Tax Implications of Selling Virtual Currency

Cryptocurrency is not backed by any government. Therefore, it is subject to less regulation than traditional currencies. As a consequence of this, many cryptocurrency investors have a belief that they have found a loophole to avoid paying taxes. However, this is not correct. Virtual currency exchanges, whether a gain or a loss, must be reported to the IRS and is taxed in a similar manner as traditional stocks.

Cryptocurrency is considered property for federal income tax purposes, meaning the IRS treats it as a capital asset. Because of this, the taxes generated as a result of a virtual currency sale are the same as a realized gain or loss on the sale or exchange of a capital asset. When a capital asset is purchased, the cost basis in the capital asset is equal to the cost to obtain the capital asset. When the capital asset is sold, the net sales proceeds are compared to the original basis to determine whether the result is a capital loss or a capital gain.

When buying and selling cryptocurrency, comparing net proceeds to the cost basis isn’t the only step. The length of time the asset is held is used to determine the type of capital gain or loss recognized.

Assets bought and subsequently sold within one year should recognize a short-term capital gain or loss. Short-term gains and losses are subject to the same tax rates as ordinary income.

Assets bought and subsequently sold after one year should recognize a long-term capital gain or loss. Typically, long-term capital gain rates are more favorable than short-term capital gain rates. There are currently three tax rates for long-term capital gains – 0%, 15%, and 20%. The rate entirely depends on your income.

2021 Rates:

  • Single Status:
    • 0%: $0 – $40,400
    • 15%: $40,401 – $445,850
    • 20%: $445,851+
  • Married Filing Jointly Status:
    • 0%: $0 – $80,800
    • 15%: $80,801 – $501,600
    • 20%: $501,601+

Tax Implications of Selling Physical Gold or Silver

Physical holdings in precious metals are capital assets. The IRS specifically categorizes gold and other precious metals as collectibles. Holdings in these metals, regardless of their form are subject to capital gains tax. However, the capital gains tax is only owed after the sale of such holdings.

While many financial securities are subject to short-term or long-term capital gains tax rates, the sale of physical precious metals is taxed a little differently. Short-term gains on precious metals are taxed using ordinary income rates that apply to other income, such as wages. Physical holdings sold after one year are subject to a capital gains tax equal to your marginal tax rate, up to a maximum of 28%. Even though the 28 percent collectibles capital gains tax rate is higher than the long-term capital gains tax rates for traditional capital assets, it is still a more favorable rate than short-term gains. This is especially true for higher income earning individuals that fall into the in the 32%, 35%, and 37% tax brackets as these individuals would still only have to pay 28% on their physical precious metals sales.

Tax liabilities on the sale of precious metals are not due at the time of sale. Instead, sales of physical precious metals need to be reported on Schedule D of Form 1040 on your tax return. However, sales of certain types of metal require Form 1099-B to be submitted to the IRS at the time of the sale.

The amount of tax owed on the sale of precious metals depends on the cost basis of the metals themselves. If you purchase the metals yourself, then the cost basis is equal to the amount paid for the metal. It’s also important to note that the IRS allows certain additions to the basis, such as the cost of appraisals.

If the precious metals are received via inheritance, then the cost basis is equal to the market value on the date of death of the person from whom you inherited the metals.

If the precious metals are received as a gift, the cost basis is the lesser of:

  1. The market value of the precious metals on the date that the gifter purchased them, or;
  2. The market value on the day that the precious metals were gifted.

Bitcoin Mining Tax Implications

The IRS has not provided a large amount of guidance regarding the taxation of crypto-asset mining. The main source of discussion is found in Notice 2014-21.

The required timing of the recognition of income for virtual mining differs from physical mining. The IRS claims that physical mining results in inventoried costs and that recognition of income does not occur until the disposition of the commodity in an exchange. With virtual mining, however, the IRS requires immediate recognition of income, even though the miner may not have yet converted it to traditional currency.

The IRS does not explain how it determines that the reward for successfully verifying a block is immediately taxable. Section. 1.61-1, in part, says that gross income includes income realized in any form, whether in money, property, or services. The key question in this instance is the timing of the taxation.

