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Article Dean Dorton

Written by Kaydee Ruppert, Accounting & Financial Outsourcing Manager at Dean Dorton

The Employee Retention Tax Credit (ERTC), often referenced to as just ERC, is confusing a lot of nonprofit employers. If it’s confusing to you, you’re not alone! There are many nuances to this credit, but the following outline will assist you in navigating and maximizing the opportunity presented by ERTC.

The version of ERTC applicable to 2020 is slightly different than the version adopted for 2021, so they are addressed separately below for greater clarity. Also note that receipt of a Paycheck Protection Program (PPP) loan in either round does NOT prohibit your organization from taking advantage of the ERTC if you otherwise qualify, although any wages used for the ERTC cannot be used for PPP loan forgiveness.

2020 ERTC

Organizations that qualify for ERTC in 2020 may still apply for a refund or tax abatement applicable to the credit.

Determine Qualified Time Period
There are two methods for determining your organization’s qualified time period for 2020 ERTC. If both apply, you should select the one that covers the greater number of days. If neither apply, your organization is not eligible for ERTC for 2020.

If applicable, your organization’s qualified time period matches the dates during which operations in 2020 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The starting date for suspended operations cannot be before March 13, 2020. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.

If applicable, gross receipts for your organization must have significantly declined for one or more quarters in 2020 as compared to 2019. To determine eligibility under this method, first determine total gross receipts by quarter for 2019 and 2020. Divide the 2020 quarter totals by the respective 2019 quarter totals. If the result is less than .5, note the first day of that quarter per the chart below. That is the start of your significant decline in gross receipts. Compare subsequent quarters until you reach a result that is greater than .8. Note the last day of that quarter per the chart below. That is the end date of your significant decline in gross receipts.

Start and End Date for ERTC Sample Periods: 2020 ÷ 2019
Q1 3/13/2020 – 3/31/2020

<.5

 >.5

>.5
Q2 4/1/2020 – 6/30/2020

<.8

 <.5

>.5
Q3 7/1/2020 – 9/30/2020

>.8

 >.8

<.5
Q4 10/1/2020 – 12/31/2020

>.8

 >.8

>.8
Sample Period of Significant Decline in Gross Receipts

3/13/2020 – 9/30/2020

 4/1/2020 – 9/30/2020 7/1/2020 – 12/31/2020

Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 100 or fewer full-time employees in 2019. If your organization averaged more than 100 full-time employees in 2019, be aware that your calculation of qualified wages is different.

Qualified Time Period in 2020 Complete individually for each employee.
Q1 Q2 Q3 Q4  
Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2020. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base.
Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions.
Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act.
The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter.

Calculate Credit and Request Refund or Abatement
Multiply each employee’s qualified wages, by quarter, by 50%. The result is the ERTC applicable to the employee for that quarter until the total year-to-date cumulative amount for the employee reaches $5,000. At that point, no additional credit can be claimed for the individual.

The maximum credit of $5,000 per employee may be realized in just one quarter for some employees, while other employees may not have sufficient qualified wages in the entire qualified time period to reach $5,000. Determine which quarters in 2020 are impacted by the credit for your organization. Then complete IRS Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) for those quarters to claim your refund or abatement.

2021 ERTC

The ERTC is available for qualifying organizations until December 31, 2021 and should be claimed on the quarterly 941 Forms for 2021. These forms are due in April, July, October, and January 2022 so there is still time to determine whether or not you are eligible to include the credit on your return. Once you are confident that your organization is eligible, you may also choose to reduce your employment tax deposits for anticipated credits or submit IRS Form 7200 to request advance payment of employer credits. For the 2021 ERTC, only employers that averaged 500 or fewer full-time employees during 2019 are eligible to request an advance payment of the credit.

Determine Qualified Time Period
There are three methods for determining your organization’s qualified time period that result in two possible time periods for the calculation of the 2021 ERTC. If more than one method applies, you should select the one that covers the greater number of days. If none apply, your organization is not eligible for ERTC for 2021.

