FAQ's

IRS FAQ Employee Retention Tax Credit Many taxpayers and practitioners anxiously await guidance and clarity on many aspects of the ERC. All of the information presented below is based on the current guidance and our best attempts to keep up with current developments. Neither our's nor the IRS’ FAQs are always current and may not be updated for the most recent developments. Further, neither our's nor the IRS’ FAQs can be relied upon as legal authority. However, companies can still review the ERC rules to determine eligibility. LTRS continues to monitor ERC developments and will provide more information when available. How much ERC money am I eligible to receive? If your business was formed before February 16th, 2020, you may qualify for up to $26,000 per W-2 employee. If your business was formed after February 16th, 2020, you my qualify for up to $33,000 per W-2 employee. The total amount your business is eligible for will depend on the number of employees you have and other revenue reduction figures. What is an eligible Employer? a. Eligible employers are small businesses in the US that carry on a trade or business during the calendar year for 2020 and/or 2021 and have fewer than 500 W-2 employees. *1099 contractors do not qualify b. This includes tax-exempt organizations that experienced either of the following: Full or partial suspension to business operations during any calendar quarter in 2020 and/or 2021. These are attributed to governmental orders that limit commerce, travel, or other group meetings due to the COVID-19 pandemic. Experienced a Significant Decline in Gross Receipts (“SDGR”) during a calendar quarter for 2020 or 2021. For 2020 quarters, SDGR is defined as a decline of at least 50% compared to the same quarter in 2019. For 2021, this metric has been reduced to a decline of at least 20% for the comparable quarter. What if my CPA or other professional already told me I don’t qualify for the ERTC? When a CPA or other professional deems a business to be “not qualified” for the ERTC, it is almost always due to the CPA’s analysis of the Revenue Reduction Test. CPA’s and other professional, broadly speaking, have been less than enthusiastic to analyze businesses under the Nominal Impact Test and have left such analysis to tax attorneys specializing in the ERTC. If your are concerned that your business may qualify, get a 15 minute second opinion from an ERTC expert. Then if you do not qualify, you are not missing out on a big opportunity. Remember, the ERTC application has a time limit, once past, you have missed on one this opportunity forever! Are there risks involved? No. You pay nothing until you receive your ERTC check from the IRS. As part of our process we prepare a pre-audit report included with our application submission We do this for three reasons, 1) The pre-audit report with the submission does the work for the IRS Review, leading to a faster approval. 2) We believe there will be a wave of audits coming in future years and we are building our submission packages in preparation for that possibility. 3) While you cannot prevent being randomly selected for an audit, if you build your application package for that possibility, you decease your chances of being selected. In addition, in the event of a subsequent IRS audit challenging our legal determination of your eligibility, our ERTC Professionals will provide a full defense of your ERTC claim at no additional fee. We can afford to do this for two reasons, 1) We guarantee our work and 2) we have already prepared for this event as part of our pre-audit application submission. Is the ERTC specific to any industry? No. The ERTC is intended for businesses the operated during the pandemic and maintained W2 employees. Only businesses that are directly related to federal or state government are ineligible. Private businesses from any industry, including non-profits, may qualify. Am I required to have a certain number of employees? There are no minimum number of employees required to access the ERTC opportunity. However, employers with 100 in 2020, and 500 in 2021 can only use the qualifying wages of employees that were paid NOT to provide services. You will often see advertisements saying, if your had more the 5 employees...... that is just because they do not want to work with small employers. What are qualified wages? Qualified wages is defined as compensation provided to employees during an eligible period after February 16th, 2020, inclusive of health plan expenses. Are group healthcare expenses considered qualified wages? Yes, group healthcare is part of the calculation of qulaifying wages Do employee wages from before March 13 count as qualified wages? No. There are no qualified wages (for either PPP and ERC) prior to March 13, 2020. Can I qualify if I’m a 1099 Independent Contractor? Unfortunately, not. This program is only available for companies that pay W2 wages to non-owners. Can I qualify if I don’t have any W2 employees? Unfortunately, not. This program is only available for companies that pay W2 wages to non-owners. As an owner do my wages, or the wages of any family member I employ qualify? Maybe. Wages of owners who have majority ownership, defined as over 50%, do not qualify, nor do the W2 wages of any immediate family members of the owner. In the case where an owner has less than 50% ownership, their W2 wages qualify, as do the W2 wages of immediate family members. What are the main differences between PPP and ERC? While both PPP and ERC are part of the CARES Act, there are some notable differences: the PPP was structured as a forgivable loan through your local bank via the SBA; the ERC is a payroll tax credit through the IRS – it is not a forgivable loan; it is cash for you to do whatever you choose. The PPP had a specific funding amount and PPP funds ran out; ERC funds don’t run out, you just have to claim your credit prior to the end of the 3 year lookback period. Finally, the PPP isn’t taxable; the ERC is. How do I qualify? A business is eligible if they meet one of two tests. Only one test is required and it’s possible to qualify under one test for one period, and another test for a different period. The first test is a quantitative test that was developed as an objective measure of whether COVID-19 impacted a company’s ability to generate revenues comparable to pre-COVID levels. This test is referred to as the “Substantial Decline in Gross Receipts” test, or SDGR. This test looks to compare quarterly periods in 2020 and 2021 to the same quarterly period in 2019. The relevant percentage threshold is 50% in 2020 and 20% in 2021. For example, if an employer had $49,000 of gross receipts in Q2 2020 compared to $100,000 of gross receipts in Q2 2019, this 51% decline would qualify the employer under the SDGR. Similarly, an employer with $79,000 of gross receipts in Q1 2021 compared to $100,000 gross receipts in Q1 2019, would also meet the SDGR test for Q1 2021. Note that in nearly all cases, if a business qualifies under this test for a quarter, they will qualify automatically for the following quarter, provided at least 6 months of eligibility. The look-forward and look-back tests can be quite complicated and we work with our clients closely to help evaluate eligibility. Even if a company doesn’t meet the SDGR, they can still qualify if they meet the Full or Partial Suspension of Operations test, or FPSO. The full or partial suspension test applies for the periods of time when the operations of a business are shut down due to government order, or are subject to certain restrictions / modifications while they are allowed to keep their doors open (such as reductions in operating hours and capacity limit restrictions). An example of a partial suspension is a restaurant that was forced to move to take-out or delivery only, or was forced to move to a reduced capacity limit with dine-in service due to social distancing requirements. A gym or fitness center that is required to move to appointment-only, reduced capacity, closed day-care facilities, etc. might also qualify under the partial suspension test. A doctor’s office that does more than a nominal amount of elective procedures will almost always have a partial suspension for some period of time. A lesser known partial suspension can occur when a business is affected due to supplier related issues. For example, a business that cannot obtain materials or supplies from vendors that were shut down by COVID-19, can also translate into the first business being treated as partially suspended. Finally, there are complex rules that look at businesses with multiple locations, segments, or divisions and can cause the entire business to be treated as partially suspended, even if only due to one of locations, segments, or divisions. When is the operation of a trade or business partially suspended for the purposes of the Employee Retention Credit? The operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations. Examples of such orders include: Limitation of an employer’s customer/store capacity An employer’s suppliers are unable to make deliveries of critical goods or materials due to a governmental order that causes the supplier to suspend its operations. Be careful here, some ERTC sales organizations are selling this as the catchall solution for any business that are not able to qualify under SDGR. An employer is required to move to an “online format” or “telework” that results in the operations of the business not continuing in a comparable manner as if the business were open regularly An employer's workplace is closed by a governmental order for certain purposes, but the employer's workplace may remain open for other purposes or the employer is able to continue certain operations remotely An employer that reduces its operating hours Employers that operate a trade or business in multiple locations and are subject to State and local governmental orders limiting operations in some, but not all, jurisdictions If the order was effective for a portion of the calendar quarter, then the employer is an Eligible Employer for the entire calendar quarter. Note: This method of qualification needs to well documented and audit proofed. It is our opinion, there is going to be a wave of IRS audits in the future because the IRS does not have the time now to closely scrutinize FPSO cases. Do we still qualify if we remained open during the pandemic? Yes. To qualify, your business must meet either one of the following criteria: 1. Experienced a decline in gross receipts by 50% in 2020 or 20% in 2021, or 2. Had to change business operations due to government orders 3. Many items are considered as changes in business operations, including shifts in job roles and the purchase of extra protective equipment. How do I apply for ERTC tax credits? Unlike the Payroll Protection Program (administered by the Small Business Administration), there is actually no “application process” for the Employee Retention Tax Credits. You simply claim the ERTC tax credit like you would any other tax credit - by asserting to the IRS that you can legally claim the credit. When you claim a child tax credit, you do so by asserting this fact on your Form 1040 Personal Income Tax Return. The difference is that when you claim an ERTC tax credit, you do so on your Form 941 Employer Quarterly Tax Filing. To claim the credits, you must file an amended form (the Form 941-X) which will trigger an "overpayment" notice from the IRS and they'll cut you a refund check for the credits you claim. Why am I just hearing about this now? ERC “Version 1” went live in March of 2020 but was mostly ignored due to the focus on PPP. However in December 2020, the Government updated the law with the release of ERC “Version 2” through the Consolidated Appropriations Act. Under Version 2, employers were both retroactively and prospectively allowed to take both ERC and PPP (Round 1 and 2). Version 2 also extended the credit into Q1, Q2 and Q3 of 2021 and increased the field of eligible employers by allowing companies with up to 500 employees to take the credit, up from 100 for 2020. In short, it was a huge expansion of eligibility which opened up a significant opportunity for hundreds of thousands of businesses in the US. The ERTC has evolved significantly since its inception and this evolution has resulted in confusion and misunderstanding of the program. Without following the details contained in hundreds of pages of the CARES Act, along with subsequent executive orders by both President Trump and President Biden, the opportunity in the ERTC can be easily missed. Are benefits of the Employee Retention Credit the same for large and small employers? Small employers receive enhanced benefits under the ERC regime. Specifically, for the time they are an Eligible Employer, they can include wages paid to all employees. Large employers can only include wages paid to employees for not providing services. How do I calculate if an employer is a large or small employer for the Employee Retention Credits? For the 2020 ERC, an employer with 100 or fewer average full-time employees (as measured in 2019) is defined as a small employer. For the 2021 ERCs, an employer with 500 or fewer full-time employees (as measured in 2019) is defined as a small employer. The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code. An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12. Special rules apply to those who were not in business all of 2019. Does my company still qualify if I have more than 500 employees? Yes. however, you can only claim the wages paid to a furloughed employee(s). What if I have more than 500 employees? Am I still eligible? Maybe! The employee count is based on “full-time equivalent” employees. So if you have employees who worked less than 40 hours per week, they will be counted differently. Additionally, if you paid any employees NOT to work or to work less than the hours they were paid, those employees would be counted differently also. Do I only qualify if I had a revenue reduction? Revenue reduction is only one of a few ways that qualifies or disqualifies a business from ERC. If you can demonstrate interruption in business operations in each quarter, we can help you document and present to become qualified for the ERC. Am I still eligible for ERC money if my business was not shut down during the pandemic? Maybe! A greater than 20% drop in revenue is usually enough to qualify your business in 2021, or a greater than 50% reduction in revenue in 2020. Even a partial suspension order by the government (federal, state, or local) of your business could potentially qualify for the ERC, separate from the reduction in gross receipts test. What if we received benefits from the Shuttered Venue Operators Grant, does my business still qualify for ERC? Maybe! However the Shuttered Venue Operators Grant benefits need to be taken into consideration in the ERC calculation. What if we received benefits from the Restaurant Revitalization Fund, does my business still qualify for ERC? Maybe! However the Restaurant Revitalization Fund benefits need to be taken into consideration in the ERC calculation. What wages qualify for the ERC? Wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses will qualify when determining the Employee Retention credit. Payment must have been made after March 12, 2020 and qualify for the credit if paid through Dec 31, 2021. If my company was deemed “an essential business” and stayed open, can I still qualify for ERC money? Maybe! Almost any impact or change in your business can qualify you. For example, you may qualify even if you were open, but your vendors were closed, and/or you couldn’t go to a client’s job site. If we lost money and don’t have any tax liability, can I still get a refund? Yes! ERC is a “refundable credit,” which means You do not have to have a tax liability to receive the funds. Any credit above your tax liability will be sent to you as a refund. What if our organization is a non-profit or charity? Are we still eligible for ERC money? Yes! The ERC is also designed to benefit charities such as churches, non-profit hospitals, museums, etc. Charities can be excellent candidates for the ERC. What if I have bad credit? Is there a credit check involved? It doesn’t matter, because this is not a loan – it’s a tax credit. There are no credit checks, collateral, or personal guarantees required. What is considered Gross Receipts for ERC? For taxable entities: Total sales (net of returns and allowances) and all amounts received for services. Includes any income from investments: Dividends Interest Rents Royalties and annuities, regardless of whether those amounts are derived in the ordinary course of the taxpayer’s trade or business Reduced by the taxpayer’s adjusted basis in certain property used in a trade or business or capital assets sold. Tax accounting method for income recognition applies. For non-taxable entities: Gross Receipts means gross receipts of the taxable year and generally includes all receipts. Tax accounting method for income recognition applies. Includes proceeds from investments and grants. Not Reduced by the taxpayer’s adjusted basis in certain property used in a trade or business or capital assets sold. If I qualify under the Government Mandate Test, does that automatically qualify me as an eligible employer for the entire quarter? Technically, yes, but you only pay qualifying wages while the mandates are in effect and they are having a more than nominal impact on the business. This is were working with a knowledgeable and qualified CPA firm is to your benefit Can I get both the ERC and PPP Loan? Yes. While an employer may not include wages funded by a PPP loan in the ERC calculation, PPP funds only apply to eight to ten weeks of wage expenses. The ERC eligibility periods are longer. PPP loans can also fund non-wage expenses. PPP will only account for 2.5 times your monthly payroll expenses and is meant to be spread out over 6 months. This leaves plenty of uncovered wage expenses for claiming ERC For ERC purposes, it is most important to develop work papers that allocate the PPP funding across the entire 24 week Covered Period. PPP funding may be allocated to wages that would not generate any ERC (e.g., to owners of the company or to wages in excess of $10,000 in one of the four ERC credit-generating periods). This is were working with a knowledgeable and qualified CPA firm is to your benefit Does PPP forgiveness count as gross receipts for ERC? No. Based on safe harbor guidance released by the IRS in August 2021, it has been confirmed that PPP forgiveness does not create gross receipts in the amount of the forgiveness (this also applies to Shuttered Venue Grant proceeds and Restaurant Revitalization Funding) I got an Economic Injury Disaster Loan (EIDL); can I also get ERC? Yes. There are no restriction around ERC for those who received EIDL. . Is the Employee Retention Credit only for full-time employees? No. An employer may include wages paid to part-time and full-time employees in the calculation of the ERC. The only limitation on the calculation of the credits is that an employer may only calculate the credits on the first $10,000 of wages and health plan costs paid to each employee during each credit-generating period. If I use a PEO instead of a traditional payroll tax provider, can I still claim the ERC? Yes. Employers using a PEO are still entitled to claim the ERC. What if I already received PPP? Paycheck Protection Program (“PPP”) recipients are now eligible. Yes! Before the Consolidated Appropriations Act (CAA) was passed in December 2020, businesses could not claim ERC if they had accepted a PPP loan. With the updated CAA, businesses are eligible in 2021 even if they claimed a Paycheck Protection Program loan. The ERC was not widely used until March 2021, when updated IRS regulations made this type of COVID-19 Relief more accessible. In short: thousands of businesses who once picked between the PPP and ERC may now use both stimulus programs. I got an Economic Injury Disaster Loan (EIDL); can I also get ERC? Yes. There are no restriction around ERC for those who received EIDL. What if my revenue went up in 2020 or 2021? Can I still qualify? Absolutely! It’s called the “Employee Retention Credit.” It is intended to help businesses that kept people employed during the height of the pandemic. This means you can qualify even if your revenue increased. You’ll need to qualify using one of the other qualifications - either shutdowns/mandates or supply chain disruptions. My revenue in Q1 2021 is back to pre-pandemic levels - so I must be ineligible - right? Even though you may feel like revenue is back to normal, there are some items you want to consider before passing on this ERTC assessment. First, even if revenues have returned to “normal” in 2021, you may have qualified in 2020 and you can retroactively claim those credits. That eligibility criteria in 2020 was based on revenue declines from 2019, or if your business was partially or fully closed due to governmental mandate. Second, while your revenue may have returned to “normal” in Q1 2021, remember that we are comparing your Q1 2021 to Q1 2019. If 2019 was a year of growth for your business, then your revenue levels 2 years ago may have been much less than Q1 2020. And lastly, if your revenues were down in Q4 2020 by just 20% compared to Q4 2019, then you are automatically eligible for Q1 2021. There is a safe harbor provision that few advisors are talking about, and it means that many businesses are qualifying for $7,000 per employee in Q1 2021. I know, it seems too good to be true, but the government wants to incentivize and reward you for keeping US residents employed and money flowing through our economy as we rebuild bigger and stronger than before. Can churches and other religious organizations qualify for ERC? Yes. The Employee Retention Credit is available to churches and other religious organizations that were impacted by government-ordered capacity restrictions on gatherings or that experienced significant declines in gross receipts. Do companies owned by Private Equity Funds need to aggregate their gross receipts and employee counts together when determining eligible employer status? Generally, no. Brother-sister portfolio companies under the fund can likely be treated as separate trades or businesses when considering eligible employer status because the Fund owning the portfolio companies is not an active trade or business (rather a passive investment vehicle). What are examples that allow an automotive dealership to qualify for the ERC due to the effects of COVID-19 mandates limiting commerce, travel, or group meetings? See Examples Below: Mandates for showroom closures: Consider limitations on indoor capacity that impacted your ability to effectively perform sales and marketing Example A: A series of dealerships in Pennsylvania were required to limit indoor showroom capacity until halfway through 2021. The sales force significantly impacted – could not conduct normal operations Example B: A dealership in Maryland normally held regular outdoor marketing events that significantly boosted visibility and customer traffic. This dealership was unable to hold events due to limitations on gathering sizes. Limitations on travel caused by geographic lockdowns in 2020 and 2021: Example: A Dealership in on an island location was closed off from mainland. No visitors were allowed on the island from March – May 2020 Supply chain disruptions due to mandates affecting shipping and manufacturing: This affects dealerships who source parts from entities partially suspended by government mandates. Example A: Port closures in China caused disruptions to the supply chain for periods in Q2 and Q3 2021. Dealerships who source cars and car parts out of these locations can be eligible for the period of time that the ports were shut down. Affected ports include Shanghai, Yantian, and Ningbo-Zhoushan. Example B: Mexican manufacturing centers were heavily affected by indoor capacity limitations affecting the supply chain for automobiles in 2020 and 2021. I thought payroll taxes deferred in 2020 had to be re-paid. Does ERTC work the same way? You are most likely referring to a provision of the CARES Act that allowed employers to defer the deposit and payment of the employer's share of Social Security taxes. Those deferrals must then be repaid - with at least 50% of the balance due by 12/31/21 and the remaining balance due by 12/31/22. ERTC credits are NOT a deferral. They are dollar-for-dollar credits against wages you’ve paid. Not taxes you've paid, but actual wages. These credits will come in the form of a refund check directly to you (unless you owe back taxes in which case the IRS will first apply the credits to those back taxes and cut you a check for the difference). And you will NOT have to re-pay these funds (unless, of course, you don’t provide adequate documentation in the course of an audit). Does the Receipt of Payroll Tax Refunds under the ERC Trigger Title IX for Private Schools? There is no guidance specific to independent schools indicating that the refund of payroll taxes under the ERC program will be considered federal financial assistance for purposes of requiring independent schools to comply with certain federal laws, such as Title IX of the Education Amendments Act of 1972. When is the Operation of a Trade or Business considered partially suspended for the ERC? An employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations since the employer's operations have been limited by a governmental order. Will the ERC funds run out? All eligible employers will receive the funds. Tax refunds are issued by the U.S. Treasury. This is not a lending program. How long is the ERC program open? For most businesses, this program will be open into 2025 (unless Congress changes the rules again). It is available as long as you can file amended 941 returns, which is the latest of 3 years from the date you filed you’re the original return or two years from the date you paid the payroll taxes, whichever is later. My revenue went up in 2020, can I still qualify for ERC? Yes! There are two possible qualifications for 2020: revenue reduction or a "full or partial shutdown of your business due to COVID-19". Specifically, the IRS describes this as "A government authority required partial or full shutdown of your business during 2020 or 2021. This includes your operations being limited by commerce, inability to travel or restrictions of group meetings." Below are several examples of qualifying events: i. Example 1: A restaurant must close or limit its on-site dining. Such as having to close every other table, due to COVID-19 restrictions. ii. Example 2: A business that needs to meet with clients in person and had to cancel meetings due to COVID-19 restrictions. iii. Example 3: A business had to reduce their operating hours because COVID-19 restrictions and cleaning requirements. iv. Example 4: A business had delayed production timelines caused by supply chain disruptions. v. Example 5: A business with a planned event had to cancel that event or restrict the amount of people who could attend due to COVID-19 restrictions. What if I have bad credit? Is there a credit check involved? Credit is not a determinate! This is not a loan. This is a tax credit to help businesses that kept people employed during the height of the pandemic.. There is no collateral required, credit checks, or personal guarantees. Yeah, if you qualify, think of it like a grant you do not have to repay. What if my business is now closed, can I still qualify for ERC? Yes, there is a possibility. It would depend upon when your business closed. Call Legacy Tax & Resolution Services today and let us walk you through the process. How is ERC different from PPP? PPP was a forgivable loan. ERC returns the payroll taxes that your business has already paid. Once you receive the ERC funds from the US Treasury, no further action is required on your part. My business was profitable or deemed essential, can I still qualify? Absolutely! Both Essential and Non-essential businesses alike can qualify, and a decline in revenue is not required. Many of our clients even had increases in sales, but still experienced disruptions or were negatively impacted. Why haven't I heard about ERC before?. PPP was heavily marketed by the SBA, while ERC is claimed directly through the US Treasury. Along with our partners, it’s our mission to educate you and obtain for your business the payroll tax refund that your business is entitled to. Why isn't my bank talking about this? Your banker was probably very helpful when it came to getting your PPP funds because they were effectively signing you to an SBA-guaranteed loan. The SBA paid the bank administrative fees based on the PPP loans they made, and so they were incentivized to educate you about the program and get all your paperwork in order. Compared to the ERTC, the PPP program was also a rather simple calculation. 