The IRS’s position on taxing virtual currency mining can conceivably be supported with an analysis of Sec. 83. Under Sec. 83, which deals with property transferred in connection with performance of services, property does not have to be transferred as direct compensation, but just in connection with the performance of the services. The property transferred in exchange for services is immediately taxable at the time the property is transferable or there is not a substantial risk of forfeiture. In the virtual currency mining context, this would occur when the crypto-asset reward is credited and available for transfer to the miner.

Another way to analyze how crypto-asset mining should be taxed is to consider financial accounting principles. Sec. 446 requires taxpayers to use the same book and tax accounting methods except if the method does not clearly reflect income. At this time, there is no set financial accounting treatment for mining of crypto-assets. The financial accounting treatment is arguably consistent with either the IRS-mandated approach or with the gold mining analogy approach.

IFRS 15 requires both a customer and a contract in order for there to be revenue recognition. There is not a specific contract between a customer and a miner for the block reward. An argument can be made that all the participants in the block chain have an implied contract regarding the block award, making all the participants in the black chain a customer. Therefore, the new crypto-asset can be considered revenue. However, it can also be argued that there can be no contract for purposes of IFRS 15 because such an implied contract could not be enforced against any one individual.

Another view is that the receipt of the block award is an accession to wealth because the miner has an increase in assets. Thus, the receipt of the award should be reported as other income. Characterizing the award as revenue or other income is consistent with the IRS’s assessment of block chain mining as immediate income.

A contrary view is that crypto-asset mining produces an internally generated intangible asset. The miner is inputting computing power, electricity, and staff costs to build, or mine, an internally generated intangible asset, that being the crypto-asset. No revenue or gain is recognized until the resulting intangible asset, the crypto-asset, is subsequently sold.

This approach is closer in application to that of gold mining. The block reward is categorized as a self-created intangible asset, and revenue is not recognized until the bitcoin is sold to a third party. Similar to the exploration and development stage of mining, success regarding efforts to create a block are not assured, so costs would be immediately expensed.

One other notable feature of crypto-asset mining that is relevant to taxation involves mining pools. Individuals or companies that want to make a profit through crypto-asset mining have the choice to either go solo with their own dedicated devices or to join a mining pool where multiple miners and their devices combine to enhance the hashing output. The bigger a pool, the steadier and more predictable a member’s earnings. The reward amount that miners participating in a pool receive is usually based on the proportion of hashing power they are contributing to the aggregate of the pool.

Whether a miner directly participates in crypto-asset mining or as part of an overall pool, the income recognition issues are the same. The question is whether the reward is for provision of services (generating immediate taxable income) or, on the other hand, for participating in the creation of an intangible asset (with taxation analogous to the mining and processing of gold). The outcome could also potentially depend upon whether the miner is a publicly traded corporation subject to GAAP principles or operates on a much smaller scale, such as an individual.

The incentive structure of crypto-asset mining with multiple participants reinforcing block chain security and other attributes through competition raises a question of the substance of the work. Arguably, the miners are providing services to the system whether intended or not. In addition, just like certain levels of placer mining activity, individuals can participate in crypto-asset mining as a hobby. For individuals participating without a realistic potentials for profit, this activity likely falls under Sec. 183 limitations.

The evolution in scale in mining activities could resemble the development of many new processes and innovations with implications for the resulting taxation. The future may bring increasing questions as to how a new process or industry interacts with existing tax rules as it evolves in adoption, participation, and scope.

Source: Craig White, Ph.D. “Gold and bitcoin: Tax implications of physical and virtual mining.” The Tax Adviser, August 2020, pp. 516-521.

Gold Mining Tax Implications

Physical materials have provisions regarding natural resource mining that are organized around the life cycle of a mining operation. The mining cycle operates in four phases:

  1. Exploration
  2. Development
  3. Operations
  4. Decommissioning and post-closure.

In the context of mining for physical minerals, the Code allows for immediate deduction of expenses through the exploration and development stages. Development involves activities after the existence of ores or minerals in commercially marketable quantities has been disclosed, and can include expenses incurred during the development and production stage.

Once in the production stage, inventories are required to be established.

