Colorado Withholding Certificate DR 0004

Form DR 0004 is the new Colorado withholding certificate that is optional for employees to complete starting in 2022. It is not meant to replace form W-4 for Colorado withholding, but is meant to help employees in a few specific situations who may want to fine-tune their Colorado withholding. If an employee asks about adjusting their withholding, the employer is required to provide form DR 0004 to them.

If an employee completes form DR 0004, the employer is required to calculate their Colorado withholding using the amounts entered on that DR 0004, as prescribed in the DR 1098 worksheet.

If an employee does not complete form DR 0004, the employer is required to calculate their Colorado withholding using the amounts prescribed in the DR 1098 worksheet based on their IRS form W-4.

An employee may want to complete form DR 0004 if:

  • They earn most of their income from one job
  • They expect significant income from sources that will not have withholding
  • They expect to claim federal itemized deductions
  • They expect to claim the new Colorado child tax credit
  • An employee may want to complete a new Federal W-4 and/or Colorado DR 0004 if:
  • Withholding certificate was last updated 3 or more years ago
  • Wages or other income changes significantly
  • Number of jobs changes
  • Filing status changes (single, married filing joint, etc.)
  • Federal deductions change significantly
Posted in Colorado, Tips

Employee Retention Credit Q3 and Q4 2021

In spite of proposed legislation to remove the Q4 Employee Retention Credit, the IRS issued Notice 2021-49 providing guidance on claiming the ERC in Q3 and Q4 of 2021.

  • The Employee Retention Credit follows essentially the same rules in Q3 and Q4 of 2021 as set forth for Q1 and Q2.
  • Spousal ownership must be considered for purposes of attribution when considering owner wages for the ERC.
  • The 2020 wage expense must be reduced by the amount of any 2020 ERC credit claimed, regardless of the period the credit is claimed.
  • Tips can be considered qualified wages for purposes of the ERC.
  • The IRS provided guidance on recovery startup businesses and severely distressed businesses for Q3 and Q4 of 2021.

On August 4, 2021, the IRS issued Notice 2021-49 to provide additional guidance on claiming the Employee Retention Credit (ERC) in Q3 and Q4, as well as to provide some clarity for very frequently asked questions related to all periods of eligibility.

As in past Notices related to the ERC, the IRS clarified that many of the rules of eligibility remain unchanged for Q3 and Q4. The focus of this Notice was to clarify issues related to the expanded definition of an eligible employer established by the American Rescue Plan and also answer other questions that have arisen over the course of the past year.

In Q3 and Q4, the expanded definition of an eligible employer includes recovery startup businesses and severely distressed organizations.

Essentially, if an organization began after February 15, 2020 and in the preceding three years had less than $1 million in gross receipts, the organization is a recovery startup business and may claim the credit in Q3 and Q4 for up to $50,000 each — regardless of whether it meets the other tests of partial shutdown or significant decline in gross receipts.

If, however, the organization qualifies under those other tests, then it will not be subject to the $50,000 limitation in credit amount.

Large employers, those with over 500 full-time employees in 2019, are generally limited to claiming the ERC for wages paid to employees not performing services. If the employer qualifies as a severely financially distressed employer, however, then all wages paid to employees are eligible to be qualified wages, similar to a small employer. A severely financially distressed employer is a business who has experienced a more than 90% decline in current quarter gross receipts compared to the same quarter in 2019. The lookback election may be utilized to establish eligibility based on the prior quarter’s gross receipts.

The Notice also indicates that tips can be considered as eligible wages for purposes of the ERC as long as they are Medicare wages. In addition, using the same tip wages for both the tip credit and the ERC is allowed.

Additionally, the Notice memorialized some key considerations that were simply understood by interpreting the Internal Revenue Code and associated regulations. The first area that can no longer be argued is that indirect, or attributed ownership, must be considered when determining whether an owner’s wages may be included for purposes of claiming the credit. As a result, anytime an owner or owner’s spouse bears an identified relationship to someone who is considered a greater than 50%, whether independently or by attribution, they may not include their own wages in calculating the credit.

In somewhat disappointing news for many taxpayers who have already filed their 2020 return, the IRS guidance is that if the credit is claimed for 2020 wages, the 2020 wage expense must be reduced by the credit amount, even if this means amending the income tax return. This will also be applicable to 2021 if a taxpayer chooses to amend their payroll tax return to claim the 2021 ERC in a future year.

The Notice further clarified that the rules related to using a prior quarter to qualify for the current quarter will remain in place for Q3 and Q4 of 2021. Unless the Infrastructure Act is signed into law changing the availability of the credit for Q4 of 2021, current guidance exists that a two-quarter decline in gross receipts may actually yield four quarters of available credit in 2021.

The final key point in the Notice is that it generally reinforces the “no double dipping” rule as it relates to using payroll wages for different economic relief provisions.