2 ½ times your average monthly payroll including health insurance and state unemployment taxes. From the conversations we’ve had with bankers, they have no interest in involving themselves in your employment tax compliance. For them it is a liability and beyond their scope of services. (Edit for 2023: Bankers are now on top of this. ERTC isn't the mystery that it once was so bankers are making backroom deals with large ERC "specialists" to sell their list of clients. Buyer beware of these firms, even if they are recommended by your banker. The Financial Meltdown of 2008 and the continued fraud at Wells Fargo has shown us just how much we can trust the bankers when their pocketbooks are padded. What about my Payroll Service Provider? Shouldn't they be on top of this? Your Payroll Service does an excellent job of executing the fundamentals of paying your employees, paying your employment taxes and filing your quarterly reports. However, we have yet to find a Payroll Service that allocates PPP and ERTC as precisely as we do . . . by employee, by day, by hour. This is especially troubling considering how these companies are positioned as experts in all things payroll . . . and yet they were not built for this level of data analysis. We have consistently seen these services (and I'm even talking about the big ones like AD*, Payche*, He*rtland) under-claiming these credits and charging a hefty fee all the same. But an even bigger deal . . . Most Payroll Services are asking clients to sign an indemnification waiver before submitting a Form 941-X because the Payroll Service can take no responsibility for the accuracy of the ERTC credits you are claiming. And even more troubling, they are allowing you to claim ERTC by checking a box and attesting that you had a full or partial suspension of operations. This is NOT okay! It is particularly important to develop contemporaneous documentation to support your tax position in the event of an IRS audit. We think the IRS is going to have a field day auditing all of these clients who filed their Form 941-X through their payroll company. All they have to ask is "How did you qualify?", and they'll be recovering ill-gotten refunds and penalties and interest by the BILLIONS! But not to only highlight the negative, there are certainly exceptions to that rule . . . And there have been plenty of Payroll Services that we’ve worked with who are happy to provide the payroll registers that we need to perform the allocations. And they are happy to file the Amended Form 941-X when they act as a PEO (Professional Employer Organization) and file all their clients' payroll taxes on a single Schedule R Why can't my CPA do this for me? There are over 70,000 pages of tax code; it’s impossible to be an expert on all of them. Tax Resolution and Tax Recovery is all we do. It’s like the diﬀerence between your family doctor and a neurologist. By concentrating on this one program, we understand the intricacies and nuances involved in determining your eligibility and accurately calculating your refunds. Whether your tax accountant is a CPA or EA, he or she most likely only prepares your Federal and State Income Tax Returns. However, ERTC credits are claimed against Payroll Taxes on Form 941-X. The complexity of the ERTC program is a beast unto itself and every tax accountant we’ve talked to has said they focus on staying up-to-date on the ever-evolving income tax code, and they can’t now become experts in the ERTC program as well. If your tax accountant is comfortable determining your eligibility by quarter and year, computing your credits, and preparing contemporaneous documentation to support an IRS audit, then you should certainly let them handle all of this. If you want to preserve that relationship and let us handle this special situation, we're happy to engage. My bookkeeper has all my info . . . can they handle my ERTC claims? Your Bookkeeper should certainly have access to all the information that is needed for an accurate calculation of your legal ERTC claim. They will have your financial reports, payroll registers, and PPP loan forgiveness documents. The Million Dollar Question is . . . Do They Have The Time? Do they have the time to dig into the text of American Rescue Plan Act of 2021. And its accompanying referenced laws like: , PPP Payroll Flexibility Act and the Consolidated Appropriations Act. Time to read the IRS Interpretations and FAQ’s? And cross-reference those definitions with that of PPP which was separately definedCARES Act, Families First Act, Payroll & Healthcare Enhancement Act and dissimilarly interpreted in the Small Business Administration's Bulletins and IFRs? Do they have the experience of applying IRS Notice 2021-20 to situations like yours? Do they have the time to ensure accuracy in eligibility determination, maximize your computation and create the supporting documentation you’ll need to support an IRS audit of employer taxes? So far, we have not found a bookkeeper who is able to take all this on, while handling the day-to-day of bookkeeping. What is your fee and when do we pay it? There are no up-front fees or obligation to receive your refund analysis. You will never come out of pocket to pay our fee. We're paid only as you receive your refund checks. Our fee includes preparation of your claims by an expert CPA or Tax Attorney who specializes ERC refunds. We also stand behind our work with Audit Protection at no additional cost. How do I know if my business qualifies? The IRS expects 70% - 80% of small and medium businesses to qualify. If your business experienced disruptions to commerce, travel, or group meetings, you qualify! This includes supply chain disruptions, price increases, stafﬁng shortages, difﬁculty hiring, reduced hours, reduction in goods or services oﬀered, were unable to travel, or attend conventions. Talk to one of our Refund Specialists to ﬁnd out more. Is it true that "Supply Chain Issues" will qualify me for these credits? While technically "true", this should come with a HUGE warning label. There are a ton of ERTC companies (some are just marketing outfits) telling business owners they will qualify if they have any supply chain issues. Frankly, they are telling people that they qualify for almost anything pandemic related. We've even had a prospect tell us they were qualified by another firm because they had trouble hiring people due to all the unemployment checks. Bottom Line: the partial suspension of operations (even due to supply chain constraints) must be as the result of a government mandate. There are plenty of businesses where a case can be made, but that is exactly what needs to occur . . . a case must be made. This is where we lean on tax attorneys to assess all the federal, state and local mandates to determine how those mandates results in a "more than nominal" impact which resulted in a partial suspension of operations. Even if you did not have supply chain issues, you may still qualify based on the reduction of revenue. We are definitely not saying that "Supply Chain" cannot be a valid reason. All we are saying is that you had better be prepared with contemporaneous documentation to support that determination because this will be a point of emphasis when the IRS audits these refunds. How do you know you are working with an expert that is going to maximize my refund? Here's an example of why this matters: While many other calculate the credit at their most basic level . . . we use algorithms to optimize these credits by employee . . . by day. Cast in point, If you received PPP funds, the precision with which we allocate these funds is critical to ensure there is no "double-dipping" while also maximizing every dollar that is legally owed to you. Since we allocated wages by employee by day, we may use PPP funds to pay an employee in the morning, and use their afternoon pay as qualifying wages for ERTC. This means that for many clients, we allocate 100% of their PPP funds without having to reduce the maximum allowable credits for each employee (that's up to $5,000 per employee in 2020 or $7,000 per employee per quarter in 2021). So if you want to know whether the ERTC firm pitching you is truly maximizing your refund, If they are not asking for a quarterly summary of payroll . . . then there is no way they can allocate this precisely by day by employee. Unless they are getting a payroll report showing every employee and the breakout of every paycheck, then you're not working with an "expert". How long does it take to get my refund? Our work will be completed within 10-14 days of receiving your documents. You’ll receive refund checks from the US Treasury in 3-4 months depending upon backlog. The longer you wait, the longer it will take! How is my refund calculated? Determining the proper amount that you’re entitled to is a complex accounting process. Although these are payroll tax credits, what you’ve paid in payroll tax has no bearing on your ERC calculations. The refunds are based on many factors including qualifying quarters, number of employees, hours worked, wages paid and if applicable, PPP loans, group health premiums and participation in other government programs to name a few. What if we wait to claim ERC? Time is of the essence as the program has technically expired. We have a limited window of time to claw back the money which is rightfully owed to you. The program could run out of allocated funds at anytime and is subject to the whims of congress. Don’t delay! But I've been told my business does not qualify. Our team has already recovered over $450 million in refunds that businesses were entitled to. Many times for companies who were previously told they didn’t qualify. It won’t cost you a penny to see how much we can recover for you. Do I have to pay this back? It’s a refund of payroll taxes. It’s YOUR money! There are no limitations on how you use it. Are there restrictions on my ERC funds? There are no restrictions on the use of funds. Are my ERC monies taxable? Although the ERC is not taxable, it is subject to cost disallowance laws that essentially render it taxable. So yes, 100% of your ERC is taxable in the year it’s received, subject to your business having taxable income. ERC is a reduction of wage expense in the relevant year. If, for example, you deducted $15,000 in wages and you received $5,000 in ERC, you would have $10,000 in deductible wages. Therefore, the $5,000 in ERC would be taxable income because you already deducted 15,000 in wages for which you received $5,000 in ERC. See IRS Notice 2021-49 for further clarification. How long will it take to receive my ERC money? Currently, the IRS is not providing any estimates related to the timing of Employee Retention Credit receipt. However, they have indicated that there are over 1.8 million paper payroll tax returns in the queue with the IRS. Our best guess is that you’ll be waiting 6+ months from the filing date of your claim. The good news is that In order to remove the uncertainty to our qualified clients on the timing of receipt of their credit, we offer an advance payment option that enables the receipt of funds in as little as two weeks following the submission of our package to the IRS. What is the interplay between wages included in the WOTC Credit and wages utilized in the ERC Calculations? Wage expenses utilized in the ERC calculation cannot also be used in the WOTC Credit calculation. Wage expenses that qualify as both ERC-eligible Qualifying Wages and WOTC Credit purposes still need to be included as QREs in the base year calculations for future year WOTC Credit calculations. Wages funded by PPP can be included in the WOTC credit calculation. What is the interplay between wages included in the R & D Credit and wages utilized in the ERC Calculations? Wage expenses utilized in the ERC calculation cannot also be used in the R & D Credit calculation. Wage expenses that qualify as both ERC-eligible Qualifying Wages and R & D Credit purposes still need to be included as QREs in the base year calculations for future year R & D Credit calculations. Wages funded by PPP can be included in the R & D credit calculation. Are most companies utilizing the Gross Receipts Test or the Government Mandate Test to reach eligibility for ERC purposes? For the 2020 ERC, most companies are qualifying as an eligible employer under the Government Mandate Test. For the 2021 ERCs, most companies are qualifying as an eligible employer under the Gross Receipts Test. What is a Severely Distressed Employer? If you experienced over 90 percent loss in gross receipts when comparing a quarter against the corresponding one in 2019, you are a Severely Distressed Employer and you are not subject to caps or maximums when claiming ERC. FAQs Specific to Restaurants My restaurant is currently required to close at an earlier hour than its regular closing time due to a statewide government curfew. Is my restaurant considered partially shut down for purposes of determining eligibility for the ERC? Yes. According to FAQs published on the IRS website, a governmental order includes an order from a local official imposing a curfew on residents that impacts the operating hours of a trade or business for a specified period. Under a government order, my restaurant is required to reduce the seating capacity of our indoor dining room to accommodate for social distancing. However, the indoor dining room is open, and we are still able to offer delivery and carry-out. Is my restaurant considered partially shut down for purposes of determining eligibility for the ERC? It depends. IRS guidance says that if all of an employer’s business operations may continue, even if subject to modification (for example, to satisfy distancing requirements), such modification of operations is not considered to be a partial suspension of business operations due to a governmental order, unless the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances. The IRS guidance does not define “nominal,” so each employer’s fact pattern must be reviewed on a case-by-case basis. Our company owns restaurants located in California, North Dakota and Utah. The restaurant locations in California were required to shut down due to government order. The ones in North Dakota and Utah were not. Is our company considered to have a suspension of operations due to a government order? Yes. According to IRS guidance, employers that operate a trade or business in multiple locations and are subject to state and local governmental orders limiting operations in some, but not all, jurisdictions are considered to have a partial suspension of operations. In this example, the company has a partial suspension of operations because of the government order in California. The partial suspension results in the company being an eligible employer nationwide. For a company that has set up separate legal entities for each state’s restaurant locations, it will need to consider the ERC’s aggregation rules. Our restaurant, a limited liability company (LLC), is owned 100% by one individual. That individual also owns 100% of two other restaurants that are also LLCs. Are we required to look at the three entities as one single employer for purposes of the ERC? Yes. Under the ERC, employers are required to review the aggregation rules. All entities that are treated as a single employer under section 52(a) or (b) of the Internal Revenue Code or section 414(m) or (o) of the Code are considered one employer for purposes of the ERC. The aggregation rules can significantly impact a group of related entities’ ERC, so these rules must be taken into consideration when determining eligibility and calculating the ERC. Is my restaurant required to include part-time employees in the calculation of employees to determine if we are a large employer for calculating qualified wages? No. Part-time employees are not included in the calculation of employees to determine large employer status. A company must calculate the average number of “full-time” employees employed during 2019. The IRS guidance for the ERC states that a “full-time” employee means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month. Restaurants should remember to count both the restaurant employees and those that work at their corporate office. They also need to keep in mind the aggregation rules discussed above when calculating the number of full-time employees. As a reminder, the definition of a large employer for 2020 ERC was defined as more than 100 full-time employees, and for 2021 ERC is defined as more than 500 full-time employees. Both full-time employee counts are based on 2019 full-time employee counts. When calculating qualified wages, should we include the wages of only the full-time employees or all employees? If the company is a large employer for purposes of the ERC, qualified wages are wages paid to an employee for time that the employee is not providing services. If the company is not a large employer, qualified wages are the wages paid to any employee, whether they provided services or not. Are tips included in the calculation of qualified wages? At this time, IRS guidance is unclear as to whether tips should be included in wages. LTRS will provide more information on this topic when guidance becomes available. My restaurant currently claims the Work Opportunity Tax Credit (WOTC). If we claim the ERC, will that impact the calculation of the WOTC? Yes. IRS guidance confirms that companies cannot “double dip.” The same wages cannot be used for both the ERC and the WOTC. Companies that currently claim the WOTC will want to inform their WOTC providers that they are planning to claim the ERC, so applicable qualified wages are not included in both credit calculations. My restaurant utilizes a PEO to report our payroll. Can we still claim the ERC? Yes. A common law employer, if eligible to receive the ERC, is entitled to the ERC regardless of whether it uses a PEO. IRS guidance explains that if a PEO is claiming the ERC on behalf of a client employer, the PEO must collect from the client any information necessary to accurately claim the ERC on its client’s behalf. Restaurants that use a PEO should inquire about the process with their PEO to claim the ERC. General Topics Related to ERC Why do you NOT believe in having tax attorneys on staff? We most certainly have our own tax attorneys to assist us, but this question comes up when a client wants to qualify based on a partial suspension of operations and they cannot provide us a clear understanding of which government mandates restricted their operations. While some ERTC firms boast of having attorneys on staff to write memos for their clients, we are fundamentally opposed to that concept. Instead, we recommend that you engage an attorney independently. We are happy to refer you to attorneys that we know who will do a fine job. However, we believe there should be a clear separation between the attorney's opinion letter and our firm who is calculating your credits. Since our fees are based on a percentage of the refunds that you receive . . . and since the size of those refunds are based on the time period that you qualify . . . we do not want there to be even an appearance of a conflict of interest. If the IRS comes to audit, we want your truth to be that you engaged an independent, third party law firm to assess your eligibility and provide an opinion letter . . . and you brought that letter to us, an independent CPA firm. What more could the IRS expect of you as a taxpayer? With that level of diligence, we can all sleep easy at night. And to be clear, we do not require (or even recommend) these letters for every client. Less than 2% of our clients have needed these letters and this is really just a function of us being very conservative in our own judgment. When other firms talk about being "aggressive" with these refunds, that's a position we just cannot support. There's no need for that. Just apply the facts to your situation, execute the math precisely, and sleep easy knowing it is not gojng to come back to haunt you. Can my accountant or bookkeeper handle the filing for the ERC money? Doubtful. Determining the proper amount of credit, you can claim – and properly documenting it – is significantly more complicated than the PPP program. There are special rules and restrictions to this program and special paperwork requirements, so unless your accountant has taken an advanced course and become a certified expert on the ERC program, you’ll want to use a CPA specializing in Employee Retention Credit. What does the Legacy Tax & Resolution Services (LTRS) do for my business? We will provide you full ERC services, including filing and claiming your Employee Retention Credit from the IRS. For those that qualify and wish to receive cash fast, we can even arrange for an advance payment of up to 70% of your total credit within as little as 3 – 4 weeks! Through our process we will collect qualitative and quantitative data to evaluate your eligibility and then perform detailed and complex computations to determine your ERC. Through sophisticated analysis and reporting, we are able to maximize the ERC for clients by carefully selecting how certain wages are treated for PPP versus ERC purposes at the employee level as well as understanding the nuances of a complex tax code. For all of our clients, we deliver a +10-page report documenting your eligibility as well as the results from our proprietary ERC calculator that supports the numbers used to claim your credit. We then prepare any amended payroll tax returns, Form 941-X(s), and file your ERC claim with the IRS. When we do that, we request a refund check for you. And when that work is done, we commit to helping you in the future in case there are questions about how you arrived at your IRS filing. We do it all for you! How are your clients getting refund checks in 2 weeks instead of 9 months? ERTC was meant to help impacted taxpayers, but the manual amendment process (you read that right, no e-filing) has led to a huge backlog of files at the IRS. For taxpayers in need of funds faster than the 8 to 12 months we expect, we have undergone due diligence with an ERTC Investment Fund that is advancing cash in 2 to 4 weeks. This was a monumental milestone for us because it was institutional acknowledgment that our methodology was sound - our calculations precise - our calculations legally maximized. Because after all, institutions don't want to lend money on a bogus receivable . . . they receive our workpapers as collateral. In the interest of full disclosure, we introduce you to the Fund after we have completed your calculation and presented your Form 941-X's. But beyond that introduction, there is no financial relationship between us and Fund. We want to keep this at arm's length - we have no desire to wade into the regulations and protections of the consumer financing industry. If the amended are processed by an ERC processing company, do they accept the liability on any false claims and incorrect filings. The short answer no! Ultimately you and your company are going will be held responsible for the documents that are submitted to the IRS. As a matter of fact the IRS just issues a new warning "IRS issues renewed warning on Employee Retention Credit claims; false claims generate compliance risk for people and businesses claiming credit improperly". In my opinion you should only be working with an EA, CPA or Tax Attorney based firm that will provide you with an "Audit Proof" executive summary of their findings. Working with an EA, CPA or Tax Attorney based firm gives you some assurance that they have an ethical and fidicuary responsibility to properly submit documents to the IRS on your behalf.

