C Corporation, S Corporation Or Partnership? Which Entity Makes The Most Sense For Your Business?

The choice of entity is among the most important decisions facing taxpayers when starting a business or investment activity. The choice of tax entity generally includes a C corporation, S corporation or partnership, each having its own advantages and disadvantages that must be evaluated in terms of how the entity’s tax and legal characteristics align with the goals of the business and its investors.

Existing businesses should also evaluate their choice of entity—especially now, in light of President Biden’s proposals to increase the tax burden on corporations and high-wealth individuals. Depending on the circumstances, it may make sense to consider converting an existing entity to a different type of tax entity or structure in order for businesses and their owners to better manage their overall tax obligations. An analysis should be performed to determine the amount of any immediate tax cost that would be incurred upon changing entity classification compared to the future tax benefits of conversion.

Choice of entity decisions need to take into account many tax and legal considerations based on the taxpayer’s specific facts and circumstances, as well as business and investment goals. Taxpayers should keep in mind that current tax proposals would raise tax rates and make other changes to the federal income tax system for corporations and high-wealth individuals. These proposals should be monitored, and their potential effects should be considered when evaluating the short and long-term benefits of a particular entity choice.

Tax considerations when choosing an entity

There any many tax considerations that play into the choice of entity decision, some of which are discussed below. All of the considerations should be analyzed together with other important factors, such as whether investors intend to distribute or reinvest available cash, income projections including whether the business anticipates upfront losses, the expected rate of return on investment, the time horizon for exit and available exit strategies.

Effective tax rate on earnings

The rate at which businesses pay tax on their earnings impacts after-tax cash flow and return on investment. Further, whether the business distributes or reinvests its available cash affects enterprise value.

C corporations pay tax on their earnings at the corporate level at a 21% rate, and earnings distributed as dividends are subject to tax again at the shareholder level. This double taxation amounts to an overall effective tax rate on distributed earnings of around 40%, as opposed to a single 21% rate on earnings that are reinvested in the business. President Biden’s tax proposals would increase the corporate tax rate to 28%, which would increase the overall rate on distributed earnings to 45%—or even higher for individuals that would, under his tax plan, be subject to ordinary income tax rates on dividends.

Passthrough entities (S corporations and partnerships), on the other hand, do not pay entity level tax. Instead, their earnings are reported by and taxed at the rates of their owners, regardless of whether the earnings are distributed. For individual owners, this means a top marginal tax rate of 37% on passthrough earnings, or 29.6% if the qualified business income deduction applies. President Biden’s plan would increase an individual owner’s top rate to 39.6% and phase out the qualified business income deduction at income levels exceeding $400,000.

Although, based on the difference in tax rates, C corporations that reinvest their earnings may be able to generate greater after-tax cash flow than a passthrough entity, the analysis should not end there. A C corporation shareholder may pay more tax upon disposing of its investment than a passthrough owner, especially in cases where no viable tax planning strategy exists (see “Exit Strategies,” below). In addition, C corporations that do not pay dividends may be subject to the accumulated earnings tax and the personal holding company tax.

Exit strategies

The amount of tax owed on exit plays a very important role in the choice of entity decision. Due to the difference in the build-up of tax basis in investments in C corporations versus investments in passthrough entities, C corporation shareholders will generally have a larger gain on the disposition of their investment than passthrough entity owners. The tax on disposition will depend on the owners’ tax rates and the amount of ordinary income recapture, among other factors.

There are certain exit strategies that may be used to defer the tax on gains from dispositions of investments. These strategies include:

  • Reinvesting the gains in qualified opportunity zones or qualified opportunity funds;
  • Selling the shares of a C corporation to an employee stock ownership plan; and
  • Transferring the investment through estate planning. Note that under President Biden’s tax proposals, the tax basis step-up of property at death would be limited.

In addition, non-corporate shareholders may be permitted to exclude part or all of the gain from the sale or exchange of “qualified small business stock” (QSBS) of C corporations that has been held for at least five years. The overall gain exclusion per issuer is limited to the greater of $10 million or 10 times the aggregate adjusted basis of the disposed shares. Each partner in a partnership and each shareholder in an S corporation is entitled to their own $10 million limitation on dispositions of QSBS by the partnership or the S corporation.

Changes to entity classification

Converting from one type of entity to another requires thoughtful consideration, analysis, and planning, and certain entity types may provide more flexibility than others for changing entity status. Converting to a different type of entity may trigger immediate tax consequences, which must be measured relative to any potential future tax benefits. Examples of possible tax consequences include taxable liquidations, tax on built-in gains, gain on liabilities in excess of tax basis, deferred revenue recognition, and changes in accounting methods.

Other tax considerations

The following are among the many other tax issues to consider when choosing an entity, the tax treatment for which can vary by entity type:


  • International tax rules, such as taxation of controlled foreign corporations, foreign tax credit limitations, and consequences of repatriation tax deferral;
  • Deductibility of upfront net operating losses;
  • Self-employment taxes (note that the social security base would increase under President Biden’s tax proposals);
  • State income taxes, which vary by state;
  • Estate and inheritance tax consequences for individual owners and their families; and
  • Tax reporting requirements, which in certain cases can be less onerous for C corporations as opposed to passthrough entities.

Non-tax considerations

While the choice of entity is often a tax driven decision, there are also many non-tax factors to consider, such as:

  • Liability protection for owners and management;
  • Flexibility for making day-to-day management decisions and for binding the organization;
  • Access to capital;
  • Transferability of ownership interests; and
  • Available exit strategies and succession planning.

How We Can Help

We can help you better understand the requirements and operational differences between C corporations, S corporations and partnerships, as well as model the immediate and long-term costs and benefits of converting, or not converting, from your current entity status or form.

IRA Issues Additional Guidance On The Employee Retention Credit

On August 4, 2021, the IRS issued Notice 2021-49, which provides long overdue guidance for employers that have taken or are considering taking the employee retention credit (ERC) as initially made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and modified and extended under the American Rescue Plan Act of 2021 (ARPA). Generally, the maximum ERC for 2020 is $5,000 per employee, while the maximum for 2021 is $28,000 per employee.

The ARPA extended the ERC for wages paid after June 30, 2021 and before January 1, 2022. The IRS previously issued nearly 100 frequently asked questions (FAQs) and two notices (Notice 2021-20 and 2021-23) in an attempt to provide guidance on the ERC. However, these FAQs and notices fail to address some important questions, such as whether cash tips received by employees and wages paid to an owner with more than 50% ownership of a company are qualified wages for the ERC. Notice 2021-49 addresses this issue and clarifies other issues related to the mechanics of the credit. The notice also clarifies and provides additional guidance for several other important provisions of the ERC as modified by the ARPA.

In addition, on August 10, 2021, the IRS issued Revenue Procedure 2021-33, which provides a safe harbor for employers to exclude (1) the amount of the forgiveness of a Paycheck Protection Program (PPP) loan under the Small Business Act, (2) a shuttered venue operator grant under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), and (3) a restaurant revitalization grant under the ARPA from “gross receipts” for purposes of determining eligibility to claim the ERC.


The CARES Act provides for a refundable tax credit for eligible employers that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020 and before January 1, 2021.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) amended and made technical changes to the ERC for qualified wages paid after March 12, 2020 and before January 1, 2021, primarily expanding eligibility for certain employers to claim the credit. The Relief Act also extended the ERC to qualified wages paid after December 31, 2020 and before July 1, 2021 and modified the calculation of the credit amount for qualified wages paid during that time. The Relief Act permitted employers to qualify for the ERC if they experienced revenue declines of 20% (previously 50%), and it changed the definition of large employer from an employer that averaged 100 employees to one that averages 500 employees, enabling businesses with 500 or fewer employees to take the ERC for all wages paid, rather than only for wage payments for which no services were provided. The Relief Act also allowed employers that received PPP loans to also take the ERC, retroactive to March 2020.

The following summarizes Revenue Procedure 2021-33 and some of the most significant issues addressed in Notice 2021-49.