In summary, the IRS does not immediately impose tax when gold is produced. The tax treatment of production follows the general rule of capitalization of costs associated with the production of gold and current deduction of period expenses.

The top five mining corporations are responsible for roughly 20% of annual projection. Therefore, a significant portion of U.S. gold production is subject to the corporate income tax.

Individuals engaged in gold mining are subject to provisions that limit their use of losses to reduce taxable income. The IRS stresses Sec. 183’s rules on hobby activities to individual placer mining. IRC section 183 states that a miner must be in a trade or business or engaged in an activity for the production of income with the objective of making a profit in order to claim mining related expenses such as those for exploration and development.

Thus, a smaller-scale operation is less likely to result in a profitable operation and more likely to fall within Sec. 183’s rules on hobby activities.

Source: Craig White, Ph.D. “Gold and bitcoin: Tax implications of physical and virtual mining.” The Tax Adviser, August 2020, pp. 516-521.

IRS issues safe harbor for employers claiming the employee retention credit

The IRS has provided a safe harbor for employers claiming the Employee Retention Credit (ERC). This safe harbor allows employers to exclude certain iamounts from their gross receipts when determining their eligibility for the ERC.

Employee retention credit. Act Sec. 2301(a) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act; PL 116-136) created the Employee Retention Credit (“ERC”), a refundable payroll tax credit. For 2020, the ERC can be claimed by eligible employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts (“eligible employers”).

Although originally the ERC was not available to employers receiving a Payroll Protection Program (“PPP”) loan, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA; PL 116-260) amended the ERC to allow eligible employers to claim the ERC even if the employer obtained a PPP loan. The TCDTRA also extended the availability of the credit into 2021. (TCDTRA Sec. 207)

Employers claim the ERC on their employment tax return, generally Form 941, Employers Quarterly Federal Tax Return, or adjusted employment tax return, generally Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.

Safe harbor for employers claiming the ERC. Rev Proc 2021-33, allows employers to exclude the following amounts from gross receipts:

  • The amount of the forgiveness of a Paycheck Protection Program (PPP) Loan;
  • Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act; and
  • Restaurant Revitalization Grants under the American Rescue Plan Act of 2021.The revenue procedure points out that, absent the safe harbor, these amounts would be included in gross revenue.

An employer electing this safe harbor:

  • may exclude the above amounts from gross receipts only to determine whether it is an eligible employer for a calendar quarter for purposes of claiming the ERC on its employment tax return
  • must exclude the above amounts from their gross receipts for each calendar quarter in which gross receipts are relevant to determining their eligibility to claim the ERC.
  • must also apply the safe harbor to all employers treated as a single employer under the aggregation rules.

This safe harbor does not permit the employer to exclude the above items from gross receipts for any other federal tax purpose.

Ohio Renews Tax Credits for Opportunity Zone Investments

As part of the state budget signed into law on June 30, 2021, additional funding for the Ohio Opportunity Zone Credit became available for the 2021-2022 biennium period. Similar to the prior two year period, a maximum of $50 million in credits will be awarded on a first-come, first-served basis.

What is the Ohio Opportunity Zone Tax Credit?

The taxpayer invests cash in the Ohio Qualified Opportunity Fund (“Ohio QOF”), which in turn must invest that money in a Qualified Opportunity Zone property in Ohio. Once the money is invested in the Qualified Opportunity Zone property (“QOZ Property”), the taxpayer is eligible for a non-refundable tax credit equal to 10% of the amount of its funds invested by the Ohio QOF in the QOZ Property. The taxpayer may invest in multiple Ohio QOFs and may receive tax credits totaling up to $2 million dollars during the 2021-2022 biennium period.

The Ohio Opportunity Zone Tax Credit is applied to the individual income tax, as outlined in the Ohio Revised Code Section 5747.02. The tax credit may be claimed for the Taxpayer’s qualifying taxable year or the next consecutive taxable year. For the 2020-2021 biennium, a total of $50 million in tax credit allocation in available.

Who is Eligible for the Ohio Opportunity Zone Tax Credit?

