for most hospitality services). Second time borrowers need to demonstrate a revenue decline of at least 25% for any quarter of 2020 relative to the same quarter in 2019. First time borrowers are not subject to this restriction. Loan applications are being accepted through March 31, 2021. We encourage you to discuss your eligibility with your CPA and banker and apply as soon as feasible.
Employee Retention Credit
Seemingly under the radar, the Act also makes significant changes to the Employee Retention Credit (ERC). Before outlining the likely changes, we advise readers that promised guidance from the IRS has not yet been received and note that the IRS has not yet updated their FAQs (which, while not unexpected with the change in administrations, does not provide the clarity we all desire). Nevertheless, our current understanding is as follows. The Employee Retention Credit was originally part of the CARES Act (see this previous blog for more information); however, the benefit was originally mutually exclusive with PPP loans. Now, it appears that small businesses that suffered a quarterly revenue decline of 50% or more in 2020 as measured against the same quarter in 2019 can benefit from both PPP loan forgiveness and the ERC. The ERC is available to employers with fewer than 100 employees and to larger companies if employees were paid to not work. The credit is up to 50% of wages and health insurance costs up to $10,000 per employee (max $5,000 credit per employee). You will want to work with your accountant to benefit from this credit and to ensure optimal coordination with your PPP loan forgiveness application (if you have not already filed).
The ERC also appears to have been extended to the first 2 quarters of 2021 under the Act. In addition to the extension, new rules have been put in place. These adjusted rules only impact 2021; however, they may amount to greater benefits (i.e., higher credit thresholds) and adjustments to the calculation method (essentially more favorable for the employer). In certain instances, the credit may also be paid in advance. The credit requires a 20% quarterly revenue decline versus 2019 (or preceding quarter), covers 70% of up to $10,000 of qualifying costs for the first two quarters of 2021 (total credit of up to $14,000 per employee) and the credit is expanded to companies with as many as 500 employees.
As with the other changes, we recommend consulting with your accountant, banker, and financial professional to optimize the credits.