Safe Harbor for Gross Receipts – Revenue Procedure 2021-33

Under Internal Revenue Code Section 448(c) for for-profit entities and Section 6033 for tax-exempt organizations, PPP loan forgiveness, shuttered venue operator grants and restaurant revitalization grants are not included in employers’ gross income but are included in gross receipts. Revenue Procedure 2021-33 provides a safe harbor for employers to exclude those amounts from gross receipts solely for determining ERC eligibility. The IRS said that Congress intended for employers to be able to participate in these relief programs and also claim the ERC. Therefore, including amounts provided under those relief programs in gross receipts for determining eligibility for the ERC would be inconsistent with Congressional intent.

Under the revenue procedure, an employer is required to consistently apply the safe harbor by (1) excluding the amount of the forgiveness of any PPP loan and the amount of any shuttered venue operator grant and restaurant revitalization grant from its gross receipts for all relevant quarters in determining eligibility to claim the ERC, and (2) applying the safe harbor to all employers treated as a single employer under the ERC aggregation rules.

Employers elect to use the new safe harbor by excluding amounts under those relief programs when claiming the ERC on Form 941, Employer’s Quarterly Federal Payroll Tax Form (or 941-X if filing an amended return). In other words, a separate “election” form is not needed. If an employer revokes its safe harbor election, it must adjust all employment tax returns that are affected by the revocation. Employers must retain in their records support for claiming the ERC, including their use of this new safe harbor for determining gross receipts.

Clarifications to the ERC Under Notice 2021-49

Applicable Employment Taxes

Notice 2021-49 confirms that, for the third and fourth quarters of 2021, eligible employers can claim the ERC against the employer’s share of Medicare tax (or the portion of Tier 1 tax under the Railroad Retirement Tax Act) after these taxes are reduced by any credits allowed under the ARPA for qualified sick leave wages and qualified family leave wages, with any excess refunded.

Recovery Startup Business

An ERC of up to $50,000 per quarter is available to “recovery startup businesses.” A recovery startup business is an employer that began carrying on a trade or business after February 15, 2020. The notice clarifies that an employer is not considered to have begun carrying on a trade or business until such time as the business has begun to function as a going concern and performed those activities for which it was organized.

The notice also states that a not-for-profit organization can be treated as an eligible employer due to being a recovery startup business based on all of its operations and average annual gross receipts. For ERC purposes, a not-for-profit organization is deemed to be a “trade or business.”

Further, a recovery startup business that has 500 or fewer full-time employees may treat all wages paid with respect to an employee during the quarter as “qualified wages.”

Finally, the aggregation rules apply when determining whether an employer is a recovery startup business, as well as to the $50,000 limitation on the credit. Thus, a recovery startup business would need to apply IRC Sections 52(a) (for related corporations), 52(b) (for related non-corporate entities, such as partnerships, trusts, etc.) and 414(m) (affiliated service group rules).

Qualified Wages

Qualified wages generally are determined differently based on whether the employer is a small or large employer, in that qualified wages for large employers are limited to wages paid to an employee for time the employee is not providing services due to a full or partial suspension of business operations or a decline in the employer’s gross receipts.

The notice clarifies the rule for qualified wages for a “severely financially distressed employer” (SFDE). An SFDE is an employer that, in the third or fourth quarter of 2021, has gross receipts of less than 10% of its gross receipts for the same quarter in 2019. For SFDEs, qualified wages are any wages paid in the quarter, regardless of the size of the employer. This is different from the standard ERC rule, which limits qualified wages for large employers to wages paid while the employee is not performing services.

Full-Time Employees Versus Full-Time Equivalents

Confusion abounds about the definition of “full-time employee” and whether “full-time equivalents” are to be included when determining whether an employer eligible for the ERC is a large or small employer. Notice 2021-49 clarifies that eligible employers are not required to include full-time equivalents when determining the average number of full-time employees. The notice also confirms that wages paid to an employee who is not a full-time employee may be treated as qualified wages if all other requirements are met.

Treatment of Tips and FICA Tip Credit

Considerable confusion has arisen as to whether tips count as qualified wages for the ERC, since customers (not the employer) generally pay the employee the tips. Notice 2021-49 clarifies that cash tips are qualified wages if all other requirements to treat the amounts as qualified wages are met. The notice also confirms that eligible employers are not prevented from receiving both the ERC and the FICA tip tax credit on the same wages.

Timing of Qualified Wages Deduction Disallowance

The IRS has provided guidance on the timing of the disallowance for wage deductions on the employer’s federal tax return relating to qualified wages claimed for the ERC. The IRS previously confirmed that employers must reduce the deduction claimed for employee wages on their federal tax return by the amount of qualified wages claimed under the ERC. Notice 2021-49 confirms that this reduction in the deduction amount must occur in the same tax year the ERC is claimed. Accordingly, if an employer files a claim for the credit for a prior tax year, it must also file an amended federal tax return to reduce the amount of the wage deduction claimed in the corresponding period.

Related Individuals

The IRS previously stated that wages paid to related individuals, as defined by IRC Section 51(i)(1), are not taken into account for ERC purposes. Notice 2021-49 clarifies that, by applying the ownership attribution rules, the definition of a “related individual” includes a majority owner (i.e., a person with more than 50% ownership) of an entity if the majority owner has a brother or sister (whether by whole or half-blood), ancestor or lineal descendant. The spouse of a majority owner is also a related individual for purposes of the ERC if the majority owner has a family member who is a brother or sister (whether by whole or half-blood), ancestor or lineal descendant.


Wages paid to a sole owner or majority owner will rarely qualify for the ERC, according to the guidance provided in Notice 2021-49, because of the way the ownership attribution rules are applied. The owner must have no family other than a spouse in order to treat his or her wages as qualified wages. Members of Congress have voiced their disagreement with this guidance. It is possible the IRS will revise their position regarding related individuals in future guidance.

Alternative Quarter Election for Calendar Quarters in 2021

The Treasury Department and the IRS have been asked whether an eligible employer must consistently use the alternative quarter election once it has been made. The Notice 2021-49 confirms that employers are not required to use the alternative quarter election consistently. For example, an employer may be an eligible employer due to a decline in gross receipts for the second quarter of 2021 using the standard quarter comparison; the employer could then use the alternative quarter election to be an eligible employer for the third quarter of 2021.

Gross Receipts Safe Harbor in Notice 2021-20

Notice 2021-49 confirms that the safe harbor rule that allows an employer to include the gross receipts of an acquired business that it did not own during a calendar quarter in 2019 continues to apply to employers that acquire businesses in 2021 for purposes of measuring whether there was a decline in gross receipts. In addition, an employer that came into existence in 2020 (e.g., the third quarter of 2020) should use that quarter to determine whether it experienced a significant decline in gross receipts for the first three quarters in 2021 and should determine whether it experienced a significant decline in gross receipts by comparing the fourth quarter of 2020 to the fourth quarter of 2021.


Guidance provided in Notice 2021-49 has created several opportunities for certain employers to obtain additional ERCs. For example, some restaurant employers may not have included cash tips as qualified wages for their previous ERC claims. Under the notice, those employers can now file amended returns to claim additional ERCs or employers who did not count amounts paid to full-time equivalent employees as qualified wages for the ERC may now do so. Revenue Procedure 2021-33 has also created an opportunity for certain employers that received PPP loan forgiveness, shuttered venue operator grant or restaurant revitalization grant to obtain additional ERC. Employers should review the contents of the notice and the revenue procedure with their tax advisor to determine if additional ERCs may be available, and if so, employers may file Form 941-X to request the additional credit or refund.

Employers should also determine if they may have claimed more ERC than they were entitled to based on the guidance in Notice 2021-49. For example, some small business owners may not have applied the ownership attribution rules correctly. If necessary, Form 941-X may be filed to correct the error. According to the notice, the IRS will not assess penalties for failure to timely pay or deposit tax if the taxpayer can show reasonable cause and not willful neglect for the failure.

H.R. 3684, the Infrastructure Investment and Jobs Act, proposes to end the ERC on September 30, 2021 rather than December 31 (but recovery startup businesses would remain eligible through year-end). That provision may or may not be included in the infrastructure bill that is eventually signed into law (which is expected in the next month or so).