To qualify for the credit, a taxpayer must meet the following requirements:

  • A taxpayer must be an individual, trust, estate or pass-through entity that elects to file a return on behalf of its investors. Note, a nonresident taxpayer could participate if they otherwise meet the requirements of a qualified investment.
  • A taxpayer must make or have made an investment in an Ohio QO Fund.
  • The Ohio QO Fund invests all or a part the taxpayer’s fund contribution in a QO Zone property in Ohio. Note, this program is separate from the federal program and a taxpayer need not invest capital gain dollars in the Ohio QO Fund to be eligible for a tax credit in Ohio.
  • A taxpayer made an investment during the eligible period and is subsequently invested in QO Zone property situated in an Ohio Opportunity Zone by the Ohio QO Fund during the eligible period.

How to Apply

Taxpayers that have invested in an Ohio QOF must apply directly to the Ohio Development Services Agency (“Development”) for the tax credit. Applications can be submitted during the eligible peiod for investments made by an Ohio QOF in QOZ Property in Ohio. The application will be available through Development’s application portal and must be filed electronically. Development will review the applications in the order they are received, issuing the tax credit certificate allocation until all eligible applications are funded OR the $50 million in tax credits is fully utilized – whichever comes first.

For more information, visit:

Ohio Department of Development

Ohio Opportunity Zones

Highlights of President Biden’s Proposed Tax Plan

In late May, the Treasury Department released its General Explanations to the Administration’s Fiscal Year 2022 Revenue Proposals (also known as the “Green Book”). The 114-page document contains detailed information about President Biden’s proposed tax law changes: the American Jobs Plan and the American Families Plan. The American Jobs plan is geared more towards business while the American Families Plan focuses on individuals. Both individuals and businesses could see tax rate increases under the proposed plan.

Clearly, these are just proposals at this point, and it’s too early to tell exactly which parts of the plan will eventually make it into law, or the extent to which they will be modified if they do. You’ve no doubt already started hearing from clients wanting to know what you know. To help with that, we’ve compiled a list of some of the highlights to help you gain an understanding of the major tax proposals and answer questions your clients may have.

Note that this is NOT an all-inclusive list of the Green Book provisions.

The American Jobs Plan

Increase the Tax Rate on C Corporations. The Tax Cuts and Jobs Act (TCJA) established a 21% tax rate for C corporations. Under President Biden’s proposal, that rate would increase to 28%. The higher rate would go into effect for tax years beginning after 2021. For fiscal year C corporations whose tax year starts after 1/1/21, the new rate would be prorated. According to the Green Book, these corporations would be taxed at a rate equal to 21% plus 7% times the portion of the year that falls in 2022. For example, if a C corporation with a June 30 year-end had $1,000,000 of taxable income for the year ended 6/30/2022, the tax would be computed by first determining how many days in the corporation’s tax year fell in each calendar year. In this case, 184 days are in 2021 and 181 in 2022. The corporation’s tax rate would be 21% + (7% x 181 / 365) = 24.471%, resulting in total tax for the fiscal year of $244,710. This mirrors the treatment required by IRC Sec. 15 and Notice 2018-38 and should be a familiar to fiscal year C corporations that dealt with this issue when the rate was reduced under the TCJA.

Impose a 15% Minimum Tax on Large Corporations. Corporations with book income of $2 billion or more would be subject to a 15% minimum tax on their worldwide book income. This proposal is expected to impact roughly 120 taxpayers and would go into effect for tax years beginning after 2021.

Observation: Clearly, the devil is in the details when computing worldwide book income.

Promote U.S. Job Creation. The proposal calls for the creation of a new general business credit of up to 10% of the eligible cost of onshoring a trade or business. Onshoring means reducing or eliminating a trade or business (or a line of business) currently conducted outside the U.S. and starting up, expanding, or otherwise moving the same trade or business to the U.S. and creating jobs in the process. Also, the proposal would disallow deductions for expenses related to offshoring a trade or business (that is, reducing or eliminating a trade or business currently conducted in the U.S. and starting up or moving the same trade or business overseas, causing the elimination U.S. jobs). The new credit for onshoring and deduction disallowance related to offshoring would apply to expenses paid or incurred after the date of enactment.