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Research & Development (R&D) FAQs

Research & Development (R&D) FAQs What is the Research & Development Tax Credit? The Research and Development (R&D) tax credit, also known as the Research and Experimentation (R&E) tax credit, is a United States government-sponsored tax initiative. It results in a dollar-for-dollar reduction in a company's tax liabilities and is one of the best things American businesses can do to reduce their liability tax. Companies can submit documentation to file using IRS Form 6765. The research and experimentation tax credit was essentially designed as an incentive to make research activities more affordable for businesses, strengthening American innovation. My start-up is not profitable, do I still qualify for the R&D Tax Credit? Yes, profitability does not affect qualification. However, if you are not profitable, you either A) have to qualify as a small business start-up to apply the credit against your payroll taxes, or B) carry forward the credits until you have regular tax liability. The qualification for small business payroll tax offset is less than five (5) years of gross receipts history, and less than $5MM in gross receipts during the tax year in which the credit is being claimed. In measuring the $5 million limit, returns and allowances and any predecessor entities are taken into account in determining gross receipts for a tax year. Rules used in determining the base amount in measuring the regular research credit do not apply.60 Where an entity's tax year is less than 12 months, gross receipts are annualized by multiplying the receipts for the short period by 12 and dividing the result by the number of months in the short period. To make the Sec. 41(h) payroll tax credit election, the taxpayer completes Section D, "Qualified Small Business Payroll Tax Election and Payroll Tax Credit," of Form 6765, attaching the form to the taxpayer's timely filed (including extensions) return for the tax year to which the election applies.81 Section D of Form 6765 requires checking a box declaring the filer to be a QSB (line 41) and then entering the portion of the research credit that the filer elects as a payroll credit, not to exceed $250,000 (line 42). For filers that are not partnerships or S corporations, the filer is to report its general business credit carryforward, if any (line 43). Finally, the filer reports, in the case of a partnership or S corporation, the lesser of the calculated research credit or the portion (up to $250,000) of the credit elected to offset payroll tax. In the case of an individual, the filer reports the least of the calculated credit, the amount of the election (up to $250,000), or the filer's general business credit carryforward (line 44). For a partnership or S corporation, the Form 6765 is attached to the entity's timely (including extensions) filed return,82 i.e., a Form 1065, U.S. Return of Partnership Income, for a partnership83 or a Form 1120S, U.S. Income Tax Return for an S Corporation, for an S corporation.84 If the QSB is an individual, the Form 6765 is attached to the individual's return. My Business is closed now, can I still apply for an R&D Tax Credit? Closed businesses may amend tax returns from previous years to claim R&D credits if they were profitable and paid taxes in those years, potentially resulting in a refund. How much money can I get back from the R&D Tax Credit? The amount of credit varies based on a variety of factors including amount of qualified expenses, historic R&D spend, and calculation method. There is no maximum limit or minimum amount of expenses that would affect qualification. There is a limit, however, to the small business payroll tax offset which is $250,000 per year. If you are applying for a payroll tax offset and exceed the $250,000 annual credit limit, then the remaining credits will just be applied to your regular tax liability. How soon can I get my money after I claim the R&D Tax Credit? The tax credit is immediately applied to your tax liability on your corporate tax return. This means that your benefit is calculated in your final tax due. If you file your return timely, you will not have to wait for the IRS to issue a refund. If you did make an amended claim, that claim can take anywhere between six (6) months to nine (9) months to be processed. Why hasn't my CPA told me about the R&D Tax Credit? CPAs are expected to have a general and broad knowledge of tax. This allows them to tackle the hundreds of possible situations that they deal with on a daily basis for their clients. Because the R&D tax credit, unlike other tax incentives, requires deep experience and interpretation of code sections that are not always clearly defined, it is not uncommon for CPAs to recommend consulting services or calculation platforms to handle the R&D credit while they handle everything else. I don't have any employees; can I still claim the credit? Yes, employee salaries are only one (1) of the qualified expenses that generate an R&D tax credit. Other qualified expenses include Supplies and Materials, Outside Contractors, and even Cloud Computing costs! Not having employees does not preclude a company from claiming and utilizing the R&D tax credit. What happens if I get audited as a result of applying for the R&D Tax Credit? In the case of an audit, provided you conducted your study, we would provide audit assistance, free of charge with your study. This includes direct discussions with our R&D tax credit experts who will advise you every step of the way and help you navigate the complex Internal Revenue Code to defend the credits you have generated. How is the R&D Tax Credit computed? There are two (2) different calculation methods for the R&D tax credit. The first is the Regular Credit which compares your current R&D qualified expenses to historic R&D spend by comparing past years spend against your total revenue. The second method is the Alternative Simplified Credit (ASC), which compares your current spend to the prior three (3) years of spend by your company. We run both methods to determine the maximum benefit that your company is entitled to. What type of deliverable will I receive for the R&D Tax Credit? We provide several items in its final deliverable for every study completed on the platform. This includes relevant tax forms (Form 6765, any state R&D tax credit forms) in addition to Qualified Research Expense (QRE) summaries for each category of expenses where QREs were identified. The level of detail within the expense analysis will be dependent on the detail provided during the study. Finally, there will be an informational guide with filing instructions. What are the limitations on the R&D Tax Credit? The Research and Development Tax Credit, like other general business credits, cannot exceed the excess of the taxpayer's "net income tax" over the greater of the tentative minimum tax for the year or 25% of the taxpayer's "net regular tax" that exceeds $25,000. Net income tax means the regular tax and alternative minimum tax less nonrefundable personal credits, foreign tax credits, and certain credits dealing with motor vehicles. Net regular tax means the regular tax less the same credits. In addition, certain "eligible small businesses" may use the Research and Development Tax Credit to offset their alternative minimum tax. Eligible small businesses for this purpose are non-publicly traded corporations, partnerships, and sole proprietorships with less than $50 million in average gross receipts for the three preceding tax years. Credits for a partnership or S corporation are not allowed to a partner or shareholder unless the partner or shareholder meets the $50 million gross receipts limit for the year the credit is claimed. Prior to the enactment of the PATH Act, many taxpayers also were unable to realize the benefits of the R&D tax credit in a given year due to the application of AMT liability, which the R&D tax credit could not reduce. Fortunately, the PATH Act also allows eligible small businesses (ESBs) to use the R&D credit to offset their AMT liability for tax years beginning after Dec. 31, 2015. (The legislation known as the Tax Cuts and Jobs Act, P.L. 115-97, repealed the AMT for C corporations for tax years 2018 and following and, for individuals in tax years 2018 through 2025, increased the AMT exemption amount and the exemption's phaseout threshold.) Any unused portion of the credit may be carried back one year and forward 20 years. Any unused credit at the end of the 20-year carryover period may be deducted in the 21st year. Can you take dedution under Section 174 and also claim the R &D Tax Credit Sec. 280C(c) prevents a double benefit, denying any deduction under Sec. 174 by the amount of a credit claimed under Sec. 41 for the same expenditures. Alternatively, the taxpayer may elect to claim a reduced research tax credit in lieu of reducing otherwise allowable deductions. Do I qualify for R&D Tax Credits? If your business has less than $5 million in annual revenue, and it's been less than five (5) years since your first gross receipts/sales, you can frequently reduce your Social Security Payroll tax liability under the PATH Act R&D credit. If you do not qualify under the PATH Act R&D Credit, you can take regular R&D Credit against income taxes (rather than against payroll taxes). As a tax or accounting or bookkeeping professional, am I able to refer your services and receive compensation? Yes, join our Tax Credit Team and earn by offering these and other tax savings and credit to your clients How much money can you recover from the R & D Tax Credit There is no cap on the amount your business can claim in R&D tax credits. Since R&D tax credits are determined by the size and scale of your business’s technical activities — the more you spend, the more you save. Most businesses recover about 10% of their qualified R&D tax credit expenditures. What examples of technical activities qualify for the R & D Tax Credit? Qualifying R&D expenses and/or activities are those which pass this four-part test: Technical uncertainty. The activity is performed to eliminate technical uncertainty about the development or improvement of a product or process, which includes computer software, techniques, formulas, and inventions. Process of experimentation. The activities include some process of experimentation undertaken to eliminate or resolve a technical uncertainty. This process involves an evaluation of alternative solutions or approaches and is performed through modeling, simulation, systematic trial and error, or other methods. Technological in nature. The process of experimentation relies on the hard sciences, such as engineering, physics, chemistry, biology, or computer science. Qualified purpose. The purpose of the activity must be to create a new or improved product or process, including computer software, that results in increased performance, function, reliability, or quality. Examples of technical activities that qualify for the R&D tax credit include: Developing Consumer Products Developing Software or Mobile Applications Developing New Processes or Techniques to Manufacture Products Improve the Performance, Functionality, Quality, or Reliability of Existing Products Designing Prototypes Testing Competitors’ Products Conducting Research that Speeds Up Your Time-to-Market Implementing New Process Automation Implementing Process Improvements that Reduce Waste or Improve Efficiency Developing Formula Improvements for Food, Beverage, or Chemical Applications Creating Patentable Products or Processes How large will my R&D tax credit be? Unlimited, if applying the R&D credit against income taxes. These credits can range between 5% and 15% of qualifying R&D costs. If taking the PATH Act R&D credit, a company can receive up to $500k* against payroll taxes and take the remainder against income taxes. As an example, for an unprofitable 5-person tech startup that has less than $5M in annual revenue with roughly 80% of time being spent on qualifying R&D activities, and average salary of $100k/year, the credit might be between $20k to $60k. Tax Prep Advocates’ fee is a small percentage of the total qualifying R&D expense and easily pays for itself by securing the R&D Tax Credit for you. *$500,000 for 2023 tax year, $250,000 for 2022 tax year Can I claim the R&D credit retroactively? Yes, we can help you file an amended tax return to claim the R&D credit for previously filed Income Tax returns (past 3 years), but you cannot take the PATH Act R&D credit on an amended tax return. What does Legacy Tax & Resolution Services' R&D Credit Service include? We help businesses with all aspects of claiming these R&D Tax Credits. Legacy Tax & Resolution Services will: ✓ Identify and calculate qualifying R&D expenses. ✓ Prepare Forms 6765, 8974, and 941 to gain IRS approval of credit. If you use Legacy Tax & Resolution Services as your tax professionals, we’ll file on your behalf as well. ✓ Prepare all required supporting technical and financial documentation, including documentation of research time, R&D payroll expenses, etc. This is an important pre-requisite to support an IRS audit in case that happens. ✓ Coordinate with your tax preparer, payroll provider, and accountant to ensure your books and taxes are accurate. ✓ Continually ensure the credit is applied correctly against your payroll liabilities. ✓ Email and phone support with R&D credit experts. Does Legacy Tax & Resolution Services support you in case of an audit? Yes, we can help support you in the case of an audit. Why is having an R&D study done important? Legacy Tax & Resolution Services recommends anyone who claims the R&D credit get a study done. An R&D study determines the total amount the business should claim and collects the necessary documentation to support that claim. When filing for the R&D tax credit, you must submit the relevant tax forms to the IRS. However, you must also have the technical and financial justification of what you were claiming prepared in case the IRS audits your claim. If the IRS audits the claim and you can’t produce technical and financial evidence behind what you claimed, you will need to return the money and potentially pay a penalty. Can I use Legacy Tax & Resolution Services' R&D Credit Service without using your Tax Preparation services? Yes, we’ll calculate the R&D tax credits and provide the necessary documentation for your tax preparer to file. If you use Legacy Tax & Resolution Services as your tax professionals, we’ll take care of the full process and file the necessary tax paperwork on your behalf as well. Are there state-level R&D tax credits? 41 states currently offer an R&D credit. Generally, the states follow federal guidelines on what constitutes qualified R&D expenditures with a few exceptions. Legacy Tax & Resolution Services will provide guidance on state level credits. For example, the CA R&D credit is non-refundable which means it cannot be taken against payroll tax. Work must be done in CA to be considered qualified and CA credits can carry forward indefinitely until exhausted. Is it worth the time? Absolutely! Considering the positive impact on your cash flows or bottom line and that your assessment can typically be completed in 90 minutes, this is the reason why this credit scores very well on something we call the “Good to Grief Ratio” which measures the value you receive vs. the time you have to put in to get that value. Isn’t the R&D credit just for tech or scientific companies? No. It’s for all types of companies, many that don’t even realize are eligible. How is a credit different than a deduction? Regarding tax deduction vs. tax credit, the essential difference between deduction and credit is that a credit directly decreases the amount of tax you owe while adeduction lowers your overall amount of taxable income. A nonrefundable credit lets you reduce your tax liability to 0. Why does this government do this? The government wants to keep innovation here in the United States by incentivizing companies to develop projects by reducing the financial risk on projects where cost might prevent them from pursuing them. How do I know if I qualify for the R&D tax credit? If your business invests in the innovation of a product or process, you may qualify for the R&D tax credits. To see if your business qualifies, use the link below for a phone consultation to determine your project's eligibility. How much will the R&D credit save my business in taxes? Once you enter your business and R&D spending details into our system, you'll get an estimated saving for your business's potential savings. After receiving your estimated savings, we will guide you through the documentation and steps to claim the credit. Is the R&D tax credit legitimate? It sounds too good to be true. Yes, the R&D tax credits are legitimate and were created by the government of the United States to encourage technology-based innovation by providing tax credits. Why should I take the R&D tax credit? As with any tax credit, the R&D tax credits create funds that go back into your business's pocket to fuel additional innovation and grow your business's bottom line. Where did the R&D Tax Credit come from? The R&D tax credit was initially created in the 1980s by U.S. Representative Jack Kemp and U.S. Senator William Roth. It has since expired eight times and been extended fifteen times. It was created to protect Americans, encourage investment in development, and increase research activities along with basic research payments. With the competitiveness of today's business world, Congress is encouraging businesses to increase their research activities; they do want to increase economic growth, after all. In the past, the Alternative Minimum Tax (AMT) did prevent businesses from being able to file. Then Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA) which reduced the corporate tax rate, thus increasing the value of the R&D tax credit. The Tax Cut and Jobs Act (TCJA) was created to help lower business tax rates. They created the R&D tax credit and made it permanent while eliminating other corporate tax credits. As a result of the TCJA, there were changes in tax deductions beginning at the end of December 2021. Before the TCJA was created, companies had to reduce regular credit to 20% of Qualified Restoration Expenditures (QRE) to 13% of QRE spending or be forced to have reduced credit on alternative simplified credit. If you're interested in learning more, the IRS has created specific guidelines for businesses to file for research and development tax credit in Internal Revenue Code (IRC) Section 41 and Section 174. How do you qualify for the R&D Tax Credit? Many businesses are not aware they meet eligibility qualifications. Some believe there are special rules needed to qualify. While the correct documentation is required, over 60 industries can qualify for R&D credit in over 30 states to offset tax liabilities. Some businesses' daily operations can even qualify them, allowing them to receive basic research credit if it puts them over a certain base amount. Even start-ups can use this to their advantage. Here are some of the factors small businesses and large businesses alike must be doing to qualify: What's the process like of claiming the R&D tax credits? The first step is to find your estimated savings in our system in minutes. Once you determine an estimate of savings, we guide you through every step, from determining the eligible projects and expenses to creating the documentation needed and preparing final documents for submission during tax season. Do I need to be an R&D tax credit expert to use your system? No, you do not. We created our system with educational, step-by-step guides to make these lucrative tax credits accessible and affordable to any business, regardless of their prior experience working with R&D tax credits. However, we recommend working with tax and accounting professionals to gain complete confidence in claiming your credit. Our project failed, and we will not qualify. Not true. Tally the eligible costs up to the termination point and include those in your company's R&D credit calculation. We don't quality because we have no federal tax liability. Smaller businesses and start-up companies can apply their R&D credits against their payroll tax—not just their profits. We're not engineers, drug researchers, or software developers, so we're not a good fit. All types of companies in various industries are now successfully utilizing R&D credits. Does the R&D credit apply to both direct and indirect research expenses? No, the R&D tax credit may be claimed for direct research expenses only. Direct research expenses are costs that are directly associated with the performance of qualified research, such as: Wages paid to employees who are directly involved in R&D activities; Supplies used in R&D activities; or Contract research expenses. Indirect research expenses are costs that are associated with the performance of qualified research but cannot be directly linked to such research because they are merely tangential. A common example of an indirect research expense is overhead costs (such as rents and utilities). What are qualified research expenses? Qualified research expenses (QREs) are defined in §41(b)(1) of the Internal Revenue Code as the sum of in-house research expenses and contract research expenses. In-house research expenses include: Wages paid to employees for the performance of qualified services (engaging in qualified research or the direct supervision or support of the research); Supplies used in the conduct of qualified research; and Fees paid to another person for the right to use a computer in the conduct of qualified research. Contract research expenses include: Generally, 65% of any amount paid to a third party for the performance of qualified research; and Only allowable if the work conducted by the third-party contractor would be considered qualified if performed by an employee of the taxpayer To be eligible for the R&D tax credit, the expenses must be for qualified research activities that meet specific requirements. The research must be technological in nature and involve a process of experimentation. It must be intended to be useful in developing a new or improved product, process, or technique. The research must also be conducted in the United States, and the expenses must be incurred in the tax year in which the credit is claimed. If an expense is not set forth in §41(b), it cannot be claimed as a QRE. What is the consistency requirement for qualified research expenses? The consistency requirement in §41(c)(5)(A) states that the qualified research expenses (QREs) and gross receipts used to compute the fixed base percentage for the R&D credit must be determined consistently with the determination of QREs for the credit year. This means that the QREs in the credit year and during the base years must be consistent, along with the gross receipts in the base years and the prior four years' average. This requirement is designed to accurately determine the increase in QREs relative to the taxpayer's gross receipts. If a taxpayer claims an expense as a QRE in the credit year that it did not previously treat as a QRE, it must adjust its fixed base percentage to include similar expenses paid or incurred during the base years. The research credit is an incremental credit, so the taxpayer must demonstrate that there has been an increase in QREs relative to the base period. The consistency requirement applies even if the period for filing a claim for credit or refund has expired for any taxable year that is considered in determining the fixed base percentage. What's the 4-part test for R&D credits? To qualify for the R&D tax credit, the IRS requires taxpayers to satisfy a four-part test to demonstrate the activity permitted activities and expenses. This test is crucial because it sets the requirements for what "qualified research activities" can potentially qualify for R&D tax credits. This helps ensure that only eligible activities receive the incentive, and it guides companies on how to structure their R&D activities to maximize their chances of qualifying for the credit. The four different parts of the test are: The Business Component Test The Section 174 Test The Process of Experimentation Test The Discovering Technological Information Test Each test must be satisfied in order to qualify for the R&D tax credit. The requirements for each test are described below. Does my employee have to be an engineer or scientist for their work to qualify for an R&D credit? Not necessarily. Credit eligibility is based on what an employee actually does, or doesn’t do, during a specific time period. It’s important to note the technical and educational qualifications of a researcher, but this alone isn’t conclusive evidence of their work being qualified for an R&D credit. Companies with large numbers of engineers and scientists do stand out as prime candidates for the credit because it was created to encourage research and experimentation based on the "hard sciences." Examples of hard sciences include physics, chemistry, and biology, while examples of soft sciences include sociology and psychology. But this holds true regardless of who performs the activities and can include employees with many different job titles and backgrounds. Experimentation performed by both employees and third-party contractors who engage in the improvement of projects and processes may be included. What documentation is needed to substantiate payroll expenses for R&D credits? To claim payroll expenses for R&D tax credits, you must provide supporting documentation to verify the wages and salaries you claim. In addition, you might need to provide documentation that shows that the employees whose wages and salaries you're claiming were directly involved in the qualified R&D activities. Documentation for wages and salaries may include the following: Payroll records, like pay stubs and wage and earnings statements. Other records show the amount, date, and nature of the wages and salaries you're claiming. To prove qualified research activities, you may need the following: Timesheets. Project plans. Other records show the specific tasks and activities the employees were involved in. Other records show how much time employees spent on specific activities. In general, you should retain thorough and detailed records of your payroll expenses in case the IRS or other tax authorities need to verify your claims. The specific documentation required can vary depending on the location and circumstances of your business. So, it's always a good idea to consult with a tax professional or refer to your area's relevant tax laws and regulations to determine the exact requirements. Which documents do I need to support the R&D credit? Below you'll find comprehensive documentation lists below for qualified research expenses (QREs) and R&D activities. Please remember that the lists aren't exhaustive since there can be variations depending on your specific type of business, the research conducted, and the types of expenses. Depending on your circumstances, you may need to provide more or less documentation. For QREs: General Calculations of your base amount and fixed base percentage Chart of accounts Acquisitions and dispositions from 1984 through the tax year under audit (if applicable) Accounting method ( i.e., whether costs are accumulated by department or by project). The IRS's preferred method for capturing qualified research expenses is a project-based approach where you can create a solid connection between qualified research activities and qualified research expenses. Project-based accounting captures research costs at the "business component" level, whereas cost-center accounting doesn't always provide enough connection between qualified activities and their related costs. Wages Organizational chart Names and work titles of the employees whose wages are included in the calculations for