IRS Releases Procedural Guidance On Changing Ads Method Of Accounting For Electing Real Property Trade Or Business

On June 17, 2021, the IRS released an advance copy of Rev. Proc. 2021-28, providing guidance for taxpayers on how to change their method of computing depreciation to a 30-year recovery period under the alternative depreciation system (ADS) for certain residential rental property placed in service before 2018 and held by an electing real property trade or business (RPTOB). The IRS also released Rev. Proc. 2021-29, which permits an eligible partnership to file an amended Form 1065, U.S. Return of Partnership Income, as an alternative to filing an administrative adjustment request (AAR) or a Form 3115 to change to this depreciation method. Rev. Proc. 2021-28 modifies guidance for automatic accounting method changes previously issued under Rev. Proc. 2019-08 and Rev. Proc. 2019-43.

Rev. Proc. 2021-28 is effective June 17, 2021. Rev. Proc. 2021-29 applies to partnership taxable years that began in 2018, 2019, or 2020.

The revenue procedures expand the scope of the relevant automatic accounting method change procedures to apply to taxpayers that made a RPTOB election in 2019 as well as taxpayers that made the RPTOB election in 2018. The revenue procedures also permit taxpayers to make an accounting method change by filing Form 3115 or by filing an amended return, and permit eligible partnerships to file amended Forms 1065 in lieu of filing an AAR.


The 2017 Tax Cuts and Jobs Act (TCJA) permits qualified taxpayers to make a RPTOB election in order to be exempt from the interest expense limitation under Section 163(j) of the Internal Revenue Code. As an offset, Section 168(g)(8) requires electing RPTOBs to depreciate nonresidential real property, residential rental property and qualified improvement property under the ADS. Prior to the TCJA, the recovery period under the ADS for residential rental property was 40 years. The TCJA modified this recovery period to 30 years for property placed in service after December 31, 2017. An electing RPTOB that owned residential rental property placed in service prior to December 31, 2017 was required to follow the change in use rules under Section 168(i)(5) and Reg. §1.168(i)-4(d) and depreciate such property over 40 years.

The Consolidated Appropriations Act, 2021 (CCA 2021), enacted on December 27, 2020, retroactively expanded the 30-year recovery period for RPTOB taxpayers to include certain residential rental property placed in service before January 1, 2018. This change makes the recovery period 30 years for residential rental property held by an electing RPTOB, regardless of when the property was placed in service.

Rev. Proc. 2019-08 provides guidance for an electing RPTOB on changing the depreciation method for its existing property (property placed in service before its RPTOB election year) to the ADS in the year it makes the RPTOB election. Rev. Proc. 2019-08 also provides that if an electing RPTOB fails to change its existing property to the required ADS for its election year or the subsequent taxable year, it will be considered to have adopted an impermissible method of accounting for that property and must then change the accounting method to a permissible method. If a taxpayer is eligible, it may make the method change by filing Form 3115 using designated automatic accounting method change number (DCN) 88, as provided under Section 6.05 of Rev. Proc. 2019-43. DCN 88 provides an automatic change in method of accounting for depreciation due to a change in the use of MACRS property.


New Guidance

Rev. Proc. 2021-28 applies to residential rental property meeting all the following criteria:

  • The property was placed in service by the taxpayer before January 1, 2018, or was placed in service by the transferor of the residential rental property before January 1, 2018 if the acquisition of such property by the transferee-taxpayer is subject to Section 168(i)(7) (this section provides “step-in-the shoes” treatment for certain depreciable property in certain types of transactions—Section 3.04 of Rev. Proc. 2021-28 provides some examples of the application of this rule);
  • The property is held by an electing RPTOB; and
  • The property was not subject to the ADS depreciation method prior to January 1, 2018 in the hands of the taxpayer or the transferor if the acquisition of such property by the transferee-taxpayer is subject to Section 168(i)(7).

Rev. Proc. 2021-28 applies only to RPTOB elections made on or before December 27, 2020 (the date of enactment of the CCA 2021). It does not apply to a taxpayer making a late RPTOB election under Section 4 of Rev. Proc. 2020-22, or a taxpayer withdrawing a RPTOB election under Section 5 of Rev. Proc. 2020-22.

Rev. Proc. 2021-28 permits an electing RPTOB to file an amended federal income tax return or information return, an AAR under section 6227 or a Form 3115, Application for Change in Accounting Method, to change its method of computing depreciation for certain existing residential rental property to use a 30-year ADS recovery period. If such property is included in a general asset account (GAA), Rev. Proc. 2021-28 also provides procedures to change a taxpayer’s GAA treatment for such property.

Rev. Proc. 2021-28 expands the availability of the relevant automatic changes as follows:

  • Generally, a taxpayer that improperly depreciates an item on only one federal tax return has not established a tax accounting method and, to correct the error, would be required to amend that return. However, once the impermissible treatment has been used on two consecutive federal tax returns, the taxpayer has established the method of accounting and would need to change to a permissible method by filing Form 3115. Rev. Proc. 2021-28 expands the application of the automatic method changes under DCN 88 (see above) and DCN 87 (which applies to a change in GAA treatment due to a change in the use of MACRS property), to permit a taxpayer that has only filed one federal tax return using an impermissible method to change to a permissible method by filing Form 3115 instead of an amended return.
  • A taxpayer now may use the automatic changes even if the year of change is the final year of the taxpayer’s trade or business.
  • A taxpayer now may use the automatic changes even if it has made or requested a change for the same residential rental property during any of the five taxable years ending with the year of change for taxable years of change beginning in 2019, 2020, 2021, or 2022.
  • For property not included in a GAA, the taxpayer must own the property at the beginning of the year of change to use DCN 88.
  • A taxpayer may include changes for both DCN 87 and DCN 88, from permissible to permissible methods of accounting for depreciation under a GAA election under Section 6.12(3)(b) of Rev. Proc. 2019-43, and for dispositions of depreciable assets in a GAA, on the same Form 3115.

If a taxpayer filed an accounting method change under Section 6.01 (impermissible to permissible method of accounting for depreciation or amortization) of Rev. Proc. 2019-43 before June 17, 2021, and the change was made either on a modified cut-off basis (if the property is in a GAA) or with a Section 481(a) adjustment (if the property is not in a GAA), the taxpayer does not have to file another accounting method change under Rev. Proc. 2021-28.

Partnership Options in Lieu of Filing Form 3115

Rev. Proc. 2021-29 allows certain BBA partnerships (a partnership subject to the centralized partnership audit regime enacted as part of the Bipartisan Budget Act of 2015) to file amended returns for tax years beginning in 2018, 2019 or 2020 instead of AARs. By granting this relief, taxpayers may generally receive an acceleration of refunds related to depreciation changes. To take advantage of the relief, a partnership must have filed initial partnership returns and schedules before June 17, 2021 and the amended returns and Schedules K-1 must be filed on or before October 15, 2021. Rev. Proc. 2021-29 applies only if the BBA partnership and the residential rental property are within the scope of Rev. Proc. 2021-28. Note however, if a partnership is eligible to file an amended return under Rev. Proc. 2021-29, the partnership may also make changes on its amended return in addition to the retroactive ADS change for residential rental property.

Limited Time to File Amended Return or AAR

Rev. Proc. 2021-28 provides that a taxpayer, including a non-BBA partnership, may file an amended federal income tax return or amended Form 1065 for its RPTOB election year on or before April 15, 2022, but in no event later than the applicable period of limitations on assessment for the taxable year for which the amended return is being filed. A BBA partnership that does not file an amended return may file an AAR for the election year on or before April 15, 2022, but in no event later than the applicable period of limitations on making adjustments under Section 6235 for the reviewed year. Collateral adjustments to taxable income or to tax liability must be made on the amended return or amended Form 1065, or AAR, and such adjustments also must be made on original or amended federal income tax returns or Forms 1065, or AARs, for any affected succeeding taxable years. For residential rental property in a GAA, the taxpayer must make the adjustments in Reg. §1.168(i)-1(h)(2)(ii) and (iii)(B).

Note that this guidance does not provide any relief in the form of being able to make an automatic accounting method change for taxpayers that are, or plan on, performing a cost segregation study after making a RPTOB election. These taxpayers may not be able to file an automatic accounting method change to reclassify any personal property that has been treated as longer-lived property to shorter depreciation recovery periods due to the order in which the RPTOB election and cost segregation study are implemented and the current accounting method change guidance.