Eliminate Fossil Fuel Tax Preferences. The President’s plan is clearly steered in the direction of non-fossil fuel energy. To that end, the proposal would repeal many of the tax benefits currently available to encourage the production of fossil fuels. Among other things, the credits for enhanced oil recovery and marginal oil and gas well production would be repealed, was well as the ability to deduct intangible drilling costs and to claim percentage depletion on oil and gas wells. In general, these changes would go into effect for tax years beginning after 2021.

The American Families Plan

Increase Highest Marginal Rate for Individuals. The President’s plan calls for a return to the pre-TCJA top income tax rate of 39.6%. For 2022, that rate would affect married filing joint taxpayers with taxable income over $509,300 (over $452,700 for single taxpayers, over $481,000 for heads of households, and over $254,650 for married filing separate). These thresholds would be adjusted for inflation and be effective for tax years beginning after 2021.

Tax High-income Individuals’ Capital Gains and Qualified Dividends at Ordinary Rates. For taxpayers with Adjusted Gross Income (AGI) over $1 million ($500,000 if married filing separate), the maximum tax on long-term capital gains and qualified dividends is proposed to increase from 20% to the top rate on ordinary income (which is proposed to be 39.6%). When factoring in the 3.8% net investment income tax, this effectively would raise the tax rate on long-term capital gains and qualified dividends to 43.4%. The $1 million threshold would be indexed for inflation.

Taxpayers would be subject to the higher rate on their long-term capital gains and qualified dividends only to the extent their income exceeds the threshold. For example, a taxpayer filing a joint return with $900,000 of ordinary income and $200,000 of long-term capital gains would have $100,000 of the capital gain taxed at the current preferential rate and $100,000 of the long-term capital gain taxed at the ordinary income tax rate.

Caution: This change is proposed to apply to gains recognized after the date of the announcement. The Green Book does not define that date, but the American Families Plan was announced on April 28, 2021, presumably meaning that any gain recognized after that date would potentially be subject to the higher rate. Unfortunately, we won’t know when this provision will be effective (if at all) until things move a little further along. While not impossible, it is generally more difficult to impose a tax retroactively since a majority of lawmakers will have to agree. However, this signals that the administration would like to prevent, as much possible, taxpayers from recognizing capital gains in anticipation of a rate increase.

Treat Transfers of Appreciated Property by Gift or at Death as Realization Events. Donors and deceased owners of an appreciated asset would realize a capital gain when the asset is transferred (either as a gift or at the taxpayer’s death). The appreciated asset would be treated as transferred at FMV on the date of the gift or the date of death. Taxpayers would have a $1 million (adjusted for inflation after 2022) per-person exemption available. The proposed change would be effective for property transferred by gift after 12/31/2021, and for property owned at death by decedents dying after that date.

In addition to the $1 million exemption, certain other exclusions would apply. Capital gain would not be realized on transfers to a spouse. But, the surviving spouse would take on the decedent’s basis and any gain would be recognized when the surviving spouse disposes of the asset or dies. No tax would be due on a transfer to charity. Additionally, the proposal would exclude from recognition any gain on tangible personal property such as household furnishings and personal effects, other than collectibles. The $250,000 per-person exclusion under current law for capital gains on a principal residence would apply to all residences and would be portable to a decedent’s surviving spouse. Finally, the current-law exclusion for gain on certain small business stock would also apply.

The tax on the appreciation of certain family-owned and operated businesses would be deferred until the business is sold or ceases to be family-owned and operated. Additionally, tax on appreciated nonliquid assets could be spread over a 15-year period with a fixed rate payment plan. This deferral would not apply to the tax on any appreciated liquid assets, such as publicly traded securities.

Tax Appreciation on Certain Assets Held in a Trust, Partnership, or Other Noncorporate Entity. An entity would be subject to tax if the assets it holds have not been subject to a recognition event within the prior 90 years. The 90-year period begins 1/1/1940, making 12/31/2030 the earliest date that a taxpayer might have to recognize gain in this situation.