the credit. Position description, what each employee did, and the amount of their time and wages included in the credit. Timesheets Tracking through a time-tracking system helps create a solid connection between wage-qualified research activities and qualified research expenses. Alternatively, you may rely on estimates through oral testimony or time allocation questionnaires. W2s This excludes non-taxable items, such as 401(k) contributions, health insurance contributions, and other pre-tax benefit deductions. Any other documentation related to the R&D credit claim Breakdown of wages claimed by the employee, year, and qualified project. Payroll registers Supplies List of the supplies showing they are tangible property, the corresponding amount, and invoices. Information on how the supplies were used concerning R&D activities. Chart of accounts General ledger Purchase orders Invoices Note: You should develop a systematic protocol to track or allocate qualified supply expenses to applicable qualified business components. Contracts Names, addresses, and the amount claimed for each contractor The location where the contractor conducted the claimed activities Description of the research activities performed Description of ownership relationships between the company claiming the credit and the contractor Contractual agreements and invoices Chart of accounts General ledger Purchase orders Form 1099 (for individual contractors) Note: If possible, you should track or allocate contract research expenses to applicable qualified business components. For R&D activities: Complete project lists identifying current and ongoing R&D projects claimed. Description of each business component's new or improved function, performance, reliability, or quality. Description of the process of experimentation. In chronological order, of all the steps or activities undertaken when developing or improving a product or business component. For example, a timeline description of the company's development processes and procedures. Documentation showing the scope of the research activities, including the problem to solve, potential solutions, concerns, and project authorization requests. Procedure manual, project checklist, technical abstract, lab schedule, lab report, project status report, summary experiment data results, etc., for products or business components developed or improved and claimed for the research credit. Issue logs, meeting minutes, chronological timelines, internal memos, emails, patent applications, abstracts, work orders, budgets, capital addition requests, purchase orders, invoices, contractual agreements with customers, grants, etc., related to the research. Workpapers generated while calculating the credit Patents or patent applications Design requirements, functional specifications, modeling simulation documentation Testing scripts What is the startup provision? The startup provision allows companies to claim credits against payroll taxes if they’re not paying income tax. This is great for pre-revenue firms that are spending a lot on product development but haven’t gone to market yet. We can decrease your burn rate by getting you money back. You can claim up to 250k a year, and up to 1.25 million in total. Is the payroll benefit only for startups or small businesses? No. It just needs to have: Gross receipts less than $5 million in the taxable credit year. No gross receipts for any taxable year preceding the 5-taxable year period ending with the taxable credit year. R&D payroll tax credit can use in that year. So even companies that have been around for more than five years and have spent billions of dollars to develop or improve any component could be eligible. Can I claim the R&D credit if I own a startup or small business? Yes, a startup or small business may be able to claim the R&D credit if it is conducting qualified research activities in the United States. The business must have qualifying research expenses, which are generally defined as expenses incurred in the process of attempting to develop new or improved products, processes, techniques, formulas, inventions, or software. If a startup or small business meets these requirements and documents appropriately, it may be able to claim the R&D credit. Here is a list of things that a small business should consider when documenting their R&D qualifying research activities and expenses: Keep detailed records of research activities and expenses. Document how research activities and expenses relate to the company's business. Retain receipts, invoices, and other documentation for expenses. Maintain time logs or other documentation of time spent on qualified research activities by employees. Keep records of any prototypes or pilot models developed as part of the research process. Document the technical uncertainty being addressed through the research. Keep records of any outside contracts or collaborations related to the research. Maintain documentation of any failed research efforts. Instead helps walk you through step by step how to determine if you are eligible for the credit and every step needed to implement the credit. How do I claim a federal R&D credit? To actually claim an R&D tax credit at the federal level in the US, you’ll need to complete and file Form 6765, “Credit for Increasing Research Activities,” with the IRS. It’s used to calculate the amount of the credit that you’re eligible to claim, and it has to be attached to your tax return You will need the following: Information on your eligible R&D expenses. Info on any other relevant business and research activities. Attach supporting documentation to verify expenses, such as receipts and invoices. Once you have completed and filed the form, the IRS will review your claim and determine the amount of credit you’re eligible for. If approved, the credit will be applied to your tax liability for the current tax year, reducing the amount of taxes that you owe. It’s important to note that the rules and regulations regarding R&D tax credits can vary depending on your location and the specific circumstances of your business. So, it’s always a good idea to consult with a tax professional or refer to the relevant tax laws and regulations in your area to ensure that you’re following the correct process. How do the rules for the R&D credit differ depending on size or revenue? The rules generally apply the same way to businesses regardless of size or revenue, but there may be some differences in how the credit is calculated and claimed depending on the revenue and age of the business. In general, the R&D credit is available to businesses of all sizes and industries that engage in qualified research activities, and the credit is calculated based on a percentage of the eligible research expenses incurred by the business. However, there are special rules that apply for qualified and eligible small businesses that relate to payroll taxes and the Alternative Minimum Tax (AMT). For example, the R&D credit for small businesses (defined as those with gross receipts of less than $5 million and no more than five years of gross receipts) lets the business use the credit to offset the employer portion of payroll taxes instead of using it against income taxes. Additionally, the R&D credit may be subject to AMT rules, which can affect the amount of the credit that is available to certain businesses. Businesses that have less than $50 million in gross receipts can use the R&D credit when calculating their AMT liability while businesses larger than that may not. Can I claim an R&D credit for research that was funded or sponsored by a government agency? Typically, research funded by a government agency isn’t eligible for R&D credit unless an exception applies, which is made clear in the terms of the grant/subsidy. There are special rules and restrictions that apply when a taxpayer receives government funding for research activities. First, the credit can’t be claimed for expenses for which you’ve received a grant, subsidy, or other forms of government funding unless the funding is specifically designated as not reducing the amount of the R&D credit. In other words, if you receive funding from a government agency that is intended to offset the costs of your research activities, you can’t claim the R&D credit for the same expenses. This is because the government funding is considered a substitute for the R&D credit, and you can’t double-dip by claiming both the funding and the credit for the same expenses. Second, even if you receive government funding that isn’t designated as reducing the R&D credit, you may still be subject to certain restrictions or limitations on the amount of the credit that can be claimed. For example, the R&D credit may be subject to alternative minimum tax (AMT) rules, which can affect the amount of the credit that’s available. Finally, there are specific rules and guidelines dictating who can claim the credit when third-party funding is involved. To qualify for the credit, the business must bear the financial risk of the research and retain substantial rights, meaning that it has the right to use the intellectual property derived from the research in a way that isn’t limited by the third party. In situations where the agreement between the business and the third party is unclear, incomplete, or nonexistent, it may be necessary to conduct a funding analysis to determine the eligibility for the credit. This analysis may involve examining the agreements between the parties, referencing contract law, and evaluating court precedents. It’s important for businesses to carefully consider the rules and requirements for claiming the R&D tax credit in order to ensure compliance with the law and to maximize the potential benefits of the credit. Can I claim an R&D credit for the same expenses as other tax incentives? No. In general, the rules for the R&D credit allow you to claim the credit for qualified research expenses that aren’t otherwise deductible or recoverable. But, you may not claim the R&D credit for expenses for which you’ve received a grant, subsidy, or other forms of government funding unless the funding is specifically designated as not reducing the amount of the R&D credit. Additionally, you may not claim the R&D credit for expenses that are included in the basis of depreciable property, or for expenses for which you’ve claimed a deduction under another provision of the tax code, such as the domestic production activities deduction. Can you utilize unused portions of R&D tax credits? Yes, you may be able to carry forward (or carry back) the unused portion of the tax credit in certain situations. The unused portion of the R&D tax credit may be carried forward for up to 20 years and there is not a limitation on how much can be claimed through this tax credit. If you believe you were previously eligible for the credit and failed to claim it, you can amend your business’s tax returns for three years (typically 4 years for state). If you had non-taxable or net loss tax years where the statute of limitations has closed, you may be able to go back additional years to calculate credits and carry them forward to taxable years on a carry-forward schedule for up to 20 years until utilized. For example, if you have an R&D tax credit in a particular year that is larger than your tax liability for that year, you may be able to apply the unused portion of the credit against your tax liability in a future year, or to claim a refund for taxes paid in a previous year. How are R&D credits affected when the company is subject to alternative minimum tax (AMT)? The alternative minimum tax (AMT) is a separate tax system that imposes a minimum tax on individuals and corporations that may have a lower tax liability under the regular tax system. The AMT is designed to ensure that individuals and corporations with higher income pay at least a minimum level of tax. The R&D credit allowed for any tax year is subject to a limitation based on the taxpayer's tax liability. For non-corporate taxpayers, the credit may not exceed the excess of the taxpayer's net income tax over the greater of: (i) the taxpayer's tentative minimum tax for the tax year; or (ii) 25% of so much of the taxpayer's net regular tax liability as exceeds $25,000. For this purpose, the net income tax is generally the sum of the regular tax liability and the AMT, and the net regular tax liability is the regular tax liability. Tentative minimum tax is the AMT increased by the regular tax. For corporations, the credit may not exceed the excess of the taxpayer's net income tax over 25% of the taxpayer's net income tax as it exceeds $25,000. However, individuals, including those who have ownership in S corporations or partnerships or sole proprietors with average annual gross receipts over the prior three years of less than $50 million may reduce AMT and their overall tax liability by the R&D credit. It's important to note that the AMT rules and how R&D credits are affected by the AMT can be complex and may vary depending on the specific circumstances of the company. It may be advisable to consult with a tax professional or refer to the Internal Revenue Service (IRS) guidelines for more information on how the AMT affects the R&D credit. Can I still claim an R&D credit if my company isn't developing anything new? Yes, you could still claim the credit despite not developing anything new, provided that you meet the criteria. The Research and Development (R&D) tax credit is a program that allows eligible companies to claim a tax credit for certain expenses associated with conducting research and development activities. To be eligible for the credit, a company must be engaged in qualified research and development activities, which generally means activities that seek to create new or improved products, processes, or technologies. It would also have to pass the 4-part test for R&D credits to be eligible to claim the credit. R&D tax credits are for taxpayers who design, develop, or improve products, processes, techniques, formulas, or software. It’s calculated on the basis of increases in research activities and expenditures—and as a result, it’s intended to reward companies that pursue innovation with increasing investment. What are energy research consortia and do payments made to them qualify for a federal R&D tax credit? Energy research consortia are groups of companies or organizations that collaborate on research and development projects related to energy. These consortia may be formed for a variety of reasons, including to pool resources and expertise to address complex problems, to share the costs of research and development, or to gain access to specialized facilities or equipment. The IRC §41(a)(3) provides a 20% credit for payments made by a business to an energy research consortium for qualified energy research. This credit is a flat credit equal to 20% of the total qualifying expenditures, rather than the incremental increase in qualifying expenditures over a base amount. To qualify as an energy research consortium, an organization must be tax-exempt, focused on conducting energy research in the public interest, and not a private foundation. At least five unrelated persons must also contribute to the organization for energy research during the calendar year in which the organization's tax year begins, and no single person can contribute more than 50% of the total amounts received by the organization. Energy research does not include research that is not qualified under IRC §41(d). A business claiming the 20% credit for payments to a qualified energy research consortium may not also claim those same expenditures for purposes of determining the amount of contract research expenses eligible for other components of the research credit. However, if the business does not claim the credit for energy research consortium payments, 75% of those payments may be taken into account in determining the contract research expenses eligible for the other components of the research credit if the energy research consortium meets the definition of a "qualified research consortium." Can companies more than 5 years old get the payroll benefit? Yes. Although the law is intended to benefit small businesses, any company formed prior to 2012 that did not receive gross receipts could also potentially benefit. What is the payroll credit election and how is it beneficial? A special election exists if your business meets the standards to be considered a qualified small business (QSB). There are different definitions for a QSB depending on their business structure: Corporations and partnerships To be considered a QSB, the business must have gross receipts of less than $5 million and no gross receipts in any tax year before the five-tax-year period ending with the current tax year. Other businesses A person who is not a corporation or partnership may also be considered a qualified small business if their aggregate gross receipts from all trades or businesses is less than $5 million and they had no gross receipts for any tax year before the five-tax-year period ending with the current tax year. Tax-exempt organizations Even if they satisfy the above requirements, organizations that are exempt from income tax under the Internal Revenue Code (IRC) §501 are never considered QSBs. In addition to meeting the qualifications for a QSB, the business must also reach the regular standards for conducting and recording qualified research activities and expenses. If a startup or small business meets these requirements, it may be able to claim the R&D credit by electing to apply a portion of the credit against its payroll taxes rather than its income tax liability. The amount of the credit used against the QSB’s payroll tax liability is limited to the lesser of: The total research credit in the tax year, Up to $500,000, or The amount of the QSB’s business credit carry-forward (not applicable to partnerships or S corporations). When do I claim the payroll tax offset? The payroll tax offset is available on a quarterly basis beginning in the first calendar quarter that begins after a taxpayer files their federal income tax return. What is the R&D payroll tax credit requirements? The R&D payroll tax credit requirements vary by country and jurisdiction. It typically involves qualifying research and development activities and meeting specific criteria for eligible expenses and documentation. What is the R&D shrink-back rule? The shrink-back rule is a concept that is used when determining which expenses qualify for the R&D tax credit. When determining which expenses qualify as qualified research expenses (QREs), companies typically have to go through a four-part test. This test is used to determine whether the expenses are related to qualified research activities. However, it is a common misconception that if a project as a whole does not pass the four-part test, then the entire project is disqualified. The shrink-back rule allows companies to take advantage of the four-part test even when a large-scale project, which may not be qualified, has smaller components that require significant improvements related to function, performance, reliability, or quality. The smaller “subproject” of a project can be used to meet the new or improved business component requirement part of the four-part test. The development costs of the subproject can then be qualified and included in QREs. To make it simple, the shrink-back rule lets companies claim the R&D credit for expenses that are incurred on specific parts of large projects that otherwise may not qualify for the credit as a whole. Can you sell R&D tax credits? Federal R&D tax credits in the United States are not saleable or transferable. The credits are directly tied to the company that incurs the qualifying R&D expenses. They are not a separate asset that can be detached from the company and sold or transferred independently. However, it's important to note that in situations where a company is sold or merged with another entity, the associated tax credits can potentially contribute to the overall value transferred in the transaction. Still, this is not the same as selling the credits separately. There are no known exceptions to this rule at the federal level. The aim of the R&D tax credit program is to incentivize companies to invest in their own innovation and growth. Allowing the sale or transfer of these credits could potentially disrupt this incentive structure. Therefore, the IRS has clear rules against the selling or transferring of federal R&D tax credits. We don't maintain supporting documentation of our R&D or track our employees' daily R&D activities. If you can provide test reports, drawings or blueprints, value stream maps, project review presentations, financial records, and invoices for qualified expenses, your chances of qualifying may be good. How much does an R & D Tax Credit study cost? We don't charge our clients unless we find a benefit. If the client continues with the tax credit study, we charge a flat fee to determine by a percentage of the benefit we identify. Additionally, if our clients are not satisfied with their cedit estimate after Phase 1 of our process, they may walk away without paying for services rendered during the Value Identification portion of the Tax Credit Study. Why haven't I heard of the R & D Tax Credit? The R&D credit is among the most misunderstood tax incentives available. Considering the myriad of industries and activities legally qualifying for the credit, the term "research and development" is a misnomer. The R & D Tax Credit also requires specialized knowledge and technology to identify and calculate the incentive property. It is really no wonder you have not heard of it. Which industries qualify for the R & D Tax Credit? Companies of various industries are unaware they can claim the R & D Tax Credit. Our specialists have successfully identified and delivered tax benefits to the following industries; Aerospace Agriculture Architecture Appeal Brewing Building System Controls Chemical Construction Electronics Energy Engineering Fabrication Food and Beverage Job Shops Manufacturing Medical Devices MEP Contractors Package Design Pharmaceuticals Plastic Injection Molding Technology Telecommunications Tool and Die Waste Management Wineries How many years can I go back to claim the R & D Tax Credit? The R&D tax can be claimed for all open tax years. Generally, open taxes years include the prior three tax years due to the statute of limitations period. In certain circumstances, the law allows businesses to claim the R&D Tax Credit for an extended period. It is common for companies to amend previous tax years to claim this benefit and reduce the maximum amount of tax liability. How long does an R&D Tax Credit study take? Each tax credit study is tailored to ensure that Legacy Tax & Resolution Services can analyze the required information and perform the necessary calculations to meet the needs of each client. A typical tax credit study lasts about six weeks; however, in the event of a pressing deadline, LTRS can complete a study in as little as one week. Where do I file the R&D Tax Credit? Partnerships and S Corporations must file this form to claim the credit. The credit will flow from Form 6765 to the K-1 to Form 3800 on the owner's personal tax return. How do individuals claim this credit on their tax returns? Individuals claiming this credit can report the credit directly on Form 3800, General Business Credit if their only source for the credit is a Partnership, S Corporation, Estate, or Trust. Otherwise, Form 6765 must be filed with the individual's tax return (i.e., sole proprietorship). Is there a limit to how much credit can be used in a given year? For the years before 2016, the credit can be used to reduce the taxpayer's regular tax liability to the tentative minimum tax. Beginning in the tax year 2016, eligible small businesses have expanded utilization for the credit, For these eligible small businesses, the regular tax liability can offset alternative minimum tax using the "25/25" rule. The credit cannot be used to offset alternative minimum tax. It's normal to have questions when filing for Research and Development, also known as the research and experimentation tax credit, especially when tax hikes are in full swing. Frequently businesses will file with incorrect documentation. We would happily provide you with a documentation checklist if you have any questions regarding the correct documentation. Partnering with Legacy Tax & Resolution Services (LTRS) is essential when filing for the R&D tax credit to ensure all is done to keep you in compliance and maximize your overall return – and that's why we're here! We'll look at your expenditures, base amount, tax rate, contract research, and gross receipts in all open tax years to determine how much credit you qualify for so that your business can receive its basic research credit. All records are kept for our internal use only. Contact us today to learn how we can set your business up for success when filing for the R&D credit. What if I have questions about the R&D credits throughout the process? We expect you to have questions along the way! That's why we've built our system as a guided platform that educates you as you move through the process of claiming R&D tax credits. If your questions aren't answered directly inside the platform, you can always access our team via live chat and/or browse our self-serve knowledgebase of 200+ articles. Additionally, our R&D Pros are ready to answer any questions. Our R&D Pros are accountants, tax professionals, EAs, CPAs, and R&D consultants who can assist you in claiming your R&D tax credits. What happens when you get audited for the R&D tax credit? If you are audited for the research and development (R&D) credit, the Internal Revenue Service (IRS) will review your claim to ensure that you are eligible for the credit and that you have calculated the credit accurately. The audit process may involve the IRS requesting additional documentation or information to support your claim, as well as reviewing your financial records and other relevant documentation. During the audit, the IRS will examine whether your research activities meet the criteria for qualified research, whether you have properly documented your research activities and expenses, and whether you have calculated the credit correctly. If the IRS determines that you are eligible for the R&D tax credit, it will allow the credit and any associated tax benefits. If the IRS determines that you are not eligible for the credit or that you have calculated the credit incorrectly, it may disallow the credit and assess any additional taxes and penalties that may be applicable. It is important to carefully document and accurately calculate your R&D tax credit claim to avoid any issues during an audit. It is also advisable to consult with a tax professional or an experienced R&D tax credit specialist to ensure that your claim is properly prepared and supported. How is the R & D Tax Credit monetized? The R&D tax credit is generally used to offset federal income taxes. If the credit is not fully utilized the year it is generated, businesses may carry it back one year for a tax refund. If excess credit is still available, companies may carry it forward for up to 20 years. Startups that are not yet profitable may apply the credit toward federal payroll taxes to offset up to $500,000 each year for up to five years (a total of $2.5 million). What is the fee for using Legacy Tax & Resolution Services' R&D Credit Service? We charge 25% of your total credit received. How is Legacy Tax & Resolutions Services different than other R&D tax credit services? Legacy Tax & Resolution Services is the first solution that allows taxpayers, accountants, and their tax advisors to collaborate on claiming R&D credits by helping you determine project eligibility, estimate tax savings, and create the required documentation all in one affordable and accessible platform.