In short, if a taxpayer has changed the depreciation of personal property to the ADS when making the RPTOB election (because the assets have not been properly reviewed and classified as personal property instead of residential rental property or nonresidential real property), the taxpayer likely has made an unauthorized accounting method change for the personal property. If a taxpayer subsequently performs a cost segregation study to properly classify the personal property, the current procedural guidance will prohibit filing an automatic accounting method change within five years of a prior accounting method change (including an unauthorized change). A taxpayer that inadvertently misclassified some assets in its fixed asset system and does not discover the misclassification until after the RPTOB election is made may also be prohibited from filing an automatic accounting method change. A taxpayer may file a non-automatic accounting method change—which may only be requested for the current tax year, requires Form 3115 to be filed with and reviewed by the IRS national office and requires the payment of an IRS user fee. Alternatively, a taxpayer could wait for the five-year period to pass before filing an automatic accounting method change.

Planning For The Unknown: Preparing For Potential Tax Increases Under The Biden Administration

The Biden Administration’s American Families Plan and other tax proposals may complicate the tax landscape for high-income earners. Many of the proposals target taxpayers earning more than $400,000 per year.

The American Families Plan proposals include:

  • Increasing the top marginal income tax rate to 39.6% for households making over $400,000;
  • Taxing long-term capital gains at 39.6% for households making over $1 million;
  • Reducing the step-up in basis for gains in excess of $1 million at death and taxing the gains if the property is not donated to charity;
  • Eliminating carried interest and taxing that income at ordinary income rates;
  • Permanently extending excess business loss limitation rules; and
  • Applying the 3.8% net investment income tax consistently for those making over $400,000.

To add significance to these proposals, President Biden also proposes earmarking $80 billion for IRS audit efforts that will target high-income individuals who have engaged in tax avoidance or other tactics to reduce their taxable income. The additional funding will be accompanied by increased IRS enforcement powers.

In addition, President Biden put forth the following proposals during his election campaign:

  • Phasing out the 20% qualified business income tax deduction;
  • Limiting the benefit of itemized deductions to 28% of their value and restoring the “Pease limitation” cap on itemized deductions;
  • Reducing the lifetime estate tax exemption from $11.7 million to $3.5 million (i.e., back to 2009 levels) and increasing the estate and gift tax rate from 40% to 45%; and
  • Imposing the 12.4% social security payroll tax on earned income above $400,000.

These proposals, although not specifically mentioned in the American Families Plan, continue to be part of the President’s tax agenda.

What can taxpayers do now?

Given the real possibility of targeted tax increases on the wealthy, as well as the uncertainty of when any increases might take effect, individuals, business owners and family offices should review their current situations to identify opportunities in which their overall federal and state tax liabilities could be minimized.

  • Taxpayers should evaluate the extent to which they can time the recognition of income and deductions within a desired tax year. Planning should not only be driven by current and future tax rates but also by the taxpayer’s individual facts and circumstances, including income and cash goals.
  • Due to the uncertainty of whether tax legislation will ultimately be passed, and to what extent, tax planning efforts should include multiple “what-if” scenarios to prepare for a range of possible legislative outcomes and effective dates.
  • As the future tax landscape takes shape, taxpayers should consider strategies to minimize tax on their capital gains, such as:
  • Accelerating capital gains to take advantage of lower rates;
  • Managing levels of other taxable income to avoid higher rates on capital gains;
  • Timing when tax is due by using or electing out of the installment method; and
  • Using deferral strategies such as like-kind exchanges, investments in qualified opportunity zones, and ESOP rollover transactions.


  • Individuals and families should revisit their estate plans in light of President Biden’s tax proposals. Individuals—especially those with large estates—should evaluate the benefits of multi-generational wealth transfers, the use of trusts and other estate planning opportunities, and be prepared to implement strategies in advance of proposals becoming law.

How we can help

We can provide comprehensive tax and financial planning assistance to wealthy individuals and their families, as well as for their business interests, whether in a domestic or cross-border context. We are experienced in all aspects of estate, income, gift, and trust tax consulting and compliance; charitable giving and philanthropic foundations; executive compensation; and cash flow, retirement, and life insurance planning.

Our professionals can keep you up to date on the status of tax proposals, provide insights on how new policies will affect your tax position, assist in assessing planning opportunities, and perform scenario planning and tax calculations. Our professionals also can assist with IRS audits and other inquiries.

R&D Tax Credit Denied Where Taxpayer Failed To Demonstrate And Document A “Process Of Experimentation”

On February 11, 2021, the Tax Court ruled in favor of the IRS in Little Sandy Coal Company v. Commissioner, finding that the taxpayer (petitioner) failed to meet the “substantially all” requirement with respect to the “process of experimentation” test under Internal Revenue Code (IRC) Section 41.

The dispute involved research tax credits claimed by Corn Island Shipyard, Inc. (CIS), a subsidiary of Little Sandy Coal Company, for the construction of several vessels for the tax year ending June 30, 2014. CIS is a corporation that designs, constructs and launches seafaring craft such as tankers and dry docks. The IRS took the position that CIS did not meet the “substantially all” requirement, i.e., that substantially all of the activities involved in the research constitute elements of a process of experimentation, which according to the relevant regulations means that 80% or more of the taxpayer’s research activities constitute elements of a process of experimentation for the costs related to the business component to be qualified. The IRS also determined that there was no identifiable sub-business component for the “Shrink Back” provision of Treas. Reg. §1.41-4(b)(2) to apply (under which a taxpayer will be permitted to claim certain improvement costs where the improvements made to an existing product account for less than 80% of the total product costs) and that CIS failed to produce sufficient records to substantiate its research tax credit. The Tax Court analyzed two selected projects: the “Apex Tanker” project and the “Dry Dock” project as representative samples of the types of activities undertaken by the taxpayer in the year at issue.

Although the Tax Court had “no doubt” that the iterative and detailed processes in designing the Apex Tanker and the Dry Dock evidenced processes of experimentation, the Court remained unconvinced that the taxpayer proved that the development activities constituted at least 80% of a process of experimentation.

For the Apex Tanker, Petitioner argued that many elements of the vessel—compared to previous models CIS had designed—were “redesigned and re-engineered during the development process.” CIS claimed that the tanker’s hull—“which makes up 90% of the vessel and was part of an extensive process of experimentation—demonstrated that the vast majority of the vessel, including every major system on the vessel, was re-engineered and redesigned meeting the substantially all requirement.” The court rejected this argument, ruling that the substantially all test must “be applied in reference to activities—not physical elements of the business component being developed or improved.”

Furthermore, although the Dry Dock project was a completely new design, the Court stated that, “accepting that the dry dock consisted entirely of novel elements that CIS had not previously designed and built would establish only that the design of those elements was uncertain at the start of the development process. Resolving that design uncertainty may have required, but did not necessarily require, a process of experimentation.” For both projects, the Court is clear that, “the novelty of an element of a business component does not establish that the work involved in developing that element involves a process of experimentation.”

In both examples, CIS asserted that substantially all of the time spent by its employees went toward a process of experimentation. The Tax Court responded that, while employee time or wages is a reasonable basis for determining if the substantially all test is satisfied, there must be a line-by-line analysis.

Significantly, the Court held that only the activities of the employees conducting direct research may be used to ascertain the numerator of the fraction that determines if a business component meets the 80% threshold and would not include supply costs or employees directly supporting or supervising research. According to the Court, the latter employees should be removed as they would not be directly involved in activities that constituted a process of experimentation. The Court further held that because supplies are not activities, when the fraction described in Treas. Reg. §1.41-4(a)(6) is computed using costs as a measure of activities, the costs of supplies used in the development of the product should not be taken into account. Correspondingly, the denominator is broad. In the view of the Tax Court, the sum of all other qualified activities and direct research should be included in the denominator. Here, it was mathematically impossible for either the Apex Tanker or the Dry Dock—analyzed at the project level—to meet the 80% threshold because the activities of directly supporting and supervising employees were excluded.

Even if a project did not meet the 80% threshold, the Tax Court signaled its acceptance that sub-components of these vessels could have likely satisfied a process of experimentation test, but given that CIS chose an “all or nothing strategy” to identify only the project at large as the business component without looking to the subcomponent level, the Tax Court was prevented from applying the “Shrink Back Rule.” This resulted in all activities related to the projects to be disqualified from inclusion in IRC Section 41.