If applicable, your organization’s qualified time period matches the dates during which operations in 2021 were at least partially suspended because of government orders limiting commerce, travel or group meetings due to COVID-19. The government issuing the order(s) that suspended your operations may be local, state or federal, but it must be a government order and not self-imposed. The start and end dates of your qualified time period using this method of calculation will likely not coincide with the start or end dates of any given quarter.

If applicable, your organization’s gross receipts for one or all of the quarters in 2021 must significantly decline as compared to the same quarters in 2019. To determine eligibility under this method of qualification, first determine total gross receipts for the quarters being considered for 2019 and 2021. Divide the 2021 quarter total by the respective 2019 quarter total. If the result is less than .8 for the quarter, that full quarter is a qualified time period due to a significant decline in gross receipts.

If applicable, your organization’s gross receipts for the quarters immediately preceding the quarters being considered in of 2021 must reflect a significant decline as compared to the same quarters in 2019. A qualified time period of 1/1/2021 – 3/31/2021 requires that gross receipts for the fourth quarter of 2020 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 12/31/2020 by the same quarter in 2019. If the result is less than .8, the first quarter of 2021 is a qualified time period due to a significant decline in gross receipts.

Likewise, a qualified time period of 4/1/2021 – 6/30/2021 requires that gross receipts for the first quarter of 2021 significantly declined as compared to the same quarter in 2019. Divide the quarter ended 3/31/2021 by the same quarter in 2019. If the result is less than .8, the second quarter of 2021 is a qualified time period due to a significant decline in gross receipts. The same methodology then applies to quarters 3 and 4 of 2021.

If this method is used to determine eligibility for a time period, you must elect to do so. Although the method for election has not been clarified yet by the IRS, there is an assumption that Form 941 will be updated to reflect this requirement.

Calculate Qualified Wages by Employee
The following process applies only to nonprofits that averaged 500 or fewer full-time employees in 2019. If your organization averaged more than 500 full-time employees in 2019, be aware that your calculation of qualified wages will be different.

Qualified Time Period in 2021 Complete individually for each employee.
Q1 Q2 Q3 Q4  
Calculate wages paid by employee for all employees paid during qualified time periods in each quarter of 2021. Wages eligible for the ERTC are wages for Social Security tax purposes determined without regard to the contribution and benefit base.
Add health care costs that are allocable to that same period, regardless of when they were actually paid. This includes the employer portion of medical insurance premiums as well as employer contributions to an HRA or health FSA. It also includes the portion of the cost paid by the employee with pre-tax salary reduction contributions.
Subtract any portion of the resulting total that is already being used in the calculation of another credit or relief program. Examples include, but are not limited to, use of PPP funding, the Work Opportunity Tax Credit, or paid sick and family leave under the Families First Coronavirus Response Act.
The remainder, by employee, is the employee’s qualified wages eligible for credit by quarter.

Calculate and Report Credit
Multiply each employee’s qualified wages, by quarter, by 70%. The result is the ERTC applicable to the employee for that quarter. The credit is capped at $7,000 per quarter per employee and must be reported on Form 941 for the applicable quarter to receive the respective offset to employment taxes due.

Dean Dorton’s nonprofit team has been closely monitoring the changing relief opportunities available to nonprofit organizations in this time of crisis. We are here to provide consultation, collaboration, or confirmation as needed in your journey back to sustainability.

Click the button below to learn more about Kaydee Ruppert, the newest nonprofit expert to join the Dean Dorton team:

Meet Kaydee Ruppert

For more information on COVID-19 relief efforts, visit our coronavirus relief resources page:

COVID-19 Resources

Do you have questions about House Bill 278? Contact your Dean Dorton advisor, or contact us at:

covid19solutions@deandorton.com

Article Dean Dorton

On Friday, March 12, 2021, the Kentucky General Assembly passed House Bill 278 (HB 278), providing deductibility for Kentucky tax purposes of expenses paid with Paycheck Protection Program (PPP) loans. The same bill provides for the exclusion from taxable income and deductibility of expenses paid with Economic Injury Disaster Loan advances.

The CARES Act, passed in March 2020, launched PPP loans and Economic Injury Disaster Loan (EIDL) advances or grants. The Act provided that the cancellation of indebtedness income from a forgiven loan would not be taxable income. The CARES Act was silent on the deductibility of expenses paid with loan proceeds and made no provision for EIDL advances.