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Work Opportunity Tax Credit (WOTC) FAQs- Employers Prospective

Work Opportunity Tax Credit (WOTC) FAQs- Employers Prospective What is Work Opportunity Tax Credit? The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who invest in hiring Americans from certain target groups who have previously faced barriers to employment. The goal of this is to act as an incentive for employers to exemplify workplace diversity in return for a maximum tax credit. It is supposed to promote the hiring of American workers of a certain target group while providing a federal tax incentive to employers who hire them. Employers have until December 31, 2025 to file. The amount of the tax credit under the WOTC program depends on the target group the employee belongs to as well as qualified wages paid and hours worked. Taxable employers can carry the current year period’s unused WOTC back one year or forward 20 years. Where did the WOTC Tax Credit come from? The WOTC was created back in 1996 as part of Section 1201 of the Small Business Job Protection Act of 1996 and has since been updated on multiple occasions. Even back then, employers at for-profit organizations could claim a tax credit against federal tax liabilities for hiring members of certain groups. Tax-exempt employers can claim WOTC against their payroll taxes. In 2015, The Protecting Americans from Tax Hikes Act (PATH Act) allowed qualified employers to claim WOTC for targeted group employee categories that were apparent before the enactment of the PATH Act as long as the individual began working for them after December 31, 2014 and before January 1, 2020. In the fiscal year of 2021, over 2 million certifications were filed by state workforce agencies. These SWAs received over $18 million in support of the WOTC program. Workforce programs such as this one were created as a voluntary act for businesses. Therefore, businesses do not need to send a job offer to an individual in one of the target groups. However, businesses are encouraged to invest in American job seekers who have faced barriers to unemployment in order to establish diversity in the workplace. How do you qualify for the WOTC Tax Credit? When looking into employer eligibility for the WOTC program, there are a few qualifications businesses must meet. Employers must verify that the new hire was part of the target group in order to claim work opportunity tax credit. What is the target group for an eligible employee? Ex-felons – those who have been previously convicted of a felony who have been released within the last 12 months Recipients of state help under title IV of the Social Security Act (SSA) Qualified veterans – veterans who have served over 180 days or were discharged sooner because of a service-connected disability Summer youth employees between the ages of 16-18 who are employed from no longer than May 1st to September 15th Applicants who qualify for supplemental security income (SSI) benefit Individuals who are long-term family assistance recipients or require temporary help for needy families (TANF) A designated community resident living in empowerment zones or rural renewal counties – empowerment zones are economically distressed communities, eligible to receive tax incentives and grants from the federal government Individuals who are part of a supplemental nutrition assistance program under the Food and Nutrition Act of 2008 A qualified long-term unemployment recipient Individuals referred after completing a rehabilitation program Individuals must have a required certification from a state workforce agency, must be within one of the ten targeted groups, and be in their first year of employment in order to be eligible. Several factors that can prevent an employer from qualifying are if they hire a family member, former employee, or someone who will have a large share in the company. In order to be eligible, employees must work a minimum of 120-400 hours. Within a qualified first-year period for employees who worked between 120-400 hours, credit is 25% of these first-year wages. For employees who worked over 400 hours, 40% of first-year wages can be credited. If you are interested in creating a diverse workplace by hiring individuals within the specified target groups, there are many resources to help you find qualified candidates such as American Job Centers. Some examples of these can be the Veterans Administration, social services offices, and various vocational rehabilitation centers. Some candidates even have certain certifications that tell potential employees the amount of credit they could earn if they hire this ‌individual. What should you pay attention to? After employees are deemed as part of the target group, employers must file for the tax within 28 days of the employee’s start date. Employers can find out if employees are a member of the target group by asking them to fill out a questionnaire upon hire. To file for WOTC, the (Internal Revenue Service) IRS Form 8850 must be completed, along with several forms from the Department of Labor. IRS Form 8850 acts as a pre-screening notice to make a certification request to the state workforce agency (SWA). DOL requires employers to fill out an Individual Characteristics Form (ICF) and ETA Form 9061 or 9062. The purpose of the forms are to ensure the individuals qualify as one of the targeted groups. All forms can be submitted via email, online, or direct mail. Both new businesses who do not have much tax credit and larger companies with a large credit portfolio can take advantage of the WOTC. Plus, businesses can apply for more than one credit for the same employee. However, credit is limited to the business’ income tax liability. Credit will not affect the employer’s Social Security tax liability on their tax return. Taxable employers can claim WOTC as a general business credit against their income taxes. Benefits of outsourcing tax credits and business incentives administration Both newly eligible business that haven’t yet taken advantage of tax credits and those that already have a large tax credit portfolio may benefit from outsourcing tax credits. It can help them: Identify and evaluate new opportunities for which they may be eligible Maintain accurate records so they can make informed decisions backed by data Stay compliant with changing tax credit laws and avoid penalties Report tax credit activities and meet deadlines Why is working with us the best way to file? The work opportunity tax credit can confuse those who have not previously filed. Working with us will save you time and effort, and will ensure you file correctly to find out the amount of your business’ income tax liability. We will make sure that all the requirements for the IRS, DOL, and U.S. Employment and Training Administration are met in order to successfully create your WOTC account. Contact us today. How much is the Work Opportunity Tax Credit? The amount of the tax credit available under the WOTC program varies based on the employee’s target group, total hours worked and total qualified wages paid. As of 2020, most target groups have a maximum credit of $2,400 per eligible new hire, but some may be higher. Hiring certain qualified veterans, for instance, may result in a credit of $9,600 per eligible new hire. Does the Work Opportunity Tax Credit benefit employees? Although the tax credit only applies to employers, the WOTC program may benefit employees by making career opportunities available to those who otherwise might have had a hard time landing a job. Such individuals include ex-felons, veterans and food stamp recipients. What Work Opportunity Tax Credit integrations does Legacy WOTC offer? Legacy WOTC and our partnership with ADP automated WOTC solution seamlessly integrates with most recruiting and hiring software and applicant tracking systems (ATS). Is participation in the Work Opportunity Tax Credit program mandatory? The Work Opportunity Tax Credit is a voluntary program. As such, employers are not obligated to recruit WOTC-eligible applicants and job applicants don’t have to complete the WOTC eligibility questionnaire. Employers can still hire these individuals if they so choose, but will not be able to claim the tax credit. Does the Work Opportunity Tax Credit benefit employees? Although the tax credit only applies to employers, the WOTC program may benefit employees by making career opportunities available to those who otherwise might have had a hard time landing a job. Are there any limits to how much I can get back in tax credit? There is no limit in the amount of the Work Opportunity Tax Credit you can generate. However, a for-profit business can only offset their business income tax liability. If the credit exceeds the income tax liability, the excess can be carried back one year and then forward for up to 20 years or until used up, whichever is sooner. Can I claim other wage-based credit with the WOTC? Generally, the wages used to calculate the WOTC cannot be used to other wage-based credits. An employer may be able to claim more than one wage-based credit, for the same employee, as long as the same wages are not used to calculate more than one credit. In other words, each credit must be beneficially allocated the qualifying wages to meet the qualification requirements of that credits such as the Empowerment Zone Employment Credit, Employee Retention Credit and Empoyee Credit for Paid Family and Medical Leave. What forms are required for WOTC? On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit.) The employer has 28 calendar days from the new employee's start date to submit Form 8850 to the designated local agency located in the state in which the business is located (where the employee works). Additionally, the employer must complete and submit ETA Form 9601 (Individual Characteristics Form) within 28 days of the employee's start date to the designated local agency. The employer will ten file a Form 5884 on their tax return to calculate and claim the Work Opportunity Tax Credit with their tax return. How are the Tax Credits Calculated? CMS Responds: The Work Opportunity Tax Credit is equal to 25% or 40% of a new employee’s first-year wages, up to the maximum for the target group to which the employee belongs. Employers will earn 25% if the employee works at least 120 hours and 40% if the employee works at least 400 hours. Typically 10-15% of new hires may be eligible, and the average tax credit is $2,400 based on 400 hours. What is considered start date. date actually started work or date hired? The “start date” from a WOTC perspective is the date the employee actually started working for paid compensation. This does not include any days spent doing any unpaid work or training. Can a non-profit organizations participation WOTC? Yes, Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for QUALIFIED VETERANS ONLY who begin work on or after December 31, 2014, and before January 1, 2020. I have a new hire who would have qualified, and it is after 28 days, can I release them and re-hire to meet the 28 day rule? The Work Opportunity Tax Credit program is an incentive for employers to hire new employees from the target groups. Unfortunately, if you terminate the employee, and then later rehire them, they would no longer be eligible as a rehire. This is why it’s critical for employers to be aware of the 28-day rule, which requires employers, or a service provider, to submit qualified applicants to the state workforce agency within 28-days of the employee’s start date. Can I still get a partial credit if the employee only worked for a few weeks? It all depends on how many hours the employee worked for you. If a qualified employee worked full time for you for three weeks, they would reach the minimum number of hours 120 so you would be eligible for a partial WOTC credit of 25% of up to $6,000 in wages or $1,500. If the employee works less than 120 hours, you would not be able to use the credit. Can the WOTC be applicable for part-time employees? Those working less than 30 hours per week? Part-time employees are definitely eligible. The only difference is that it may take them slightly longer than a full-time employee to reach either the minimum amount of hours required to qualify (120) or the maximum (400). A full-time employee working 40 hours per week would reach the 120-hour target after 3 weeks of full-time employment, whereas someone working 30 hours per week would take 4 weeks. What is the benefit to the employee? The actual WOTC credit is only given to the employer as an incentive for hiring someone who may have faced barriers to becoming employed such as individuals on SNAP (food stamps), TANF, ex-felons, the long-term unemployed, and Veterans. There are ten target groups. Does the new hire have to fill out the forms? The Work Opportunity Tax Credit program is an incentive for employers to hire new employees from targeted groups of employees. New hires may be asked to complete the WOTC questionnaire as part of their onboarding paperwork, or even as part of the employment application. It is voluntary from the new hire’s perspective, an employer cannot require the employee to complete the forms. What is a Conditional Certification from the State Workforce Agency? The first question on the IRS Form 8850 is “Check here if you received a conditional certification from the state workforce agency (SWA) or a participating local agency for the work opportunity credit.” Some states refer to employment agencies as State Workforce Agencies (SWA), while others refer to them as State Employment Agencies. When a SWA determines that a job-ready applicant is, TENTATIVELY ELIGIBLE as a member of a WOTC target group, it uses the DOL Form 9062, to show that eligibility pre-determination was made for the individual. The Conditional Certification alerts prospective employers to the availability of the tax credit if this individual is hired. Can WOTC Apply to My Seasonal Hires? Definitely. Make sure you include the WOTC survey with your standard new hire paperwork (paper or online). Seasonal hires still have to work a minimum amount of 120 hours to obtain the Work Opportunity Tax Credit. Why Should I Use a Service Like Yours When I Can Do It Myself? While WOTC is something you can do yourself, there are several reasons employers large and small use our WOTC administration services; We aim to reduce the administrative burden on your staff, Maximizes your tax credits, Help maintain compliance, and Make it easy to implement. We can get you up and running today! How Legacy WOTC and our partnership with ADP can help employers navigate the Work Opportunity Tax Credit program ADP’s web-based WOTC screening system improves screening compliance rates and simplifies data collection. It uses plain language and automatically skips sections of the WOTC questionnaire that may be irrelevant, helping applicants complete the form quickly and correctly. We also offer benchmarking and analytics tools that can help employers forecast their tax credits. Legacy will prepare the annual credit application form. Legacy WOTC and our partnership with ADP saves time and reduces stress for Work Opportunity Tax Credit clients Switching from a manual Work Opportunity Tax Credit screening process to ADP’s automated solution can help minimize the workload of hiring managers. It works on most mobile devices, so there’s less paperwork and it has applicant-friendly features that make it more likely for applicants to complete the WOTC questionnaire. Note: Even if you decide not to take advantage of the ADP screen, Legacy WOTC can still help your company obtain WOTC. What differentiates Legacy WOTC and ADP from other Work Opportunity Tax Credit providers? ADP screens over 34 million applicants per year for the WOTC program*. With that level of experience across different industries, we’re uniquely positioned to help employers identify and apply for tax credits while maintaining compliance. *Source: ADP Internal Data, 2019.