The Tax Court focused on the taxpayer’s lack of substantiation with respect to its non-time- tracked employees. Although the Court recognized that CIS was burdened because there was an absence of any nontax reason to track the work of some of its employees by project and activity, the Tax Court highlights that Treas. Reg. §1.41-4(d) requires taxpayers to retain sufficient records to demonstrate they are eligible for the credit. Although the record-keeping requirement is liberal, the Court found that CIS’ choice “not to maintain detailed records of how its (non-production employees) spent their time placed on (CIS) the burden of demonstrating . . . the portion of those individuals’ work that did and did not involve a process of experimentation.” Thus, because CIS lacked detailed documentation, the burden fell on it to produce evidence of time allocations that it did not know. Consequently, CIS failed to meet its burden and all of the qualified activities associated with the projects were excluded.

The Tax Court’s decision rejects the U.S. District Court for the Northern District of Texas’ holding in Trinity Industries v. United States for its lack of detailed analysis around how two of the ships at issue, in that case, satisfied the substantially all requirement. The Tax Court’s decision reinforces the importance of analyzing business components and having a methodology to support a reasonable basis to quantify whether the substantially all test is met. The Court is particularly direct in requiring a “line by line” analysis of the costs associated with the processes of experimentation that occur for each business component.

Although Petitioner argued that analysis should be conducted based on assessing the new or improved nature of the product, the Court found that the process of experimentation test must be based on the activities of the employees. Without sufficient substantiation to support that substantially all of the activities constituted a process of experimentation, the taxpayer was unable to meet its burden and, due to the taxpayer’s all or nothing approach, its entire research tax credit was rejected. Taxpayers should carefully consider documenting employees’ time by type and by project.

연말 세금 절세계획

이 자료는 현재 2020년 대비 2021년 예비 인플레이션 조정 항목을 제공하여 납세자들의 연말 절세계획을 하는데  도움을 드리고자 준비되었습니다. 확정된 세율과 내용이 아직 미국국세청에 의해 게시되지는 않았습니다. 2020년 후반에 제공 될 것으로 예상됩니다. 납세자분들은 아래 항목에 대해 세금 및 재정적 결정을 내리실 때에 도움이 필요하시면 언제든지 저희 사무실로 연락을  주시기 바랍니다.


2020 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse


Head of Household

Married Filing Separately

Estate & Trusts


$0 – $19,750

$0 – $9,875

$0 – $14,100

$0 – $9,875

$0 – $2,600


$19,751 –   $80,250

$9,876 – $40,125

$14,101 – $53,700

$9,876 – $40,125


$80,251 – $171,050

$40,126 – $85,525

$53,701 – $85,500

$40,126 – $85,525


$171,051 – $326,600

$85,526 – $163,300

$85,501 – $163,300

$85,526 – $163,300

$2,601 – $9,450


$326,601 – $414,700

$163,301 – $207,350

$163,301 – $207,350

$163,301 – $207,350


$414,701 – $622,050

$207,351 – $518,400

$207,351 – $518,400

$207,351 – $311,025

$9,451 – $12,950


Over $622,050

Over $518,400

Over $518,400

Over $311,025

Over $12,950



Projected 2021 Federal Income Tax Rate Brackets

Tax Rate

Joint/Surviving Spouse


Head of Household

Married Filing Separately

Estates & Trusts


$0 – $19,900

$0 – $9,950 

$0 – $14,200

$0 – $9,950

$0 – $2,650


$19,901 –   $81,050

$9,951 – $40,525

$14,201 – $54,200

$9,951 – $40,525


$81,051 – $172,750

$40,526 – $86,375

$54,201 – $86,350

$40,526 – $86,375


$172,751 – $329,850

$86,376 – $164,925

$86,351 – $164,900

$86,376 – $164,925

$2,651 – $9,550


$329,851 – $418,850

$164,926 – $209,425

$164,901 – $209,400

$164,926 – $209,425


$418,851 – $628,300

$209,426 – $523,600

$209,401 – $523,600

$209,426 – $314,150

$9,551 – $13,050


Over $628,300

Over $523,600

Over $523,600

Over $314,150

Over $13,050



 Long-Term Capital Gains


Long-Term Capital Gains Tax Rate



Head of Household


Projected 2021


Projected 2021


Projected 2021


$0 – $40,000

$0 – $40,400

$0 – $80,000

$0 – $80,800

$0 – $53,600

$0 – $54,100


$40,001 – $441,450

$40,401 – $445,850

$80,001 – $496,600

$80,801 – $501,600

$53,601 – $469,050

$54,101 – $473,750


Over $441,450

Over $445,850

Over $496,600

Over $501,600

Over $469,050

Over $473,750


사회 보장 세금

  • 사회보장세의 노년기, 생존자 및 장애보험(OASDI) 부분은 직원 보상 및 자영업 소득에 부과되지만 사회보장국이 설정한 최대 임금 기준액(2020년 137,700달러, 2021년 142,800달러)에 부과합니다.
  • OASDI 프로그램은 FICA 세금을 통해 직원과 고용주의 기부금으로 지원됩니다. 직원과 고용주 모두에 대한 FICA 세율은 직원의 총 임금의 6.2 %입니다. 자영업자는 기업 순이익의 12.4%를 기준으로 SECA(또는 자영업세)라고 불리는 유사한 세금을 납부합니다.
  • 2020년 8월 8일, 트럼프 대통령은  고용주가 2020년 9월 1일부터 12월 31일까지 특정 직원 급여세금의 원천징수, 예금 및 납부를 연기할 수 있도록 하는 행정 명령을 내렸습니다. 추가 지침은  통지 2020-65에포함되어있습니다.
  • 고용주, 직원 및 자영업자는 FICA 세금의 일부인 메디케어 / 메디 케이드 보험에 대한 세금을 지불하지만 OASDI 임금 기반에 의해 제한되지 않습니다. 메디케어 세금는 급여의 2.9 %이며 소득에만 적용됩니다. 자영업자도 전액을 납부하고, 고용주와 직원은 각각 1.45%를 지불합니다.  
  • 일부 고소득자는 특정 조정 총소득(AGI) 액을 초과하는 소득에 대해 0.9%의 급여 세금을 추가로 지불해야 합니다. 그러나 고용주는 추가 세금을 납부하지 않습니다.


장기요양보험 및 서비스

  • 개인이 자격을 갖춘 장기 요양 보험에 지불하는 보험료는 의료 비용으로 공제됩니다. 공제액의 최대 금액은 개인의 나이에 따라 결정됩니다. 다음 표는 2020년과 2021년공제한도를 명시합니다.


Deduction Limitation 2020

Projected Deduction Limitation 2021

40 or under



Over 40 but not over 50



Over 50 but not over 60



Over 60 but not over 70



Over 70



이러한 제한사항은 1인당 공제액입니다. 따라서 70세 이상의, 배우자인 부부는 해당 AGI 한도에 따라 $10,860(2021년 예상$11,300)의 총 최대 공제액을 가지고 있습니다


은퇴 계획

  • 고용주(면세 기관 포함)가 401(k) 계획 또는 403(b) 계획을 가지고 있는 경우, 2020년에 직원이 할 수 있는 최대 납부 금액은 $19,500(50세 이상 또는 추가 $6,500 이상)입니다. 2021년에 예상되는 것은 동일합니다.
  • SECURE ACT은 2019년 12월 31일 이후 아동의 출생 또는 입양과 관련된 비용에 대해 일반 IRA에서 최대 $5,000까지 인출에 대하여 페널티가 면제됩니다. (공동 으로 결혼 신청의 경우최대  $10,000)
  • 이전에는 개인이 70 1/2이후에는 일반 IRA에 추가 납부 할 수 없었습니다. 그런데 SECURE ACT에서 이 연령 한도를 제거하였습니다.
  • SECURE ACT은 required minimum distributions (RMDs)의 연령을 70 1/2 세에서 72 세로  변경하였습니다.
  • CARES ACT는 자격을 갖춘 개인에게 최대 $ 100,000까지 10 % 조기 인출에 대한 페널티가 면제됩니다. COVID-19의 영향을 받는 개인 또는 배우자, 부양가족 또는 기타 가정 구성원은 이 해당이 될 수 있습니다. 이러한 과세 분배는 3년 동안 총 소득에 포함될 수 있습니다. 납세자는 양도한 금액이 배포 후 3년 이내에 언제든지 세금 자격을 갖춘 계획 또는 IRA에 재 납부 할 수 있습니다. 이러한 상환액은 면세 롤오버로 처리되며 납부금에 대한 해당 연도의 상한선이 적용되지 않습니다.