The Consolidated Appropriations Act, 2021 (Appropriations Act) made expenses paid with PPP loan funds deductible for federal income taxes and provided that EIDL advances would be treated in the same manner as PPP loans. With the Appropriations Act, Congress reversed the Internal Revenue Service’s decision that expenses paid with PPP loan proceeds would not be deductible. A collective sigh of relief could be heard across the country. Then, business owners and their advisors realized that deductibility of expenses at the state level would depend on each state’s laws.

The Kentucky Department of Revenue announced that Kentucky law did not permit the deductibility of expenses associated with income not subject to tax. Thus, Kentucky taxpayers were back at square one for at least a portion of their 2020 tax liability. With the passage of HB 278, expenses paid with PPP loan proceeds are deductible, and EIDL advances are treated the same as for federal income tax; that is, the amount of the advance is not subject to tax and amounts paid with the proceeds of the advance are tax-deductible. The General Assembly’s action is welcome, needed relief for most of Kentucky’s small businesses. Governor Beshear has stated that he will sign the bill when it arrives on his desk.

For more information on COVID-19 relief efforts, visit our coronavirus relief resources page:

COVID-19 Resources

Do you have questions about House Bill 278? Contact your Dean Dorton advisor, or contact us at:

covid19solutions@deandorton.com

Article Dean Dorton

By: Erica Horn, CPA, JD | ehorn@deandorton.com

Many small businesses across the United States are waiting for a promised second round of Paycheck Protection Program (the Program) loans. Both political parties and the House of Representatives and Senate agree on expanding the Program, likely with new restrictions on which borrowers will qualify for loans. While we wait, here is some general information about the Program and the latest updates.

By the numbers

On August 8, 2020, the date on which the Program closed to new loan applications, SBA issued a Paycheck Protection Program (PPP) Report. The Report summarizes information about the Program, including total approved lending, loan count and net dollars loaned by state, and loan sizes. The data shows the following:

  • Number of loans: 5.2 million
  • Total approved lending: $525 billion
  • Number of loans and total approved lending for Kentucky businesses: 50,655 loans totaling $5.3 billion
  • Average loan size: $101,000
  • Loans more than $2,000,000: 29,000 totaling $105.3 billion
  • Loans $50,000 and under: 3.6 million totaling $62.7 billion

A forgiveness application for loans $50,000 and under

For months it was rumored that Congress might enact some sort of “automatic forgiveness” for loans $150,000 and under. While this rumor hasn’t come to fruition, the fact that 3.6 million or 69% of all loans were for $50,000 or less explains why SBA issued a simplified forgiveness application for those borrowers. In early October, Form 3508S, for loans of $50,000 and less, was issued. SBA issued instructions and a new Interim Final Rule to accompany the new form. However, the big news is that borrowers who received these loans will not have their forgiveness reduced based on decreases in headcount or salary and wages.

A surprise for borrowers with loans of $2 million or more

In early November, SBA released to lenders, but not to the public, two proposed forms—Form 3509 and Form 3510. These forms are described as “loan necessity questionnaires.” Form 3509 is for for-profit borrowers, and Form 3510 is for non-profit borrowers. SBA describes the purpose of the form as “to facilitate the collection of supplemental information that will be used by SBA loan reviewers to evaluate the good-faith certification that you made on your PPP Borrower Application.” Applicants had to certify that “the uncertainty of current economic conditions make necessary the loan request to support the ongoing operations of the eligible recipient.”

The questions on the forms are straightforward, and supporting documentation is required. The questions cover business activity and liquidity; for example, the first question requests the borrower’s gross revenue for the second quarter of 2020 and the same quarter of 2019. Other questions include the amount of cash and cash equivalents on hand before the loan application date and the amount of compensation greater than $250,000 (annualized) paid to owners or employees. The questions for non-profit borrowers are similar and include a request for the amount of any endowment funds and restrictions on those funds.

A borrower will receive Form 3509 or 3510 after submission of its forgiveness application to its lender. Upon receipt of the form, the borrower has 10 days to respond. The lender then has 5 days to provide the information to SBA. SBA has 90 days to make a decision and report back to the lender.