Subject Certain Income to Either Net Investment Income or Self-employment Tax. Currently, married taxpayers filing a joint return with AGI over $250,000 ($200,000 for single and head of household, $125,000 for married filing separately) are subject to a 3.8% tax on their Net Investment Income (NII), which generally includes capital gains, interest, dividends, royalties, and income from passive activities. Self-employment (SE) income is not subject to the NII Tax (NIIT). The proposed changes are aimed at nonpassive S corporation shareholders and limited partners/LLC members whose share of pass-through ordinary income currently isn’t subject to SE tax or the NIIT. All income not subject to SE tax would be subject to NIIT for taxpayers with AGI over $400,000. Also, ordinary income passed through to S corporation shareholders and limited partners/LLC members who materially participate in the trade or business would be subject to SE tax to the extent it exceeds certain thresholds, effectively making this pass-through income subject to either NIIT or self employment tax. This change would be effective for tax years beginning after 2021.

Make Certain Tax Credit Changes Permanent. The American Rescue Plan Act of 2021 (ARPA) expanded and modified several credits available to individuals. However, the changes made by ARPA were generally for 2021 only. The President’s proposal would make the following ARPA changes permanent.
•Premium Tax Credit. This refundable credit is available to taxpayers who get health insurance through a Marketplace established under the Affordable are Act of 2010 (ACA). ARPA modified the income threshold for eligibility and decreased the contribution percentages for taxpayers.
•Earned Income Tax Credit. This refundable credit is available to taxpayers with low to moderate income levels. ARPA expanded eligibility to taxpayers as young as age 19 (age 18 for a qualified former foster youth or a qualified homeless youth), provided the taxpayer can’t be claimed as a dependent on their parent’s return and expanded the credit for workers without children.
•Child and Dependent Care Tax Credit. This credit is available to taxpayers who must pay for childcare to allow them to work. ARPA made the credit fully refundable for eligible taxpayers and increased allowable expenses (to $8,000 for taxpayers with one qualifying child and to $16,000 for those with two or more children).

Extend Child Tax Credit Changes. This credit is available to taxpayers with qualifying children. ARPA made this credit fully refundable for eligible taxpayers in 2021 and increased the credit amount to $3,000 (for children ages 6 through 17) and $3,600 (for children under 6). The Biden proposal would extend these ARPA changes to tax years beginning before 2026.

Limit Like-kind Exchange Deferrals. The TCJA limited the ability to defer gains using a like-kind exchange to exchanges of real property. The proposed law changes seeks to further restrict a taxpayer’s ability to delay paying tax when a property is exchanged. The proposed law caps the amount of gain that can be deferred in a Section 1031 like-kind exchange at $500,000 per taxpayer, per year ($1 million for MFJ). Gains from a like-kind exchange that exceed the cap will be subject to tax in the year the taxpayer transfers the real property subject to the exchange. This proposal would be effective for exchanges completed in tax years beginning after 2021.

Make Excess Business Loss Limit Permanent. The provision that limits a noncorporate taxpayer’s ability to claim excess business losses is set to expire at the end of 2026. The proposed law would make this a permanent provision.

Increase IRS Funding. According to the Treasury Department’s report, the IRS’s operating budget (in constant dollars) decreased roughly 20% between 2010 and 2020. Meanwhile, additional resources were needed by the Service to keep up with new areas of noncompliance, implement changes brought on by the TCJA and other recent law changes, and respond to the COVID-19 crisis. Long story short, the IRS wants more funding. Under the proposal, additional funding would be used to beef up enforcement and compliance efforts, enhance information technology functionality, and specifically allocate resources to enforcement activities for taxpayers with income of $400,000 and higher.

Improve Oversight of Tax Preparers.The IRS seeks to gain additional regulatory control over paid tax return preparers to reduce collection costs, increase revenue, and increase overall confidence in the voluntary compliance system. The proposed changes would establish minimum competency standards, effective on the date of enactment. It will also increase penalties on tax preparers who don’t sign the returns they prepare (“ghost preparers”). The proposal would increase the penalty to the greater of $500 per return or 100% of the fee received for preparing a ghost return and increase the time to assess the penalty from three to six years after a return was filed, effective for returns required to be filed after 2021.

Expand Crypto Asset Reporting for Brokers. Crypto currency is a huge hot button issue for the IRS. The service sees the crypto realm as ripe for tax evasion. The proposal would expand the scope of information reporting by brokers, including entities such as U.S crypto asset exchanges and hosted wallet providers, to require reporting related to gross proceeds, sales, and “substantial foreign owners” in passive entities. The plan would allow the U.S. to share this information with other global taxing jurisdictions. This change would be effective for returns required to be filed after 2022.