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IRS 1099-K FAQs

IRS 1099-K FAQs These updated FAQs were released to the public in Fact Sheet 2023-06, March 22, 2023. What's New On December 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of more than $600 that was to go into effect for information returns due in 2023. See Notice 2023-10. Pursuant to Notice 2023-10, for calendar year 2022, third party settlement organizations who issue Forms 1099-K, Payment Card and Third Party Network Transactions, are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions. Use tab to go to the next focusable element Why am I receiving a Form 1099-K, from a payment card or third party settlement organization? (updated December 28, 2022) A. Third party information reporting for certain income is required by law. Third party information reporting has been shown to increase voluntary tax compliance, improve tax collections and assessments within the IRS, and thereby reduce the tax gap. How is the IRS planning to address the changes to the Form 1099-K reporting requirements? (updated December 28, 2022) A. As outlined in Notice 2023-10, the IRS is delaying the implementation of the requirement for third party business reporting more than $600 threshold for the 2022 calendar year. More specifically, the IRS is delaying the implementation of the provision of the American Rescue Plan Act of 2021 that: Lowered the threshold for reporting third party network transactions from aggregate payments exceeding $20,000 to aggregate payments exceeding $600 during the calendar year. Eliminated the 200 transaction threshold for reporting third party network transactions entirely. Is the gain or loss on the sale of a personal item used to compute my taxable income? Is that reported on a Form 1099-K? (updated March 22, 2023) A. Gain or loss on the sale of a personal item is generally the difference between the amount you paid for the item (the purchase price) and the amount you receive when you sell it (the sales price). For example, if you bought a refrigerator for $1,000 (the purchase price) and sold it for $600 (the sales price), you have a loss of $400. $600 sales price - $1,000 purchase price = ($400) loss amount. On the other hand, if you bought concert tickets for $500 (the purchase price) and sold them for $900 (the sales price), you have a gain of $400. $900 sales price - $500 purchase price = $400 gain amount. gain on the sale of a personal item is taxable. You must report the transaction (gain on sale) on Form 8949, Sales and Other Dispositions of Capital AssetsPDF, and Form 1040, U.S. Individual Income Tax Return, Schedule D, Capital Gains and LossesPDF. See Publication 551, Basis of AssetsPDF, for guidance in determining your basis. The gain on the sale of a personal item might be reported on a Form 1099-K. The loss on the sale of a personal item is not deductible. For calendar year 2022 tax returns, if you receive a Form 1099-K, for the sale of a personal item that resulted in a loss, you should make offsetting entries on Form 1040, U.S. Individual Income Tax Return, Schedule 1, Additional Income and Adjustments to Income, as follows: Report your proceeds (the Form 1099-K amount) on Part I – Line 8z – Other Income, using the description "Form 1099-K Personal Item Sold at a Loss." Report your costs, up to but not more than the proceeds amount (the Form 1099-K amount), on Part II – Line 24z – Other Adjustments, using the description "Form 1099-K Personal Item Sold at a Loss." In the example of the refrigerator sale above, if you received a Form 1099-K for $600 for the refrigerator for which you originally paid $1,000, you should report the loss transaction as follows: Form 1040, Schedule 1, Part I – Line 8z, Other Income. List type and amount: "Form 1099-K Personal Item Sold at a Loss …. $600" to show the proceeds from the sale reported on the Form 1099-K and, Form 1040, Schedule 1, Part II – Line 24z, Other Adjustments. List type and amount: "Form 1099-K Personal Item Sold at a Loss…. $600" to show the amount of the purchase price that offsets the reported proceeds. Do not report the $1,000 you paid for the refrigerator because the loss on the sale of a personal item is not deductible. You can use Form 8949 and Schedule D to report the sale of a personal item at a loss instead of Schedule 1 if you wish, for example, because you have other transactions that require you to file Form 8949 and Schedule D anyway. Because the loss isn't deductible, enter an adjustment when reporting the proceeds and basis of the personal item on Form 8949 as follows. Enter “L” in column (f) as the code explaining the loss is nondeductible. Then enter the amount of the nondeductible loss as a positive number in column (g). In the example of the refrigerator sale above, enter $600 in column (d) for the proceeds, $1,000 in column (e) for the cost or other basis, “L” in column (f), and $400 in column (g) as the amount of the adjustment. This will result in $0 as the gain or loss in column (h). To make sure that I report properly on the Form 8949, how do I determine if the capital gain on the sale of my personal item is short-term or long-term? (added December 28, 2022) A. Generally, if you hold a personal item for more than one year before you sell it, your capital gain is long-term. If you hold it one year or less before you sell it, your capital gain is short-term. For additional guidance, see Publication 544, Sales and Other Dispositions of Assets. How do I account for the fees I paid to an online marketplace related to the sale of my personal items? (added December 28, 2022) A. You should include all fees (e.g., selling fees, payment processing fees, etc.) associated with the sale of your personal items in your basis when computing your gain or loss on the sale. See Publication 551 for additional information. In general, you should adjust your gain or loss on the sale of your property by the amount of expenses and fees paid to facilitate the sale. If you realize a gain on the sale of your property, report the selling expenses as a downward adjustment to the gain that you report on Form 8949 or Schedule D. Box 1a of the Form 1099-K reports the gross amount of payment card/third party network transactions. This amount is not adjusted to account for fees, refunds, chargebacks, or other costs included in the unadjusted dollar amount of the payment transactions. If the Form 1099-K reports the total unadjusted dollar amount of the payment transactions and you separately paid selling expenses, you may need to make a separate adjustment to the resulting gain or loss. You should maintain and consult your own records to determine these amounts. During the year, I sold my personal guitar for $800 on a social media platform's marketplace and I received Form 1099-K. I purchased the guitar several years ago for $3,000. How do I prove how much I paid if requested by the IRS? (added December 28, 2022) A. Generally, you should keep accurate records for personal items you may sell. If your records are lost, destroyed, or are not available due to circumstances beyond your control and your return is audited, examiners may allow you to present reconstructed records. Additionally, examiners may accept oral testimony when records do not exist. In this example you have a nondeductible personal loss. $800 sales price - $3,000 purchase price = ($2,200) loss amount. You can offset the proceeds reported on the Form 1099-K using some of your purchase price as shown here: Form 1040, Schedule 1, Part I – Line 8z, Other Income. List type and amount: "Form 1099-K Personal Item Sold at a Loss…. $800" to show the proceeds from the sale reported on the Form 1099-K. and Form 1040, Schedule 1, Part II – Line 24z, Other Adjustments. List type and amount: "Form 1099-K Personal Item Sold at a Loss…. $800" to show the amount of the purchase price that offsets the reported proceeds. Do not report the $3,000 you paid for the purchase because a personal loss is not deductible. In a single online transaction on an online marketplace, I sold two sets of four tickets (I bought for personal use) to two separate sporting events for $1,000 (one set for $800 and the second set for $200) and I received Form 1099-K. I purchased each set of tickets for $250 ($500 total) two months prior to selling them. How do I report the sale on my tax return? (added December 28, 2022) A. You must report the gain and loss separately because the loss on the second set of tickets cannot offset the gain on the first set of tickets. $550 gain from the sale of one set of tickets ($800 sales price - $250 purchase price = $550 gain) must be reported as short-term gain on Form 8949PDF and Schedule DPDF. The $50 loss transaction from the other set of tickets ($200 sales price - $250 purchase price = ($50) loss) should be reported as follows: Form 1040, Schedule 1: Part I – Line 8z, Other Income. List type and amount: "Form 1099-K Personal Item Sold at a Loss…. $200" to show the proceeds from the sale reported on the Form 1099-K and Part II – Line 24z, Other Adjustments. List type and amount: "Form 1099-K Personal Item Sold at a Loss…. $200" to show the amount of the purchase price that offsets the reported proceeds. My friend and I went to a concert, and my friend reimbursed money to me for her concert ticket through an online application. If I get a Form 1099-K for the reimbursement, do I need to pay taxes on it? (added December 28, 2022) A. Because the money is not payment for the sale of goods or the provision of services, generally the reimbursement would not be taxable to you. If you believe the information on Form 1099-K, is incorrect, the form has been issued in error, or you have a question relating to the form, contact the filer, whose name and contact information appears in the upper left corner on the front of the form. You may also contact the payment settlement entity whose name and phone number are shown in the lower left side of the form. If you cannot get the form corrected, the error should be reported on Form 1040, Schedule 1, Part I, Additional Income, Line 8z, Other Income, with an offsetting entry in Part II, Adjustments to Income, Line 24z, Other Adjustments. For example, if you received $800 from a friend reimbursing you for a concert ticket and you received a Form 1099-K reporting this as gross proceeds, your Schedule 1 should reflect the following: Form 1040, Schedule 1 Part I – Line 8z, Other Income. List type and amount: "Form 1099-K Received in Error…. $800" to show the proceeds reported on the Form 1099-K. Part II – Line 24z, Other Adjustments. List type and amount: "Form 1099-K Received in Error…. $800" to offset the proceeds reported to you in error. Not reporting this adjustment could result in you improperly reporting gain on the reimbursement. Does the delayed reporting requirement in Notice 2023-10 mean that I don’t have to report income reported to me on a Form 1099-K? (added December 28, 2022) A. The IRS is delaying the requirement for third party settlement organizations to report income more than $600 threshold for calendar year 2022 (tax filing season 2023). However, the legal requirement for reporting income has not changed, regardless of the reporting threshold for providing a Form 1099-K. Reporting does not impact a taxpayer's responsibility to accurately report ALL income, whether or not they receive a Form 1099-K or other information return (e.g., Form 1099-MISC, Miscellaneous Information; Form 1099-NEC, Nonemployee Compensation; etc.). Except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. A taxpayer can receive income in the form of money, property, or services. Publication 525, Taxable and Nontaxable IncomePDF, discusses many kinds of income and explains whether they are taxable or nontaxable. Who can a taxpayer call if they have a question about their Form 1099-K? (updated December 28, 2022) A. Taxpayers who have questions about the information on a Form 1099-K they received should contact the filer. The contact information is in the upper left corner on the form. If a taxpayer does not recognize the filer shown in the upper left corner of the form, they should contact the payment settlement entity whose name and phone number are shown in the lower left corner of the form above their account number. If you have general questions about the Form 1099-K, please consult the Instructions for Form 1099-K. If you have general questions about information returns, please consult the General Instructions for Certain Information Returns. Who can a payment settlement entity, or electronic payment facilitator/other third party call if they have a question on Form 1099-K? (updated November 21, 2022) A. For questions about Form 1099-K, Payment Card and Third Party Network Transactions, see the general instructions for information returns.

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Tax Refund Status FAQs

Tax Refund Status FAQs Why is my current year return refund still being processed? According to the IRS, the agency issues most refunds within 21 days of filing online or six months of mailing your paper return, but a few circumstances could delay processing. Math errors or missing information are common culprits that can lead to longer waiting times. Here are a few more tax-filing mistakes to look out for. What if I made a mistake on my tax return? If you're due a refund, don't file an amended return until you receive the refund per the IRS. If you're not due a refund and need to correct a mistake, you can file an amended tax return using IRS Form 1040-X. Here's how to do it. Can I tell the IRS what account to put my tax refund in? Yes. Simply provide your direct deposit account information on your Form 1040 or 1040-SR when you file. If you file IRS Form 8888 with your tax return, you can even tell the IRS to split the money up and deposit it into as many as three different investment accounts. Here's how to do it. What could happen to my tax refund if I owe back taxes? If you're behind on your taxes, the IRS will withhold what you owe from your federal tax refund. You'll get a letter from the IRS explaining what it adjusted. How can I get a bigger tax refund? One way is to qualify for more tax deductions and tax credits. They can be huge money-savers — if you know what they are, how they work and how to pursue them. Here's a list of 20 popular ones to get you started. But beware of big tax refunds. They're a direct result of overpaying your taxes all year, and that often happens because you're having too much tax withheld from your paychecks. Get that money in your hands now (instead of having to wait until tax time to get it) by adjusting your Form W-4 at work. Here's how to do it.