Because the IRS continues to have five years to examine the ERC claims on the payroll tax returns, it is imperative to document your organization’s eligibility position and calculations contemporaneously with claiming the credit. This can help protect against questions arising five years in the future when data may no longer be available.

Posted in Uncategorized

Child and Other Dependent Tax Credits

If you have a child or someone you support almost entirely, there’s a good chance you’re eligible for one of these tax breaks.

The Child Tax Credit is a tax break that can benefit people with children under the age of 17. You can get up to $2,000 for each child you claim.

The Other Dependent Tax Credit is a new $500 tax break for people with dependents who are 17 or older, not necessarily related to them, or have an Individual Taxpayer Identification Number (ITIN) instead of a Social Security number. You’ll get $500 for each dependent you claim.

One thing to note about the Child Tax Credit – it can come with a “refundable credit” depending on your income and how many children you claim.

Here’s an example of how refundable credits work:

Mary owes $1,675 in taxes and received a Child Tax Credit of $2,000. The tax she owed was reduced to zero, and the remaining $325 was converted to another credit called the Additional Child Tax Credit, which was refunded to her. If Mary didn’t qualify for the Additional Child Tax Credit, the remaining $325 would have been lost.

The Credit for Other Dependents doesn’t have a refundable portion like the Child Tax Credit.

Posted in Taxes, Tips

Investor Agreements

Investor agreements generally cover any transaction that gives other people or businesses ownership interest in the company.  This could be of interest now or into the future and could be in exchange for anything of value such as cash, labor, an asset, and more.

Some common types of investors agreements are:

  • Stock Purchase Agreement
  • Royalty, Commission, or Percent of Revenue
  • Convertible Debt Agreement
  • Deferred Compensation

Stock Purchase Agreement

A stock purchase agreement is one of the more simple options for investment agreements. Generally, money is given in exchange for stock, much like you would do when purchasing stock from the stock market, but because the company is not publicly traded, the paperwork is more complicated.

If you are considering this type of strategy, you should meet with an attorney who understands not only the transactional and drafting side but the actual real world business situations that apply.

Royalty, Commission, or Percent of Revenue

In a lot of situations, investors only want to own the rights to profits of the company or product of the company. For an investor to be entitled to such distributions, a royalty agreement, also known as Commission Agreements or Profits Interests, can be created.

In this type of agreement, an investor would give money up in exchange for a certain percentage or dollar amount that vests over a period of time.

An example would be in Jane wants to give $50,000 to ABC (company) in exchange for $10 per widget sold by ABC for the first 5 years. Jane is assuming that by giving the company $50,000, they will sell more than enough widgets to make her investment plus more back.

In this situation, she doesn’t own any part of the company but rather has a contract to receive a portion of each widget sold by the business. It should be noted that there are no rules stating a limitation on the number of years or percentage of profits/ amount of interest per product the investor can take.

Thus, Jane above could take 99% of profits forever if the owner agrees to it.

Convertible Debt Agreement

Convertible debt allows an investor to loan money to a company and then later either be repaid or convert the debt into their own ownership interest of the company.

The terms of the contract will determine whether or not the debt is converted to ownership or gets repaid.

An example would be if Dexter gives $100,000 to ABC (company) in exchange for a convertible debt note that will either be repaid in 1 year with 50% gain or converted into 100,000 shares of the company’s stock.

Deferred Compensation

Deferred compensation results, not in ownership, but rather allows the recipient to ownership through one of the other types of agreements. An example would be employees who agree to receive bonuses or larger salaries later for the work they put in now.

Basically, the investment of time for them is an investment for the sake of the company which will vest later through a deferred compensation agreement.

The different investment agreements can be combined to satisfy the requirements of the specific situation between the investor and the owner of the company.

If you are considering taking someone else’s money or investing money in a company, you should see a CPA and an attorney to help advise you through the process.

Posted in Tips

Looking For an Investor?

Every deal is different, but here are some basics.

There are three main ways investors can provide funding to your small business: equity investment, debt investment, or convertible debt.

With equity investment, an investor will buy an ownership stake in your business. For instance, an investor might provide $100,000 in cash for a 10% ownership stake, meaning they will receive 10% of whatever profits you make down the road.

Debt investment is different in that an investor loans your venture money in exchange for eventual repayment of the loan, plus interest income. Debt capital is most often provided either in the form of direct loans with regular amortization (reduction of interest first, then principal) or the purchase of bonds issued by the business, which provide semi-annual interest payments mailed to the bondholder.  Debt investment is considered less risky for the investor. If your venture fails, debt investors recoup their investment before equity investors. However, debt investors also have no ownership stake, meaning if your business is wildly successful, they won’t see the same escalating profits that an equity investor will.

The third option, convertible debt, is a hybrid of debt and equity investment. Your business borrows money from investors under the agreement that the loan will either be repaid or turned into an ownership share at a later point. This conversion typically takes place after an additional round of funding or once your company reaches a certain valuation.