Guidance on Claiming the Employee Retention Credit for the First and Second Quarters

The IRS recently released Notice 2021-23, providing guidance on claiming the employee retention credit. The notice expands on information provided in Notice 2021-20, 2021-11 IRB 922 in light of amendments made to the Coronavirus Aid, Relief and Economic Security (CARES) Act by the Taxpayer Certainty and Disaster Relief Act of 2020.

Changes for first and second quarters. The notice details the changes for the first and second quarters of 2021. This includes:

  • The increase in the maximum credit amount from $5,000 per calendar quarter (for a total of $10,000) to $7,000 per calendar quarter (for a total of $14,000;
  • Expansion of definition of eligible employer, for example now including college or university, and businesses that have the principal purpose or function of providing medical or hospital care;
  • Changes to the definition of “qualified wages.” Certain exclusions from “employment,” related to certain services performed for governmental or educational entities, are disregarded for purposes of the employee retention credit for the first and second calendar quarters of 2021.

Additionally, employers can get the employee retention credit for the first two calendar quarters of 2021 before filing their employment tax returns by reducing employment tax deposits. Small employers may request advance payment of the credit on Form 7200, Advance of Employer Credits Due to COVID-19 after reducing deposits.

Under the American Rescue Plan Act of 2021 (ARPA), the employee retention credit is also available to eligible employers for wages paid during the third and fourth quarters of 2021. Guidance is expected to be provided at a future date.

SBA Announces the Closure of the Paycheck Protection Program

On June 1, 2021, Small Business Administrator Isabella Casillas Guzman announced the closure of the Paycheck Protection Program (PPP). Since the PPP was first introduced through the  “Coronavirus Aid, Relief, and Economic Security Act” (the CARES Act), it has dispersed $798 billion in loans to small businesses and nonprofit organizations.

Over 8.5 million employers received PPP loans to cover payroll costs and nonpayroll costs such as rent, mortgage interest, and utilities since the program began. The program was so popular that it was extended and modified on multiple occasions including the introduction of Second Draw PPP Loans through the Consolidated Appropriations Act, 2021 (CAA, 2021) and propped up with additional funding with the last COVID-19 relief bill, the American Rescue Plan Act (ARPA).

After some initial backlash that the smallest businesses were having difficulties obtaining a PPP loan, the SBA noted that in 2021, 96% of PPP loans went to business with fewer than 20 employees with the average loan at $42,000.

General PPP Funding Exhausted and Most Applications No Longer Accepted

A spokesperson for the U.S. Small Business Administration (SBA) has confirmed that the SBA is no longer accepting Paycheck Protection Program applications from lenders.

Background. The CARES Act established the Paycheck Protection Program (PPP) which permitted the SBA to provide loans to qualified businesses impacted by the coronavirus (COVID-19) pandemic. The 100% federally guaranteed loans must be used for payroll and certain non-payroll costs. The Consolidated Appropriations Act 2021 (CAA, 2021) included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the Economic Aid Act) that authorizes additional funding to the program and extended the program until March 31, 2021. The Economic Aid Act also expanded access to First Draw PPP Loans to other entities, expanded additional eligible expenses, clarified terms, and authorized Second Draw PPP Loans for smaller borrowers.

The CAA provided $284.45 billion and ARPA provided $7.25 billion in direct funding to the PPP.

PPP funding status. Cecelia Taylor, Deputy Press Director/Team Lead, SBA Press Office, has informed Thomson Reuters that after serving more than eight million small businesses, general funding for the PPP has been exhausted and the PPP application portal has been closed for applications from most lenders.

Taylor added that the SBA will continue funding outstanding approved PPP applications, but new qualifying applications will only be funded through $9.9 billion that is set aside for Community Financial Institutions, financial lenders that serve underserved communities.

This includes Community Development Financial Institutions (CDFIs), Minority Depository Institutions (MDIs), Certified Development Companies (CDCs), and Microloan Intermediaries.