외국인 소득 공제

  • 2020년에는 외국인 소득 공제가  $107,600이며, 2021년에는 $108,700로 증가할 것으로 예상됩니다.


키디 텍스

  • SECURE ACT은 이전에TCJA에 의해 중단 된 KIDDIE TAX를 다시 회복시켰습니다. 2019년 12월 31일부터 시작되는 과세 연도의 경우, 자녀의 미소득은 더 이상 재산 및 신탁과 동일한 비율로 과세되지 않습니다. 대신, 자녀의 미소득은 자녀의 세율보다 높은 경우 부모의 세율로 과세됩니다. 납세자는 2018년 또는 2019년에 개정된 신고서를 제출하여 이 조항을 소급하여 2018년 또는 2019년에 납부하는 세금 연도에 적용할 수 있습니다.


비영리단체 기부금

  • 현재 공개적으로 지원되는 자선 단체에 현금 기부를 하는 개인은 AGI의 최대 60%에 달하는 자선 기부 공제가 허용됩니다. CARES ACT은 AGI 제한을 일시중단 하였습니다. 공제하지 못한 기부액은 5 년까지 사용이 가능합니다.  


상속 및 증여세

  • 부동산 및 증여세 면제 및 세대 건너뛰는 양도세 면제는 2020년에 1인당 $11,580,000입니다. 2021년 면제는 $11,700,000로 증가할 것으로 예상됩니다.
  • 미국 시민권자인 배우자에게 주는 것에 대해서는 연방 증여세가 없습니다. 그러나 2020년과 2021년의 경우 미국 이외의 사람들에게 증여한 첫 번째 $157,000 및 $159,000(예상)만 면세가 가능합니다. 시민 배우자는 올해의 과세 대상 기부금 총액에서 제외됩니다.



  • 중소기업은 직원 급여의 최대 25%를SEP에 납부 할 수 있습니다. 2020년 의 최대 SEP 납부 가능액은 $57,000였습니다. 2021년 의 최대 SEP 납부 가능액은 $58,000로 예상됩니다.
  • 자영업자 에 대한 25% 한도의 계산은 SEP 납부로 인한 소득 감소 후 계산되는 순자영업 소득을 기준으로 합니다.



  • TCJA에 따르면 2018년부터 발생한 순영업손실은 과세 소득의 80%로 제한되었으며, Carryback 없이, 무기한 Carryover는 진행될 수 있었습니다. CARES 법은 2017년 12월 31일부터 2021년 1월 1일 이전에 과세 연도에 발생한 순영업손실을 가진 개인이 5년 동안 과세 대상을 되돌릴수 있도록 허용하고 있습니다. CARES 법은 또한 이러한 손실에 대한 80 %의 제한을 두지 않습니다.


초과 사업 손실 제한

  • 461항(l)에 따라 납세자는 2021년 최대 $262,000(예상)의 순사업 손실을 공제할 수 있습니다(공동 신고자는 2020년 12월 31일부터 2026년 1월 1일 이전에 과세 연도동안 $524,000(예상)를 공제할 수 있습니다.) 초과영업손실은 일반적으로 허용되지 않고 납세자의 순영업손실이 적용되지만, CARES법은 2020년 이 초과영업손실 규제법을 중단하고 2018년과 2019년 초과영업손실 제한규정을 소급하도록 하였습니다.

Employee Retention Credit FAQs Released For 2020 Claims

On March 1, the IRS issued guidance for employers claiming the employee retention credit (ERC) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as modified in December 2020 by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act). The ERC is designed to help eligible businesses keep employees on their payroll by offering a credit against employment taxes when qualified wages and healthcare expenses are paid during the COVID-19 pandemic. The guidance under Notice 2021-20 clarifies and describes retroactive changes to the ERC under the new law for employers seeking to claim the credit for 2020 in the form of frequently asked questions. The IRS has stated that it will address calendar quarters in 2021 in later guidance.

Under the 2020 ERC rules, 50% of qualified wages and healthcare expenses (up to $10,000 of wages per employee in 2020) are fully refundable if paid by businesses that experienced a full or partial suspension of their operations or a significant decline in gross receipts. Prior to the Relief Act, employers that had received Paycheck Protection Program (PPP) loans were not eligible to claim the ERC. Now, employers with PPP loans can retroactively claim the ERC, however, the same wages cannot be used for both benefits. Q&A 49 of the notice outlines the IRS’ position on the interaction of the ERC with PPP loans for 2020.


Unfortunately, borrowers who have already received PPP loan forgiveness do not have the same planning opportunities that are available to borrowers who have not yet filed the SBA application, Form 3508 series, for forgiveness.

An eligible employer can elect which wages are used to calculate the ERC and which wages are used for PPP loan forgiveness. Generally, the election is made by not claiming the ERC on the federal employment tax return for the quarter. If the IRS adhered to this general rule, it would nullify the retroactive effective date of the credit. Therefore, in lieu of the general rule on how an employer would elect the wages used for ERC (i.e., by not claiming the ERC on the federal employment tax return for the quarter), the notice provides for a deemed election for any qualified wages that are included in the amount reported as payroll costs on the PPP Loan Forgiveness Application, unless the included payroll costs exceed the amount needed for full forgiveness when considering only the entries on the application.  

For example, a business that borrows $100,000 of PPP loans and has both payroll and nonpayroll costs that far exceed the borrowed amount but reported payroll costs of $100,000 on their application to simplify the forgiveness process, cannot use any of the $100,000 of payroll cost to claim the ERC. This is notwithstanding the fact that 100% forgiveness may have been achieved by reporting only $60,000 of payroll costs and the remaining $40,000 from nonpayroll costs.   

While the text of Q&A 49 appears to treat the minimum amount of payroll costs required for PPP loan forgiveness (i.e., 60%) as being the deemed election, the examples make it clear that the entire $100,000 in payroll costs reported on the PPP application cannot be included in ERC calculations. The IRS’ examples do not address the documented nonpayroll expenses that were excluded from the PPP application but were retained in the borrower’s files in accordance with the SBA’s instructions. 

The notice also formalizes and expands on prior IRS responses to frequently asked questions and addresses changes made since the enactment of the Relief Act. It contains 71 frequently asked questions regarding the following topics:

  • Eligible employers
  • Aggregation rules
  • Governmental orders
  • Full or partial suspension of trade or business operations
  • Significant decline in gross receipts
  • Maximum amount of employer’s ERC
  • Qualified wages
  • Allocable qualified health plan expenses
  • Interaction with PPP loans
  • Claiming the ERC
  • Special issues for employees regarding income and deduction
  • Special issues for employers regarding income and deduction
  • Special issues for employers that use third-party payers
  • Substantiation requirements




The Consolidated Appropriations Act, 2021 (CAA), a coronavirus relief package enacted on December 27, 2020, contains a number of provisions to assist businesses and individuals that have suffered economically from the coronavirus pandemic. Included in the CAA are beneficial provisions for businesses that obtained or qualify to obtain a loan under the Paycheck Protection Program (PPP) and employers that qualify for the Employee Retention Credit (ERC). The CAA also addresses the interplay for businesses that intend to claim both the ERC and the research and development (R&D) tax credit. Specifically, the CAA:

  • Confirms that business expenses (that normally would be deductible for federal income tax purposes) paid out of forgiven PPP loans may be deducted for federal income tax purposes, thus rejecting the position previously taken by the Internal Revenue Service (IRS) that expenses paid with forgiven PPP loan proceeds are not deductible for income tax purposes.
  • Clarifies that wages taken into account in determining a taxpayer’s 2021 ERC may not be considered in determining the R&D tax credit. Taxpayers, therefore, may deduct and take an R&D tax credit for expenses that otherwise qualify as qualified research expenses (QREs).


Deductibility of expenses paid with forgiven PPP loan proceeds

Before the CAA was enacted, Section 1106(i) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided that any PPP loan forgiveness will be excluded from gross income, and IRS Notice 2020-32 clarified that costs paid using forgiven PPP loan proceeds are not deductible for income tax purposes, even if otherwise deductible.

