By Michael J. Devereux II, CPA, CMP, Mueller Prost
In December 2020, Former President Trump signed the Consolidated Appropriations Act, 2021 (CAA), ushering in several tax changes aimed at curbing the impact of the
COVID-19 pandemic. Some of the changes build upon provisions passed in The Coronavirus Aid, Relief and Economic Security (CARES) Act, and others modify or extend provisions that may help taxpayers during the pandemic. The following provides a brief overview of the tax provisions found in the CAA and how these provisions can impact American mold builders.
Employee Retention Credit
The Employee Retention Credit was introduced with the CARES Act and provides eligible employers opportunity for a refundable credit toward payroll taxes. The credit for 2020 is equal to 50% qualified wages paid between March 12, 2020, and December 31, 2020, and has a maximum credit of $5,000 per employee.
The CAA brought a retroactive change to the Employee Retention Credit. Under previous laws, employers receiving a Paycheck Protection Program (PPP) loan were not eligible for this credit. Under this new law, even those receiving PPP loans are eligible but must exclude the wages during the period covered by PPP forgiveness. Further, the CAA modified the definition of eligible wages for the Employee Retention Credit to include health insurance paid by the employer.
Eligible wages only include those wages paid during a calendar quarter for which the entity meets one of the following two tests:
- Business operations were fully or partially suspended due to a government-ordered, COVID-19-related shut-down order; or
- Business operations remained open, but gross receipts declined by more than 50% when compared to the same quarter in 2019.
A full or partial government shutdown means:
- The order has come from the federal, or a state or local government that has jurisdiction over the entity.
- The order must limit commerce, travel or group meetings due to COVID-19.
- The order must affect an employer’s trade or business.
All three tests must be met for the wages paid in that quarter to qualify. If mold shops have more than one location, and one geographic area meets the tests, the whole company can qualify.
If a mold builder’s operations were deemed essential, and the business was not closed due to government order during the quarter, the mold builder still can qualify if gross receipts dropped by more than 50%.
If a mold builder’s 2020 quarter (starting after March 12, 2020) gross receipts are less than 50% of the 2019 comparable-quarter gross receipts, then that quarter is eligible. The company keeps counting quarters until the quarter that gross receipts for that quarter in 2020 are greater than 80% of the 2019 comparable quarter. Gross receipts are total sales (less returns) and income from services provided, interest, dividends, royalties and sale of assets less cost basis. Companies may not reduce gross receipts by cost of goods sold.
For employers that had more than 100 average-number of full-time employees in 2019, only the wages of employees who were paid during a shutdown or faced reduced hours because of their employers’ closure or reduced gross receipts are qualified wages. For employers that had an average number of full-time employees in 2019 of 100 or fewer, in addition to wages paid during a shutdown or reduced hours, qualified wages also include amounts paid to all employees due to reduced gross receipts.
Qualified wages are capped at the first $10,000 in wages paid to an eligible employee for all quarters in 2020.
The Employee Retention Credit not only received a retro-active enhancement, but also was extended through June 30, 2021, with several changes that can increase the amount of credit mold builders can receive:
- The 2021 Employee Retention Credit increased from 50% to 70% of eligible wages.
- The limitation per employee is raised to $10,000 per quarter, up from $10,000 annually, with a maximum of $14,000 of credit per employee in 2021 ($10,000 x 70% x 2 quarters).
- The average number of full-time employees’ threshold increases from 100 average number of full-time employees to 500 average number of full-time employees. Now, if the quarter qualifies due to the drop in gross receipts, employers with less than 500 average-number of full-time employees can claim the credit on all qualifying wages, even if paid to work.
- Any quarter qualifies if gross receipts are less than 80% of the 2019 comparable quarter, a change from the 50% drop required for a quarter to qualify in tax year 2020.
- Mold builders can satisfy the 20% drop by looking to the previous quarter (if a mold builder’s 4th quarter of 2020 gross receipts drop by more than 20% of the 4th quarter of 2019 gross receipts, then the 1st quarter of 2021 is an eligible quarter).
Claiming the Employee Retention Credit also can have an impact on other tax incentives important to tool builders, such as the R&D tax credit and work opportunity tax credit. Eligible wages for these two federal tax credits must be reduced by any wages used to calculate the Employee Retention Credit.
Energy-Efficient Building Improvements
The ACT makes permanent the §179D Energy Efficient Buildings Deduction. Mold shops building new plants, or adding onto or renovating their existing plants, should consider whether they may claim accelerated depreciation related to energy-efficient designs or improvements.
IRC §179D provides a deduction of up to $1.80 per sq. ft. for energy-efficient commercial building property, once placed in service. This deduction will increase annually, starting in 2021, to account for inflation. The accelerated depreciation of $1.80 per sq. ft. is available for those meeting all three energy-efficient component improvements – lighting, HVAC and building envelope – with partial deductions available for taxpayers not meeting the energy-efficient standards on all three components.
In addition, the energy efficiency criteria have become a more stringent version of the ASHRAE Standard 90.1. Previously, energy cost savings were determined utilizing a reference building under ASHRAE Standard 90.1-2007. With the new law, taxpayers will utilize the ASHRAE standard in effect two years prior to the date of construction.
The Act makes business meals 100% deductible for tax years 2021 and 2022. The provision allows for mold builders to deduct the full amount of any business meals, including beverages, that are provided at a restaurant.
These changes can have a significant impact on mold builders’ overall federal tax liabilities. The changes made to the Employee Retention Credit, along with these other provisions, can be a significant increase to cash flow and after-tax profits.
Michael J. Devereux II, CPA, CMP, is a partner and director of manufacturing, distribution & plastics industry services for Mueller Prost. Devereux’s primary focus is on tax incentives and succession planning for the manufacturing sector. He regularly speaks at manufacturing conferences around the country on tax issues facing the manufacturing industry. For more information, visit www.muellerprost.com.