Borrowers should describe all of the mid-March concerns related to their business as the scale of the pandemic started to unfold. While some have speculated there will be additional opportunities to make your case to SBA, as the saying goes, “You only get one chance to make a good first impression.”

Tax deductibility of PPP loan expenses

Finally, there is no news about whether PPP loan expenses will be deductible on 2020 income tax returns. Again, there is bipartisan and bicameral support for the deductibility of expenses paid with PPP funds, but Congress is not moving any bills. The AICPA says it is a matter of when, not a matter of if, such a bill will pass.

Dean Dorton’s COVID-19 Solutions Team is available to answer questions and provide you with assistance on your PPP forgiveness application or Form 3509 or 3510.

This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).

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Article Dean Dorton

By: Maddie Schueler, JD, LLM | mschueler@deandorton.com

Like most states, Kentucky imposes a sales tax on the retail sale of tangible personal property, digital property, and some services. Kentucky also imposes a complementary use tax on the storage, use, or other consumption of taxable property in the state if no sales tax was paid to Kentucky when the property was purchased.

To achieve various policy objectives, the General Assembly has enacted multiple sales and use tax exemptions. The goal of many of these exemptions is to encourage the development and continuation of industries important to the Commonwealth. This article explores basics about how sales and use taxes apply to two major industries in the state—manufacturing and equine.

The Manufacturing Industry

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Manufacturers’ products sold to end users normally are subject to sales tax in the state where the product is shipped or delivered. The sales tax on a transaction generally is collected by the seller from the purchaser. Specific exemptions may cause the sale to be nontaxable. Because manufacturers typically sell to distributors or retailers who acquire property for resale, manufacturers’ sales often are nontaxable.

When manufacturers buy property for use in their manufacturing process in Kentucky, favorable sales tax treatment is tied to two major exemptions: (1) the exemption for materials, supplies, and industrial tools and (2) the exemption for machinery for new and expanded industry.

Materials that become part of a manufactured product, as well as supplies and industrial tools that are “used up” during the manufacturing process, are exempt from tax because tax ultimately will be collected when the final product is sold to the end user. All materials that enter into and become an ingredient or component part of the manufactured product are exempt from tax. Supplies and industrial tools must be “directly used in manufacturing” and have a useful life of less than one year to qualify for exemption. Notably, the exemption does not apply to repair, replacement, or spare parts.

The exemption for machinery for new and expanded industry permits manufacturers to purchase certain machinery without paying sales or use tax. For an item to qualify for exemption, it generally must meet four requirements:

Be machinery;

Be used directly in the manufacturing process;

Be incorporated for the first time into plant facilities established in Kentucky; and

Not replace other machinery.

A caveat applies to the fourth requirement: new machinery that replaces other machinery qualifies for exemption if it performs a different function, manufactures a different product, or has a greater productive capacity than the machinery being replaced.

The Equine Industry

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Breeding a horse involves producing a product, not unlike manufacturing. The mare may be thought of as “production equipment,” with the stallion’s contribution to the process being “raw material.” So, in what ways is breeding horses subjected to or not subjected to sales tax in a similar manner to manufacturing?

Sales in Kentucky of horses less than two years old at the time of sale are exempt from tax if the purchaser is a nonresident of Kentucky. A nonresident includes both an individual who is not a resident of Kentucky and a business that is not commercially domiciled in the Commonwealth. Sales of horses which are bought for resale also are nontaxable.

Horses, or interests or shares in horses, bought for breeding purposes only are exempt from sales or use tax in Kentucky. However, fees paid to breed to a stallion in Kentucky are subject to sales tax.

Kentucky sales tax law includes numerous general agricultural exemptions, but many do not apply to the equine industry. For example, Kentucky exempts from tax feed, farm machinery, and on-farm facilities. However, all of these exemptions apply in the context of raising “livestock,” which under Kentucky law excludes horses.

In Summary

In summary, both similarities and differences exist in how Kentucky applies its sale and use tax law to manufacturers, in general, and to horse breeders, who also produce items of tangible personal property.