The R&D tax credit requires that expenditures be deductible to qualify as QREs. Consequently, wages paid with forgiven PPP loan proceeds were not eligible to be QREs. Under the previous guidance, many taxpayers’ R&D credits were reduced as a result of PPP loan forgiveness; the CAA eliminates this unfortunate result by allowing expenses paid with forgiven PPP loan proceeds to be deductible.

Changes to ERC that impact R&D tax credit

The ERC, introduced under the CARES Act and expanded under the CAA, is a refundable payroll tax credit for wages and health plan expenses paid or incurred by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or where the employer experienced a significant reduction in gross receipts.

The ERC is limited to $10,000 in qualified wages and health plan expenses per employee per quarter for the first two quarters of 2021. Health plan expenses for purposes of the ERC include both the employer and employee paid portions (if paid with pre-tax salary reduction contributions). Pre-tax health plan expenses are not eligible as qualified wages for purposes of the R&D tax credit (i.e., they will not reduce the credit).

Additionally, the CAA increased the ERC’s threshold for treatment as a “large employer” from 100 to 500 employees for 2021. As a result, more employers may be able to include all qualified wages for employees during an eligible quarter, regardless of whether the employee provided services to the company during that period. This change could have a significant impact on the R&D tax credit because more employees who are providing services may qualify for the ERC.


Wages for employees involved in qualified research who are included in PPP loan forgiveness applications will no longer reduce a taxpayer’s QREs or have a negative impact on the R&D tax credit.
Taxpayers that are eligible for the ERC and that claim R&D credits should analyze their ERC and R&D-credit qualified wages to mitigate the impact on both credits. To lessen the negative impact on the 2021 R&D credit, taxpayers should claim as ERC-eligible qualified health plan expenses and qualified wages expenses that are not potentially QREs as well, e.g., expenses related to employees who did not perform any R&D-creditable “qualified service.”

Comprehensive COVID-19 Relief Package Passed

On March 10, 2021, the U.S. House of Representatives passed a modified version of the American Rescue Plan Act of 2021 (ARP bill), President Biden’s $1.9 trillion COVID-19 relief package aimed at stabilizing the economy, providing needed relief to individuals and small businesses, and improving and accelerating the administration of coronavirus vaccines and testing. The House was required to re-vote on the bill after the House version passed on February 27 was modified by the Senate on March 6. The relief package, which is Biden’s first major legislative initiative, is one of the largest in U.S. history and follows on the heels of the Trump Administration’s $900 billion COVID relief package enacted in December 2020 (Consolidated Appropriations Act, 2021 (CAA)).

The House-approved bill will now be sent to President Biden for his signature, and it is expected that the legislation will be enacted before the current supplemental federal unemployment benefits expire on March 14.

The most significant measures included in the Act are the following:

  • A third round of stimulus payments to individuals and their dependents
  • Extension of enhanced supplemental federal unemployment benefits through September 2021
  • Expansion of the child tax credit and child and dependent care credit
  • Extension of the Employee Retention Credit (ERC)
  • $7.25 billion in aid to small businesses, including for the Paycheck Protection Program (PPP)
  • Increased federal subsidies for COBRA coverage
  • Over $360 billion in aid directed to states, cities, U.S. territories and tribal governments, and the Senate added $10 billion for critical infrastructure, including broadband internet, and $8.5 billion for rural hospitals
  • $160 billion earmarked for vaccine and testing programs to improve capacity and help curb the spread of COVID-19; the plan includes funds to create a national vaccine distribution program that would offer free shots to all U.S. residents regardless of immigration status
  • Other measures that address nutritional assistance, housing aid and funds for schools.

The original House version of the bill included a plan to gradually increase the federal minimum wage to $15/hour. This minimum wage provision was stripped from the Senate version following a ruling by the Senate parliamentarian that the minimum wage provision did not conform to the budget reconciliation rules.

Measures Affecting Individuals

The bill includes several measures to help individuals who have been adversely affected by the impact of the coronavirus pandemic on the economy. The additional round of stimulus checks, in conjunction with supplemental federal unemployment benefits, should provide some measure of relief to individuals. A temporarily enhanced child tax credit offers another area of assistance.

Cash Payments

Immediate cash relief will be granted to individuals and families in the form of new stimulus payments. While a $1,400 stimulus check (compared to the $600 under the CAA) will be paid to qualifying individuals and their dependents, the final version of the bill was narrowed by the Senate as a compromise to accommodate concerns of certain members and to secure votes, with the result that fewer taxpayers will receive a stimulus payment than was the case with the previous stimulus checks. The relief payments are expected to start shortly after President Biden signs the bill.

Under the final bill, individuals earning up to $75,000, single parents earning $112,500 and couples earning up to $150,000 are eligible for the $1,400 check, with the amount decreasing for individuals making between $75,000 and $80,000. Individuals earning more than $80,000, single parents earning $120,000 and couples earning more than $160,000 are disqualified from receiving stimulus checks. The House version of the bill would have allowed single taxpayers earning up to $100,000, single parents earning up to $150,000 and couples earning up to $200,000 to have qualified for the $1,400 payment.

An additional $1,400 check will be sent to each dependent of the taxpayer, including adult dependents (e.g., college students, parents). The previous two stimulus payments limited the additional checks to dependent children 16 years old or younger.  

The amount of the stimulus check will be based on information in the taxpayer’s 2020 tax return if it has been filed and processed; otherwise, the 2019 return will be used. The amount of the check will not be taxable income for the recipient.

Extended Unemployment Benefits

The current weekly federal unemployment benefits (which apply in addition to any state unemployment benefits) of $300 will be extended through September 6, 2021; the Senate cut back the $400 that would have applied through August 29 under the House version. Additionally, the first $10,200 of unemployment insurance received in 2020 would be nontaxable income for workers in households with income up to $150,000. 

The extension also covers the self-employed and individual contractors (e.g., gig workers) who typically are not entitled to unemployment benefits.

Child Tax Credit

The child tax credit will be expanded considerably for 2021 to help low- and middle-income taxpayers (many of the same individuals who will be eligible for stimulus checks), and the credit will be refundable.

The amount of the credit will increase from the current $2,000 (for children under 17) to $3,000 per eligible child ($3,600 for a child under age six), and the $3,000 will be available for children that are 17 years old. The increase in the maximum amount will phase out for heads of households earning $112,500 ($150,000 for couples).

Because the enhanced child tax credit will be fully refundable, eligible taxpayers will receive a check for any credit amount not used to offset the individual’s federal income tax liability. Part of the credit will be paid in advance by the IRS during the period July through December 2021 so that taxpayers do not have to wait until they file their tax returns for 2021.

Child and Dependent Care Tax Credit

The Child and Dependent Care Tax Credit will be expanded for 2021 to cover up to 50% of qualifying childcare expenses up to $4,000 for one child and $8,000 for two or more children for 2021 (currently the credit is up to 35% of $3,000 for one child or 35% of $6,000 for two or more children). The credit will be refundable so that families with a low tax liability will be able to benefit; the refund will be fully available to families earning less than $125,000 and partially available for those earning between $125,000 and $400,000.

Earned Income Tax Credit (EITC)

The EITC will be expanded for 2021 to ensure that it is available to low paid workers who do not have any children in the home. The maximum credit will increase from about $530 to about $1,500, and the income cap to qualify for the EITC will go from about $16,000 to about $21,000. Further, the EITC will be available to individuals age 19-24 who are not full-time students and those over 65.

Measures Affecting Businesses

The ARP bill contains provisions designed to assist small businesses, in particular. 

Small Businesses and Paycheck Protection Program        

An additional $7.25 billion is allocated to assist small businesses and for the Paycheck Protection Program (PPP) forgiven loans. The current eligibility rules remain unchanged for small businesses wishing to participate in the PPP, although there is a provision that will make more non-profit organizations eligible for a PPP loan if certain requirements are met.

The PPP—which was originally created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020—is designed to help small businesses that have suffered from the disruptions and shutdowns related to the coronavirus pandemic and keep them operational by granting federally guaranteed loans to be used to retain staff at pre-COVID levels. A PPP loan may be forgiven in whole or in part if certain requirements are met.