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Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Specific Provisions Related to Self-Employed Individuals

Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021: Specific Provisions Related to Self-Employed Individuals These updated FAQs were released to the public in Fact Sheet 2022-15, March 3, 2022. Note: These FAQs address the tax credits available under the American Rescue Plan Act of 2021 (the "ARP") by employers with fewer than 500 employees and certain governmental employers without regard to the number of employees ("Eligible Employers") for qualified sick and family leave wages ("qualified leave wages") paid with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, as well as the equivalent credits available for certain self-employed individuals. For information about the tax credits that may be claimed for qualified leave wages paid with respect to leave taken by employees prior to April 1, 2021, under the Families First Coronavirus Response Act ("FFCRA") and the COVID-related Tax Relief Act (the "Relief Act"), see Tax Credits for Paid Leave Under the Families First Coronavirus Response Act for Leave Prior to April 1, 2021 FAQs. Although the requirement that Eligible Employers provide leave under the Emergency Paid Sick Leave Act ("EPSLA") and Emergency Family and Medical Leave Expansion Act ("Expanded FMLA") under the FFCRA does not apply after December 31, 2020, the tax credits under sections 3131 through 3133 of the Internal Revenue Code ("the Code") are available for qualified leave wages an Eligible Employer provides with respect to leave taken by employees beginning on April 1, 2021, through September 30, 2021, if the leave would have satisfied the requirements of the EPSLA and Expanded FMLA, as amended for purposes of the ARP. Throughout these FAQs, the use of the word "work," unless otherwise noted, is inclusive of telework. 106. Who is an eligible self-employed individual for purposes of the qualified sick leave equivalent credit and the qualified family leave equivalent credit? (added June 11, 2021) An eligible self-employed individual is defined as an individual who regularly carries on any trade or business within the meaning of section 1402 of the Code, and would be eligible to receive qualified sick leave wages or qualified family leave wages that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, if the individual were an employee of an Eligible Employer (other than the self-employed individual) that would have been subject to the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP. Eligible self-employed individuals are allowed a credit against their federal income taxes for any taxable year equal to their "qualified sick leave equivalent amount" or "qualified family leave equivalent amount." 107. Which individuals regularly carry on a trade or business for purposes of being an eligible self-employed individual for the qualified sick leave equivalent credit and the qualified family leave equivalent credit? (added June 11, 2021) An individual regularly carries on a trade or business for purposes of being an eligible self-employed individual for the qualified sick leave equivalent credit and/or the qualified family leave equivalent credit if the individual carries on a trade or business within the meaning of section 1402 of the Code, or is a partner in a partnership carrying on a trade or business within the meaning of section 1402 of the Code. Section 1402(c) of the Code defines trade or business and includes exceptions to this standard for purposes of section 1402 of the Code. 108. How is the "qualified sick leave equivalent amount" for an eligible self-employed individual calculated? (updated July 29, 2021) For an eligible self-employed individual who is unable to work because the individual: is subject to a Federal, State, or local quarantine or isolation order related to COVID-19; has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or is: experiencing symptoms of COVID-19 and seeking a medical diagnosis, seeking or awaiting the results of a diagnostic test for, or a medical diagnosis of, COVID-19 and the individual has been exposed to COVID-19 or is unable to work pending the results of the test or diagnosis, or obtaining immunization related to COVID-19 or recovering from any injury, disability, illness, or condition related to the immunization, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100 percent of the "average daily self-employment income" of the individual for the taxable year, or the prior taxable year. For an eligible self-employed individual who is unable to work because the individual is: caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; caring for a child if the child's school or place of care has been closed, or child care provider is unavailable due to COVID-19 precautions; or experiencing any other substantially similar condition specified by the Secretary of HHS in consultation with the Secretary of the Treasury and the Secretary of Labor. The Secretary of HHS has specified, after consultation with the Secretaries of Treasury and Labor, that a substantially similar condition is one in which the employee takes leave: to accompany an individual to obtain immunization related to COVID-19, or to care for an individual who is recovering from any injury, disability, illness, or condition related to the immunization. the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67 percent of the "average daily self-employment income" of the individual for the taxable year, or the prior taxable year. In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten. Note: The only days that may be taken into account in a taxable year in determining the qualified sick leave equivalent amount for the year are days occurring during the year and during the period beginning on April 1, 2021, through September 30, 2021. 109. How is the "average daily self-employment income" for an eligible self-employed individual calculated? (added June 11, 2021) Average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year, or prior taxable year, divided by 260. A taxpayer's net earnings from self-employment are based on the gross income that the individual derives from the taxpayer's trade or business minus ordinary and necessary trade or business expenses. 110. How is the "qualified family leave equivalent amount" for an eligible self-employed individual calculated? (added June 11, 2021) During the second and third quarters of 2021 , the qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 60) that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave (if the individual were employed by an Eligible Employer (other than the self-employed individual)), multiplied by the lesser of two amounts: (1) $200, or (2) 67 percent of the average daily self-employment income of the individual for the taxable year, or the prior taxable year. 111. Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts? (added June 11, 2021) Yes, but the qualified sick or family leave equivalent amounts are reduced by the qualified sick or family leave wages. That is, if a self-employed individual is entitled to a refundable credit for a qualified sick leave equivalent amount under 9642(a) of the ARP, and also receives qualified sick leave wages as an employee, section 9642(e)(2) of the ARP reduces the qualified sick leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount described in section 9642(c) of the ARP and any qualified sick leave wages under section 3131(b)(1) of the Code, exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the EPSLA, as amended for purposes of the ARP). Similarly, if a self-employed individual is entitled to a refundable credit for a qualified family leave equivalent amount under section 9643(a) of the ARP, and also receives qualified family leave wages as an employee , section 9643(e)(3) of the ARP reduces the qualified family leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave equivalent amount described in section 9643(c) of the ARP and the qualified family leave wages under section 3132(b)(1) of the Code, exceeds $12,000. Example: In her capacity as an employee, Taxpayer A receives $4,000 in qualified sick leave wages, comprised of: $3,000 in qualified sick leave wages for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, as amended for purposes of the ARP; and $1,000 in qualified sick leave wages for reasons described in paragraphs (4), (5), or (6) of the EPSLA, as amended for purposes of the ARP. In addition, in her capacity as a self-employed individual, Taxpayer A is eligible for a $3,300 qualified sick leave equivalent credit comprised of: $2,500 in qualified sick leave equivalent credits for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA, as amended for purposes of the ARP; and $800 in qualified sick leave equivalent credits for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA, as amended for purposes of the ARP. Taxpayer A must reduce the $3,300 qualified sick leave equivalent credit for which she is eligible by $2,190, which is comprised of: the excess of the qualified sick leave wages and qualified sick leave equivalent amounts for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA over $5,110 (that is, $390); plus the excess of the qualified sick leave wages and qualified sick leave equivalent amounts for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA over $2,000 (that is, $0); plus the remaining excess of the total leave credits to which Taxpayer A is entitled in her capacity as either an employee or a self-employed individual over $5,110 (that is, $1,800). Accordingly, Taxpayer A may claim a qualified sick leave equivalent credit of $1,110. Example: In his capacity as an employee, Taxpayer B receives $8,000 in qualified family leave wages. In addition, in his capacity as a self-employed individual, Taxpayer B is eligible for a $4,500 qualified family leave equivalent credit. Taxpayer B may claim a qualified family leave equivalent credit of $4,000, because he must reduce the qualified family leave equivalent amount to which he is entitled to the extent that the sum of the qualified family leave equivalent amount and his qualified family leave wages (that is, $12,500) exceeds $12,000 (that is, $500). 112. Do self-employed individuals need to account for wages excluded under section 3121(b)(1)-(22) of the Code, or compensation excluded under section 3231(e)(1) of the Code, when determining the amount by which to reduce their self-employed equivalent leave credit? (added June 11, 2021) Yes. Section 9642(e)(2) of the ARP reduces the qualified sick leave equivalent amount for which a self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount described in section 9642(c) of the ARP and any amounts described in section 3131(b)(1) of the Code exceeds the applicable thresholds under section 5102(a) of the EPSLA, as amended for purposes of the ARP. Similarly, section 9643(e)(2) of the ARP reduces the qualified family leave equivalent amount for which a self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave amount described in section 9643(c) of the ARP and any amounts described in section 3132(b)(1) of the Code exceeds $12,000. Sections 3131(b)(1) and 3132(b)(1) of the Code describe the amounts of qualified sick leave wages and qualified family wages taken into account for purposes of the employer payroll tax credits for paid sick leave and paid family leave, respectively. Section 3131(c) and (f)(2) and section 3132(c) and (f)(2) of the Code define these qualified leave wages as wages (as defined in section 3121(a) of the Code determined without regard to the exclusions from employment under section 3121(b)(1)-(22) of the Code), and compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions from compensation under section 3231(e)(1) of the Code). Therefore, when determining the amount by which to reduce their self-employed equivalent credits, self-employed individuals should account for wages excluded under section 3121(b)(1)-(22) of the Code or compensation excluded under section 3231(e)(1) of the Code. 113. Do self-employed taxpayers need to account for sick leave and/or family leave wages reported by United States government employers on Form W-2,, either in Box 14 or in a statement provided with the Form W-2? (added June 11, 2021) No. Generally, federal governmental employers are not eligible to claim the tax credits under sections 3131 and 3132 of the Code. Accordingly, any sick leave wages and family leave wages paid by a federal governmental employer are not taken into account to reduce the self-employed taxpayer's self-employment equivalent credits on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed IndividualsPDF. If a federal governmental employer reports the sick leave wages or family leave wages in Box 14 of Form W-2, Wage and Tax StatementPDF or a separate statement with Form W-2, the self-employed person should not take these reported leave wages into account when determining the amount by which to reduce his or her self-employment equivalent credits. This rule does not apply to the government of any State or political subdivision thereof, any agency or instrumentality of those governments, Tribal governments, or federal government employers described in section 501(c)(1) and exempt from tax under section 501(a) of the Code that are Eligible Employers permitted to claim the tax credits for sick leave wages and family leave wages paid to employees. 114. How does a self-employed individual claim the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts? (added June 11, 2021) The refundable credits are claimed on the self-employed individual's Form 1040, U.S. Individual Income Tax ReturnPDF. 115. How does a self-employed individual determine the sick and family leave equivalent tax credit that the individual may claim? (added June 11, 2021) A self-employed individual will determine the paid sick and family leave equivalent tax credit to which the individual is entitled by completing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed IndividualsPDF. This form is available at irs.gov. To complete the Form 7202, self-employed individuals who are also employees will need any amount of qualified sick and family leave wages that their employers reported on the Form W-2, Wage and Tax StatementPDF. For more information on the requirement for Eligible Employers to report the amount of qualified sick and family leave wages paid to employees on Form W-2, see Special Issues for Employers: Other Issues and Notice 2020-54PDF. 116. How does a self-employed individual elect to use prior year net earnings from self-employment income to determine average daily self-employment income for purposes of the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts? (added June 11, 2021) A self-employed individual may elect to use prior year (rather than current year) net earnings from self-employment to determine his or her average daily self-employment income by indicating this election when filing their 2020 or 2021 Form 1040, U.S. Individual Income Tax ReturnPDF. See applicable instructions for the form for more information. 116a. If a self-employed individual who claimed the self-employed equivalent leave credit receives a Form W-2c from an employer reporting corrected qualified sick and/or family leave wages received for the period beginning April 1, 2021, and ending September 30, 2021, should the individual file an amended tax return? (added March 3, 2022) It depends. If a self-employed individual who claimed the qualified leave equivalent credits for qualified sick and/or family leave equivalent amounts for the period beginning April 1, 2021, and ending September 30, 2021, receives a Form W-2c, Corrected Wage and Tax Statement, reporting corrected amounts of sick and/or family leave wages in Box 14 (or receives a corrected statement) for this period, the individual must recalculate the credit on the 2021 Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. If the amount of the qualified leave equivalent credit has changed from the amount claimed on the individual’s 2021 Form 1040, U.S. Individual Income Tax Return, the individual must file a Form 1040-X, Amended U.S. Individual Income Tax Return, for 2021 with the corrected amounts from the Form 7202. 117. How can a self-employed individual cover the individual's qualified sick leave equivalent and qualified family leave equivalent amounts before filing his or her Form 1040? (added June 11, 2021) The self-employed individual may cover sick leave and family leave equivalents by taking into account the credit to which the individual is entitled and will claim on Form 1040, U.S. Individual Income Tax ReturnPDF, in determining required estimated tax payments. This means that a self-employed individual can effectively reduce payments of estimated income taxes that the individual would otherwise be required to make if the individual was not entitled to the credit on the Form 1040. 118. Can an independent contractor who generally performs services for multiple clients as a nonemployee claim the tax credit with regard to the lost services due to COVID-19? (added June 11, 2021) Yes. If an individual is an independent contractor who generally performs services for multiple clients as a nonemployee, the individual is self-employed and is eligible for the tax credits for days the individual is not able to work for reasons related to COVID-19. For more information on whether an individual is an independent contractor or an employee, and the tax consequences of either status, see Self-Employed Individuals Tax Center. 119. Can a partner in a partnership claim the tax credits? (added June 11, 2021) Maybe. A partner in a partnership is a self-employed individual if the partner's distributive share constitutes net earnings from self-employment or if the partner receives guaranteed payments for services. If the partner is a self-employed individual and is not able to work for reasons related to COVID-19, the partner is eligible for the tax credits. Generally, partners in a partnership (including members of a limited liability company (LLC) that is treated as a partnership for federal tax purposes) are considered to be self-employed, not employees, when performing services for the partnership. 120. Can a self-employed individual use the Form 7200 to apply for an advance of the tax credits? (added June 11, 2021) No. Form 7200, Advance Payment of Employer Credits Due to COVID-19PDF, is only available for employers that file Form 941, Employer's Quarterly Federal Tax ReturnPDF, or certain other employment tax returns. However, a self-employed individual may reduce payments of estimated income taxes equal to the credit to which the individual is entitled. For more information about how a self-employed individual can reduce estimated income taxes to cover a credit for qualified sick leave equivalent amounts and qualified family leave equivalent amounts, see "How can a self-employed individual cover the individual's qualified sick leave equivalent and qualified family leave equivalent amounts before filing his or her Form 1040?" 121. Does an eligible self-employed individual who is allowed a credit under section 9642 of the ARP for the qualified sick leave equivalent amount or a credit under section 9643 of the ARP for the qualified family leave equivalent amount include any amount of these credits in gross income? (added June 11, 2021) No, the amount of the credits allowed under sections 9642 and 9643 of the ARP are not included in the gross income of the eligible self-employed individual. 122. How should a self-employed individual substantiate eligibility for tax credits for qualified leave wage equivalents? (added June 11, 2021) Self-employed individuals should maintain documentation establishing their eligibility for the credits as a self-employed individual. That documentation should be similar to the documentation that employers claiming the credits for qualified leave wages under sections 3131 and 3132 of the Code should maintain. See "How Should an Eligible Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?". 123. May a nonresident alien (NRA) claim the self-employed equivalent credits under sections 9642 and 9643 of the ARP? (added June 11, 2021) Yes. The qualified sick leave equivalent credits and qualified family leave equivalent credits under sections 9642 and 9643 of the ARP, respectively, are available to NRAs who otherwise meet the requirements to claim the tax credits. That is, an individual's status as an NRA does not preclude the individual from claiming the tax credits if the individual both (1) regularly carries on a trade or business within the meaning of section 1402 of the Code, and (2) would be eligible for paid leave that would have satisfied the requirements of the EPSLA or Expanded FMLA, as amended for purposes of the ARP, if the individual was an employee of an Eligible Employer (other than the self-employed individual).

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IRS' FAQ: Special Issues for Employees