Article Dean Dorton

Yesterday, March 26, 2019, Governor Bevin signed House Bill 354, which the General Assembly passed earlier this month. This legislation reverses the dramatic negative effect on many nonprofits caused by last year’s tax bill and the Kentucky Department of Revenue’s interpretation of it. The applicable provisions of House Bill 354 became effective upon the Governor’s signature meaning that the changes are effective today!

To whom does the new law apply?

The new law exempts from tax sales of admissions and most fundraising activities by nonprofit educational, charitable, or religious institutions that are exempt from income tax pursuant to Section 501(c)(3) of the Internal Revenue Code, and provides the same exemptions for “nonprofit civic, governmental, or other nonprofit organizations.”

For 501(c)(3)’s, House Bill 354 restores the law related to sales of admissions to the understanding of the law prior to July 1, 2018. The bill also broadens the law to allow for the vast majority of fundraising activities to be exempt from sales tax. The exemptions for the second group of nonprofits – “nonprofit civic, governmental, or other nonprofit organizations” – is new.

House Bill 354 does not provide a definition for this second group, but those surrounding the drafting process related to the bill understand the provision to apply to other groups covered by Section 501(c) of the Internal Revenue Code, such as civil leagues, business leagues, chamber of commerce, social and recreational clubs, and fraternal beneficiary societies and associations.

Tell me, again, what the law covers.

The law exempts from sales tax:

  • Admissions to events and activities sponsored by nonprofit organizations, and
  • Sales at fundraising events, with the exception of:
    • Sales related to the operation of a retail business, including, but not limited to, thrift stores, bookstores, surplus property auctions, recycle and ruse stores, or any ongoing operations in competition with for-profit retailers.

When does the law become effective?

The law became effective upon the Governor’s signature yesterday, March 26, 2019. This means you can stop charging sales tax on admissions and auctions at fundraising events. However, be sure to remit any sales tax you have already collected, and no refunds are allowed for prior periods in which sales tax was collected. Furthermore, we don’t recommend closing your sales tax account right away. The Department of Revenue will be issuing guidance on how to proceed in the near future.

If you have any questions, please contact your Dean Dorton advisor or Erica Horn at ehorn@deandorton.com.

Article Dean Dorton

Business growth throughout Kentucky is critical to the continued expansion of Kentucky’s economy and vital to job creation throughout the Commonwealth. In conjunction with The Lane Report, Dean Dorton is proud to recognize the distinct and esteemed companies that are impacting Kentucky’s economic development through Best Bets 2018! The Best Bets list is based on several factors including the revenue figures for the last three years, employee investment, re-investment in the company, and other achievements. Bim Group is honored to be the supporting sponsor of this unique new initiative.

“Dean Dorton has had the honor and privilege of working with a variety of Kentucky-based companies for several decades now. We get to see firsthand the significant impact these companies have each year on our state’s economy,” said David Bundy, President and CEO of Dean Dorton. “We wanted to create a way that we could recognize their efforts and results, so we have created the Best Bets list. We are proud to recognize the distinct and esteemed companies that are impacting Kentucky’s economic development through a new special report, Kentucky’s Proof, and the Best Bets list. This year we are excited to see some of the same companies on the list for a second year in a row, as well as some new names, indicative of the impact these companies are making on overall economic growth.”

Congratulations to this year’s Best Bets 2018 winners (in alphabetical order):

Company Headquarters Year Founded
ACE Consulting Company Nicholasville 2007
Bates Security Lexington 1984
Country Boy Brewing Georgetown 2012
ID+A, Inc. Louisville 1981
 Investors Heritage Life Insurance Company Frankfort 1960
Maverick Insurance Group Louisville 2013
PHOENIX Process Equipment Company Louisville 1987
SkuVault Louisville 2011

Kentucky’s Proof will hit business mailboxes in April, highlighting each of the companies listed above and featuring meaningful insights into what these companies are doing to succeed year after year.

More than 30 companies applied for this year’s Best Bets list and eight were chosen as 2018’s Best Bets. This year, the size of the companies ranged from one to more than 300 employees and revenues ranged from $1 million to $140 million. To learn more, visit kybestbets.com.