The Economic Aid Act, which is part of the CAA, had earmarked an additional $284 billion for PPP loans, with specific set asides for eligible borrowers with no more than 10 employees or for loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. The program ends the earlier of March 31, 2021 (the application period under the PPP is not extended under the ARP bill) or the exhaustion of the funds—additional funds are now allocated under the ARP bill.

It should be noted that the Biden Administration recently designated the 14-day period between February 24 and March 10, 2010 for businesses and nonprofits with fewer than 20 employees to apply for a PPP loan.

Employee Retention Credit

The ERC, originally introduced under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and enhanced under the CAA, aims to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the COVID-19 pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.

The CAA extended the eligibility period of the ERC to June 30, 2021, increased the ERC rate from 50% to 70% of qualified wages and increased the limit on per-employee wages from $10,000 for the year to $10,000 per quarter ($50,000 per quarter for start-up businesses). The new bill extends the ERC for another six months to December 31, 2021 under the same terms as provided in the CAA.

Other Measures

  • Employers offering COVID-19-related paid medical leave to their employees would be eligible for an expanded tax credit through September 30, 2021.
  • The bill increases the proposed subsidies of insurance premiums for individual workers eligible for COBRA after they were laid off or had their hours reduced to 100% (85% under the version of the bill passed by the House) through September 30, 2021.
  • Funds are allocated for targeted Economic Injury Disaster Loan advance payments, as well as for particularly hard-hit industries such as restaurants, bars, and other eligible food and drink providers; shuttered venue operators; and the airline industry.
  • Effective for taxable years beginning after December 20, 2020, the bill repeals IRC section 864(f), which allows U.S. affiliated groups to elect to allocate interest on a worldwide basis. This provision was enacted as part of the American Jobs Creation Act of 2004, and has been deferred several times. The provision is relevant in computing the foreign tax credit limitation under IRC section 904.
  • The bill does not cancel student debt but there is a provision that would make student loan forgiveness passed between December 31, 2020, and January 1, 2026, tax-free (normally the cancellation of debt is considered taxable income). 
  • A deduction will be disallowed for compensation that exceeds $1 million for the highest paid employees (e.g., the CFO, CEO, etc.) for taxable years beginning after December 31, 2026.
  • The limitation on excess business losses of noncorporate taxpayers enacted as part of the Tax Cuts and Jobs Act will be extended by one year through 2026.
  • The threshold for third-party payment processors to report information to the IRS is lowered substantially. Specifically, IRC section 6050W(e) is revised so that the current threshold of $200,000 for at least 200 transactions is reduced to $600. As a result, such payment processers will have to provide Form 1099K to sellers for whom they have processed more than $600 (regardless of the number of transactions). This change, which applies to tax returns for calendar years beginning after December 31, 2021, will bring many more sellers, including “casual” sellers, within the 1099K reporting net.

Biden Administration Unveils Tax Blueprint As Part Of American Jobs Plan

The Biden administration on March 31, 2021, unveiled a jobs and infrastructure plan, the American Jobs Plan, to address the nation’s pressing infrastructure needs. The plan calls for about $2 trillion in spending over eight years. To pay for these expenditures, the plan also includes a proposed overhaul of the corporate tax system that would increase the corporate tax rate and the global minimum tax, eliminate federal tax benefits for fossil fuel companies, and strengthen enforcement against corporations.

While the proposed spending would be spread out over eight years, the tax increases would continue for 15 years.

Proposed Tax Measures

The White House released a Fact Sheet that lists the proposed tax measures under the plan:

Corporate Tax Rate — The Biden plan would increase the corporate tax rate from 21% to 28%. The rate had been reduced by the Trump administration from 35% to the current rate of 21%.

Global Intangible Low-Taxed Income (GILTI) Modifications – President Biden’s proposal would increase the effective rate on GILTI for U.S. corporations to 21% and calculate GILTI on a country-by-country basis. It also would eliminate the rule that allows U.S. companies to reduce their GILTI inclusion by 10 percent of their average adjusted basis of qualified business asset investments.

Encourage Other Countries to Adopt a Minimum Tax Regime – The plan proposes to encourage other countries to adopt strong minimum taxes on corporations, and deny deductions to foreign corporations on payments that could allow them to strip profits out of the U.S. if they are based in a country that does not adopt a strong minimum tax.

Inversions – In addition to enacting reforms that would remove incentives for U.S corporations to invert, President Biden’s proposal would make the inversion process more difficult.

Offshoring/Onshoring Jobs –President Biden’s reform proposal would deny companies deductions generated by offshoring jobs and would also propose a tax credit to support the onshoring of jobs.

Eliminate the Foreign Derived Intangible Income (FDII) deduction and Invest in R&D Incentives – The Biden plan proposes the complete elimination of the FDII deduction, which was introduced as part of the Tax Cuts and Jobs Act. The revenue collected as a result of the repeal of the FDII deduction would be used to expand other R&D investment incentives.

Minimum Tax on Book Income – The plan  includes a proposed 15 percent minimum tax on U.S. corporations’ book income, which would apply only “to the very largest corporations,” according to the Fact Sheet.

Tax Preferences for Fossil Fuels – Biden’s plan would eliminate all subsidies, loopholes, and special foreign tax credits for the fossil fuel industry.
Enforcement – The plan calls for increased investment in enforcement so that the Internal Revenue Service has the necessary resources to effectively enforce the tax laws.

Business Tax Credit Basics: The Work Opportunity Tax Credit

How can your business get valuable tax credits while expanding your workforce and benefiting your local community? The Work Opportunity Tax Credit (WOTC) may be the answer.

The WOTC is a federal tax credit available to employers who hire and retain veterans and individuals from other target groups including:

    • Temporary Assistance for Needy Families (TANF)
    • Food stamp recipients
    • Residents of empowerment zones
    • Vocational rehabilitation referrals
    • Ex-felons
    • Supplemental security income recipients
    • Youth living in empowerment zones for summer jobs

Nationwide, businesses claim about $1 billion in tax credits annually under the WOTC program. The maximum tax credit can be up to $9,600 for each qualifying new employee during the first year of employment.

You don’t have limits on the number of individuals you hire from target groups. This is good news for potential employees, too, since individuals in these groups can experience significant employment barriers.

How WOTC Works

John, a veteran, is hired at your company for a part-time position. As the employer, your WOTC tax credit lasts for two years. In year one the credit equals 40 percent of John’s wages. If John stays on board, your tax credit in year two is 50 percent of his wages. Even though he’s part-time, because John works more than 400 hours each year – the minimum – you still qualify for the tax credit.

While 400 hours per year is the minimum to claim the full tax credit, partial credit (25 percent) is available starting at 120 hours.

These are just the basics; there is a lot of fine print. Before you calculate your company’s potential tax breaks, check out the full details on the official WOTC site.

How Do I Know if My Employee Fits the Profile?

How do you determine if Sharon, your new hire, fits one of the profiles mentioned above? The U.S. Equal Opportunity Commission (EEOC) protects employers from discriminatory claims or lawsuits when you ask congressionally mandated questions on WOTC screening and application forms.

You can ask Sharon for her date of birth, for example. The EEOC protects you since any eligible employee must be younger than 40 for age-specific categories like the summer youth program. What if Sharon isn’t hired for a summer job? In that case, use this online tool from the U.S. Department of Housing and Urban Development (located under the What’s New tab on their website). The tool will help you see if Sharon lives in an empowerment zone.

Yet another tricky question: How-to determine if Sharon or her family uses food stamps. States have considerable discretion in definitions used for food stamps and the TANF program. For WOTC purposes, the term family is the same as the benefit household. Social service agencies in your state can clarify definitions for your region.


A helpful hint: No WOTC tax credit can be claimed for wages paid to relatives or dependents living with and employed by a taxpayer-employer.

You would use IRS Form 8850 to apply for WOTCs. Once completed, send the form to your state’s workforce agency within 28 calendar days of the employee’s start date. The Department of Labor has an updated WOTC Form 9061 or 9062 to request certifications for new employees.

If you’re expanding your workforce, consider the benefits of hiring individuals from one of these target groups. Aside from the tax credits – which can be substantial – you can make a long-lasting, positive impact on your community.

We can help you implement the Work Opportunity Tax Credit at your company. Call or email us with questions.