Posted in Tips

IRS offers further guidance on ERC, and Congress may end it

The Internal Revenue Service and the Treasury Department released guidance for employers who pay qualified wages after June 30, 2021, and before January 1, 2022, and Congress considered a proposal to end the tax break next month.

The employee retention credit was included last year as part of the CARES Act by offering tax credits to encourage more businesses to retain employees at the height of the COVID-19 pandemic in March 2020. However, the Paycheck Protection Program, with forgivable loans from the Small Business Administration, proved to be a more popular way for businesses to get help from the federal government. Initially, businesses couldn’t take advantage of both programs, but later legislation passed last December allowed them to use both the PPP and the ERC.

 Under the American Rescue Plan Act, the employee retention credit was extended until the end of the year, but the bipartisan infrastructure bill that the Senate is taking up this week proposes to end the tax credit in September. Lawmakers contend the program hasn’t been used by enough businesses to justify keeping it for the rest of the year.

 The new notice explains changes made by the American Rescue Plan Act of 2021 to the employee retention credit that are applicable to the third and fourth quarters of 2021.  It also explains that the employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant.

Form 941, the employer’s quarterly federal tax return, is one way to claim the credit whereby employers can report their total qualified wages and the related health insurance costs for each quarter on a Form 941 for the period in question.

The IRS seems to have been holding up many of the tax credit claims due to the backlog at the resource-constrained agency.

Frequently asked questions and updates on the employee retention credit, tax credits for required paid leave and other items can be found on the coronavirus page of IRS.gov.

Posted in IRS

Gross Receipt Exclusions for ERC

A taxpayer is permitted to exclude certain items from “gross receipts” for determining eligibility to claim the ERC under the CARES Act and other recent relief legislation including:

  •  amount of the forgiveness of a PPP loan
  • grant from the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act
  • restaurant revitalization grant under the American Rescue Plan Act
Posted in Tips

Colorado Workers’ Compensation Insurance

All businesses with employees operating in Colorado are required to have workers’ compensation insurance, regardless of the number of employees, whether the employees only work part-time, or if they are members of the same family. All workers’ compensation insurance in Colorado is sold by private insurance carriers; there is no state fund. Employers should contact their insurance agent to seek quotes and get coverage.

 

Posted in Colorado, Tips

SBA Defers EIDL Payments Until 2022

Small businesses that received a COVID-19 Economic Injury Disaster Loan (EIDL) won’t have to start making payments on the loan until 2022. The SBA announced extended deferment periods for all of its disaster loans, including the COVID-19 EIDL loans. The deferral details differ depending on the calendar year the disaster loan was made.

  • For all SBA disaster loans made in 2020, the first payment due date is 24 months from the date of the note.
  • For all SBA disaster loans made in 2021, the first payment due date is 18 months from the date of the note.

The SBA also granted an additional 12-month deferment of principal and interest payments for existing disaster loans approved prior to 2020 that were in regular servicing status as of March 1, 2020. 

Borrowers may voluntarily make payments during the deferment, as interest will continue to accrue on the outstanding loan balance during this period.

The SBA has approved in excess of $200 billion in COVID-19 EIDL loans to more than 3.7 million small businesses and not-for-profit organizations. The loans have a 30-year maturity with interest rates of 3.75% for small businesses, including sole proprietors and independent contractors, and 2.75% for not-for-profits.

 

Posted in Uncategorized

Restaurant Revitalization Fund Closed

The U.S. Small Business Administration (SBA) announced the closure of the Restaurant Revitalization Fund (RRF) after awarding the program to more than 100,000 restaurants, bars, and other businesses that provide on-site food and drink.

Demand for the funds far outstripped the supply, with restaurants and other eligible businesses submitting more than 278,000 applications seeking more than $72.2 billion in funding, as of June 30, the SBA said in a news release issued July 2.

Most of those applications were submitted in the first few days after the RRF application window opened May 3. Less than 10 days after the RRF’s launch, the SBA reported that it had received requests for more than twice the $28.6 billion Congress provided for grants.

The program was to provide the vast majority of its funding to eligible businesses owned by women, veterans, and socially and economically disadvantaged individuals. The priority policy was challenged with lawsuits alleging that the policy discriminated against white men. Several judges ruled in favor of those claims, leading the SBA to stop processing applications from members of prioritized groups and to rescind some approvals already made. So while more than 60% of all applications were denied funding, thousands of restaurant owners had the SBA approve their applications only to be notified that they would not receive the funding.

The average size of grant awards was $283,000.

Under the RRF, food and beverage providers could apply for grants equal to their pandemic-related revenue loss, up to $10 million per business and no more than $5 million per physical location. The funds could be used for eligible expenses, such as payroll and rent.

The SBA said it would keep the RRF application platform open until July 14 to allow applicants to check their status, address payment corrections, or ask questions.

Posted in Uncategorized