IRS' FAQ: Special Issues for Employees These updated FAQs were released to the public in Fact Sheet 2022-16PDF, March 3, 2022. Note that the American Rescue Plan Act of 2021, enacted March 11, 2021, amended and extended the tax credits (and the availability of advance payments of the tax credits) for paid sick and family leave for wages paid with respect to the period beginning April 1, 2021, and ending on September 30, 2021. These FAQs do not currently reflect the changes made by the American Rescue Plan Act; however, please continue to check IRS.gov for any updates related to the change in law. 57. Are qualified sick leave wages and qualified family leave wages taxable to employees? (Updated January 28, 2021) Yes, generally. Under sections 7001(c) and 7003(c) of the FFCRA, qualified leave wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”) determined without regard to section 3121(b)(1)-(22) of the Code and without regard to section 7005(a) of the FFCRA), and compensation (as defined in section 3231(e) of the Code determined without regard to the exclusions under section 3231(e)(1) of the Code and without regard to section 7005(a) of the FFCRA), so the employee must pay social security and Medicare taxes (and for railroad employees, Tier II of the Railroad Retirement Tax Act tax), unless the qualified leave wages are subject to an exclusion under section 3121(b)(1)-(22) of the Code or exclusions under section 3231(e)(1) of the Code. In addition, wages are generally compensation for services subject to income tax under section 61 of the Code and federal income tax withholding under section 3402 of the Code unless an exception applies. The FFCRA did not include an exception for qualified leave wages from income. 58. Are qualified sick leave wages and qualified family leave wages excluded from gross income as “qualified disaster relief payments”? (Updated January 28, 2021) No. Section 139 of the Internal Revenue Code (the “Code”) excludes from a taxpayer’s gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster (“qualified disaster relief payments”). Although the COVID-19 outbreak is a “qualified disaster” for purposes of section 139 the Code (see below), qualified leave wages are not excludible qualified disaster relief payments, because qualified leave wages are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19. Section 139(c)(2) of the Code provides that for purposes of section 139 of the Code, the term “qualified disaster” includes a federally declared disaster, as defined by 165(i)(5)(A) of the Code. The COVID-19 pandemic is a “federally declared disaster,” as defined by section 165(i)(5)(A) of the Code. On March 13, 2020, the President of the United States issued a Proclamation declaring a national emergency concerning the Novel Coronavirus Disease (COVID-19) outbreak, stating that the ongoing COVID-19 pandemic warrants an emergency determination under section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 – 5207. A “qualified disaster relief payment” is defined by section 139(b) of the Code to include any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster relief payments do not include income replacements such as sick leave or other paid time off paid by an employer. 59. Can an employee receive both “qualified sick leave wages” and “qualified family leave wages”? (Updated January 28, 2021) Yes, but at different times. Qualified sick leave wages are available for up to 80 hours during which an employee cannot work or telework for any of six reasons related to COVID-19, including because the employee must care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19. By contrast, qualified family leave wages are available only because the employee must care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, for reasons related to COVID-19, and only after an employee has been unable to work or telework for this reason for 80 hours. Example: Your child-care provider is unavailable indefinitely due to the COVID-19 outbreak, leaving you unable to work or telework to care for your child. For up to the first 80 hours of any period of leave to care for your child, you are eligible for qualified sick leave wages, up to $200 per day and $2,000 in the aggregate. After that, you are eligible for qualified family leave wages for up to ten weeks of additional leave you need, up to $200 per day and $10,000 in the aggregate. Specific Provisions Related to Self-Employed Individuals 60. Who is an eligible self-employed individual for purposes of the qualified sick leave equivalent credit and the qualified family leave equivalent credit? (Updated January 28, 2021) An eligible self-employed individual is defined as an individual who regularly carries on any trade or business within the meaning of section 1402 of the Internal Revenue Code, and would be eligible to receive qualified sick leave wages or qualified family leave wages under the EPSLA or Expanded FMLA if the individual were an employee of an Eligible Employer (other than himself or herself) that is subject to the requirements of the EPSLA or Expanded FMLA. Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.” 60a. What individuals regularly carry on a trade or business for purposes of being an eligible self-employed individual for the qualified sick leave equivalent credit and the qualified family leave equivalent credit? (Added January 28, 2021) An individual regularly carries on a trade or business for purposes of being an eligible self-employed individual for the qualified sick leave equivalent credit and/or the qualified family leave equivalent credit if he or she carries on a trade or business within the meaning of section 1402 of the Internal Revenue Code (the “Code”), or is a partner in a partnership carrying on a trade or business within the meaning of section 1402 of the Code. Section 1402(c) of the Code defines trade or business and includes exceptions to this standard for purposes of section 1402 of the Code. 61. How is the “qualified sick leave equivalent amount” for an eligible self-employed individual calculated? (Updated January 28, 2021) For an eligible self-employed individual who is unable to work or telework because the individual: Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19; Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or Is experiencing symptoms of COVID-19 and seeking a medical diagnosis, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100 percent of the “average daily self-employment income” of the individual for the taxable year, or the prior taxable year. For an eligible self-employed individual who is unable to work or telework because the individual: Is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; Is caring for a child if the child’s school or place of care has been closed, or child care provider is unavailable due to COVID-19 precautions; or Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in any trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67 percent of the “average daily self-employment income” of the individual for the taxable year, or the prior taxable year. In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten. Note: The only days that may be taken into account in a taxable year in determining the qualified sick leave equivalent amount for the year are days occurring during the year and during the period beginning on April 1, 2020, and ending on March 31, 2021. 62. How is the “average daily self-employment income” for an eligible self-employed individual calculated? (Updated January 28, 2021) Average daily self-employment income is an amount equal to the net earnings from self-employment for the taxable year, or prior taxable year, divided by 260. A taxpayer’s net earnings from self-employment are based on the gross income that he or she derives from the taxpayer’s trade or business minus ordinary and necessary trade or business expenses. 63. How is the “qualified family leave equivalent amount” for an eligible self-employed individual calculated? (Updated January 28, 2021) The qualified family leave equivalent amount with respect to an eligible self-employed individual is an amount equal to the number of days (up to 50) during the taxable year that the self-employed individual cannot perform services for which that individual would be entitled to paid family leave (if the individual were employed by an Eligible Employer (other than himself or herself)), multiplied by the lesser of two amounts: (1) $200, or (2) 67 percent of the average daily self-employment income of the individual for the taxable year, or the prior taxable year. 64. Can a self-employed individual receive both qualified sick or family leave wages and qualified sick or family leave equivalent amounts? (Updated January 28, 2021). Yes, but the qualified sick or family leave equivalent amounts are reduced by the qualified sick or family leave wages. That is, if a self-employed individual is entitled to a refundable credit for a qualified sick leave equivalent amount under section 7002(a) of the FFCRA, and also receives qualified sick leave wages as an employee, section 7002(d)(3) of the FFCRA reduces the qualified sick leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount described in section 7002(c) of the FFCRA and any qualified sick leave wages under section 7001(b)(1) of the FFCRA, exceeds $2,000 (or $5,110 in the case of any day any portion of which is paid sick time described in paragraph (1), (2), or (3) of section 5102(a) of the EPSLA). Similarly, if a self-employed individual is entitled to a refundable credit for a qualified family leave equivalent amount under section 7004(a) of the FFCRA, and also receives qualified family leave wages as an employee under the Expanded FMLA, section 7004(d)(3) of the FFCRA reduces the qualified family leave equivalent amount for which the self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave equivalent amount described in section 7004(c) of the FFCRA and the qualified family leave wages under section 7003(b)(1) of the FFCRA, exceeds $10,000. Note: The COVID-related Tax Relief Act of 2020 extended the period during which Eligible Employers may provide paid leave for which they claim tax credits to include periods of leave taken between January 1, 2021, and March 31, 2021. Self-employed individuals entitled to refundable credits for a qualified sick or family leave equivalent amount for periods of leave taken between January 1, 2021 and March 31, 2021 will reduce the credit by any aggregate qualified sick or family leave wages that they received from their employers in both 2020 and 2021. If consideration of the aggregate qualified leave wages results in a $0 qualified sick or family leave equivalent amount, the taxpayer will not be entitled to claim the qualified sick or family leave equivalent credit in 2021. Example: In her capacity as an employee, Taxpayer A receives $4000 in qualified sick leave wages, comprised of: $3000 in qualified sick leave wages for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA; and $1000 in qualified sick leave wages for reasons described in paragraphs (4), (5), or (6) of the EPSLA. In addition, in her capacity as a self-employed individual, Taxpayer A is eligible for a $3300 qualified sick leave equivalent credit comprised of: $2500 in qualified sick leave equivalent credits for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA; and $800 in qualified sick leave equivalent credits for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA. Taxpayer A must reduce the $3300 qualified sick leave equivalent credit for which she is eligible by $2190, which is comprised of: The excess of the qualified sick leave wages and qualified sick leave equivalent amounts for reasons described in paragraphs (1), (2), or (3) of section 5102(a) of the EPSLA over $5110 (that is, $390); plus The excess of the qualified sick leave wages and qualified sick leave equivalent amounts for reasons described in paragraphs (4), (5), or (6) of section 5102(a) of the EPSLA over $2000 (that is, $0); plus The remaining excess of the total leave credits to which Taxpayer A is entitled in her capacity as either an employee or a self-employed individual over $5110 (that is, $1800). Accordingly, Taxpayer A may claim a qualified sick leave equivalent credit of $1110. Example: In his capacity as an employee, Taxpayer B receives $6000 in qualified family leave wages. In addition, in his capacity as a self-employed individual, Taxpayer B is eligible for a $4500 qualified family leave equivalent credit. Taxpayer B may claim a qualified family leave equivalent credit of $4000, because he must reduce the qualified family leave equivalent amount to which he is entitled to the extent that the sum of the qualified family leave equivalent amount and his qualified family leave wages (that is, $10,500) exceeds $10,000 (that is, $500). Example: In his capacity as an employee, Taxpayer C receives $4000 in qualified family leave wages in 2020. In addition, also in 2020, in his capacity as a self-employed individual, Taxpayer C is eligible for a $4500 qualified family leave equivalent credit. In 2020, Taxpayer C may claim a qualified family leave equivalent credit of $4500, because the total qualified family leave wages and qualified family leave equivalent credits to which he is entitled (that is, $8,500) does not exceed $10,000. In the first quarter of 2021, Taxpayer C receives $1000 in qualified family leave wages, and would be eligible for a $1500 qualified family leave equivalent credit in his capacity as a self-employed individual, prior to applying any reduction. In 2021, Taxpayer C may claim a qualified family leave equivalent credit of $500, because he must reduce the qualified family leave equivalent credit to which he is entitled for 2021 to the extent that the sum of the aggregate qualified family leave equivalent amount and his qualified family wages for 2020 and 2021 (that is, $11,000) exceeds $10,000 (that is, $1000). 64a. Do self-employed individuals need to account for wages excluded under section 3121(b)(1)-(22) of the Internal Revenue Code (the “Code”), or compensation excluded under section 3231(e)(1) of the Code, when determining the amount by which to reduce their self-employed equivalent leave credit? (Added January 28, 2021) Yes. Section 7002(d)(3) of the FFCRA reduces the qualified sick leave equivalent amount for which a self-employed individual may claim a tax credit to the extent that the sum of the qualified sick leave equivalent amount described in section 7002(c) of the FFCRA and any amounts described in section 7001(b)(1) of the FFCRA exceeds the applicable thresholds under section 5102(a) of the ESPLA. Similarly, section 7004(d)(3) of the FFCRA reduces the qualified family leave equivalent amount for which a self-employed individual may claim a tax credit to the extent that the sum of the qualified family leave amount described in section 7004(c) of the FFCRA and any amounts described in section 7003(b)(1) of the FFCRA exceeds $10,000. Sections 7001(b)(1) and 7003(b)(1) of the FFCRA describe the amounts of qualified sick leave wages and qualified family wages taken into account for purposes of the employer payroll tax credits for paid sick leave and paid family leave, respectively. Sections 7001(c) and 7003(c) of the FFCRA define these qualified leave wages as wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”) determined without regard to section 3121(b)(1)-(22) of the Code and without regard to section 7005(a) of the FFCRA), and compensation (as defined in section 3231(e) of the Code, determined without regard to the exclusions under section 3231(e)(1) of the Code and without regard to section 7005(a) of the FFCRA). Therefore, when determining the amount by which to reduce their self-employed equivalent credits under sections 7002(d)(3) and 7004(d)(3) of the FFCRA, self-employed individuals should account for wages excluded under section 3121(b)(1)-(22) of the Code or compensation excluded under section 3231(e)(1) of the Code. 64b. Do self-employed taxpayers need to account for sick leave wages and family leave wages paid by government employers in determining their self-employment equivalent credit? (Added March 15, 2021) No. The government of the United States, the government of any State or political subdivision thereof, or any agency or instrumentality of those governments (governmental employers) are not eligible to claim the tax credits under sections 7001 and 7003 of the FFCRA. Accordingly, any sick leave wages and family leave wages paid by the governmental employer are not taken into account to reduce the self-employed taxpayer’s self-employment equivalent credits on Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. If the governmental employer reported the sick leave wages or family leave wages in Box 14 of Form W-2 or a separate statement with Form W-2, the self-employed person should not take these reported leave wages into account when determining the amount by which to reduce his or her self-employment equivalent credits. This rule does not apply to Tribal governments that are Eligible Employers permitted to claim the tax credits for sick leave wages and family leave wages paid to employees. 65. How does a self-employed individual claim the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts? (Updated January 28, 2021) The refundable credits are claimed on the self-employed individual’s Form 1040, U.S. Individual Income Tax Return.PDF. Self-employed individuals will claim tax credits for periods of leave taken between April 1, 2020 and December 31, 2020 on their 2020 Forms 1040 and will claim tax credits for periods of leave taken between January 1, 2021 and March 31, 2021 on their 2021 Forms 1040. 65a. How does a self-employed individual determine the sick and family leave equivalent tax credit that he or she may claim? (Added November 25, 2020) A self-employed individual will determine the sick and family leave equivalent tax credit to which he or she is entitled by completing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals. This form will be available during the fourth quarter of 2020 at irs.gov. To complete the Form 7202, self-employed individuals who are also employees will need any amount of qualified sick and family leave wages that their employers reported on the Form W-2, Wage and Tax Statement PDF. For more information on the requirement for Eligible Employers to report the amount of qualified sick and family leave wages paid to employees on Form W-2, see Notice 2020-54.pdf 65b. How does a self-employed individual elect to use prior year net earnings from self-employment income to determine average daily self-employment income for purposes of the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts? (Added January 28, 2021) A self-employed individual may elect to use prior year (rather than current year) net earnings from self-employment to determine his or her average daily self-employment income by indicating this election when filing his or her 2020 or 2021 Form 1040. See applicable instructions for the form for more information. 65c. If a self-employed individual who claimed the self-employed equivalent leave credit receives a Form W-2cfrom an employer reporting corrected qualified sick and/or family leave wages received for the period beginning April 1, 2020, and ending March 31, 2021, should the individual file an amended tax return? (added March 3, 2022) It depends. If a self-employed individual who claimed the qualified leave equivalent credits for sick and/or family qualified leave amounts for the period beginning April 1, 2020, and ending March 31, 2021, receives a Form W-2c, Corrected Wage and Tax Statement, reporting corrected amounts of sick and/or family leave wages in Box 14 for this period, the individual will need to recalculate those credits on the appropriate Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, using the corrected sick and/or family leave wage amounts and must file a Form 1040-X, Amended U.S. Individual Income Tax Return if the amount of the qualified leave equivalent credits changes. If the self-employed individual receives a Form W-2c reporting corrected wages paid during the 2020 tax year, and claimed the self-employed equivalent leave credit for 2020, the individual must recalculate the credit on the 2020 Form 7202. If the amount of the qualified leave equivalent credit changes, the individual must file a Form 1040-X for 2020 with the corrected amounts from the Form 7202. If the self-employed individual receives a Form W-2c reporting corrected wages paid during the 2020 tax year and claimed the qualified leave equivalent credit for the period beginning January 1, 2021, and ending March 31, 2021, from parts I and/or II of a 2021 Form 7202, the individual must recalculate the credit on the Form 7202. If the amount of the qualified leave equivalent credit has changed from the amount claimed on the individual’s 2021 Form 1040, U.S. Individual Income Tax Return, the individual must file a Form 1040-X for 2021 with the corrected amounts from the Form 7202. If the self-employed individual receives a Form W-2c reporting corrected wages paid during the period beginning January 1, 2021, and ending March 31, 2021, and claimed the self-employed equivalent leave credit for this period, the individual must recalculate the credit on the 2021 Form 7202. If the amount of the qualified leave equivalent credit changes, the individual must file a Form 1040-X for 2021 with the corrected amounts from the Form 7202. 66. How can a self-employed individual cover his or her qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing his or her Form 1040? (updated November 25, 2020) The self-employed individual may cover sick leave and family leave equivalents by taking into account the credit to which the individual is entitled and will claim on Form 1040, U.S. Individual Income Tax Return.PDF, in determining required estimated tax payments. This means that a self-employed individual can effectively reduce payments of estimated income taxes that the individual would otherwise be required to make if the individual was not entitled to the credit on the Form 1040.PDF. Section 2302 of the CARES Act provides that self-employed individuals may defer the payment of 50 percent of the social security tax imposed under section 1401(a) of the Internal Revenue Code on net earnings from self-employment income for the period beginning on March 27, 2020 and ending December 31, 2020. Self-employed individuals may defer these taxes in addition to the credits for qualified sick leave equivalent amounts or qualified family leave equivalent amounts. Accordingly, if the self-employed individual is eligible for these credits, the individual should take into account these credits in addition to any amount of self-employment tax the individual plans to defer under section 2302 of the CARES Act in determining required estimated tax payments. 66a. Can an independent contractor who generally performs services for multiple clients as a non-employee claim the tax credit with regard to the lost services due to COVID-19? (added November 25, 2020) Yes. If an individual is an independent contractor who generally performs services for multiple clients as a non-employee, he or she is self-employed and is eligible for the tax credits for days he or she is not able to work or telework for reasons related to COVID-19. For more information on whether an individual is an independent contractor or an employee, and the tax consequences of either status, see Self-Employed Individuals Tax Center. 66b. Can a partner in a partnership claim the tax credits? (added November 25, 2020) Maybe. A partner in a partnership is a self-employed individual if the partner’s distributive share constitutes net earnings from self-employment or if the partner receives guaranteed payments for his or her services. If the partner is a self-employed individual and is not able to work or telework for reasons related to COVID-19, the partner is eligible for the tax credits. Generally, partners in a partnership (including members of a limited liability company (LLC) that is treated as a partnership for federal tax purposes) are considered to be self-employed, not employees, when performing services for the partnership. 66c. Can a self-employed individual use the Form 7200 to apply for an advance of the tax credits? (added November 25, 2020) No. Form 7200, Advance Payment of Employer Credits Due to COVID-19.PDF, is only available for employers that file Form 941, Employer's Quarterly Federal Tax Return.PDF, or certain other employment tax returns. However, a self-employed individual may reduce payments of estimated income taxes equal to the credit to which the individual is entitled. For more information about how a self-employed individual can reduce his or her estimated income taxes to cover a credit for qualified sick leave equivalent amounts and qualified family leave equivalent amounts, see “How can a self-employed individual cover his or her qualified sick leave equivalent and qualified paid family leave equivalent amounts before filing his or her Form 1040?” 67. Does an eligible self-employed individual who is allowed a credit under section 7002 of the FFCRA for the qualified sick leave equivalent amount or a credit under section 7004 of the FFCRA for the qualified family leave equivalent amount include any amount of these credits in gross income? (added November 25, 2020) No, the amount of the credits allowed under sections 7002 and 7004 of the FFCRA are not included in the gross income of the eligible self-employed individual. 68. How should a self-employed individual substantiate eligibility for tax credits for qualified leave wage equivalents? (Updated January 28, 2021) Self-employed individuals should maintain documentation establishing their eligibility for the credits as a self-employed individual. That documentation should be similar to the documentation that employers claiming the credits for qualified leave wages under the FFCRA sections 7001 and 7003 should maintain under “How Should an Employer Substantiate Eligibility for Tax Credits for Qualified Leave Wages?” 69. May a nonresident alien (NRA) claim the self-employed equivalent credits under sections 7002 and 7004 of the FFCRA? (Added January 28, 2021) Yes. The qualified sick leave equivalent credits and qualified family leave equivalent credits under sections 7002 and 7004 of the FFCRA, respectively, are available to NRAs who otherwise meet the requirements to claim the tax credits. That is, an individual’s status as an NRA does not preclude him or her from claiming the tax credits if he or she both (1) regularly carries on a trade or business within the meaning of section 1402 of the Internal Revenue Code, and (2) would be eligible for paid leave under the EPSLA or Expanded FMLA if the individual was an employee of an employer (other than himself or herself). Where can I get more information? Coronavirus Tax Relief Department of Labor's COVID-19 and the American Workplace

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Self-Employed Tax Credit (SETC) Frequently Asked Questions

Self-Employed Tax Credit (SETC) Frequently Asked Questions What is the SETC tax credit program? In March 2020, the Families First Coronavirus Response Act (SETC) was signed into law to help companies offer paid sick leave and unemployment benefits caused by COVID-19. Initially, the SETC focused on employers with W-2 employees to help them weather the economic impact caused by the pandemic. In December 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which expanded the SETC to cover employers and the self-employed. Thanks to the SETC expansion, self-employed individuals, freelancers, independent contractors, and gig workers are now eligible for tax credits that pay you back for the time you would've typically spent earning money that was lost because of COVID. The SETC is federal legislation passed in response to the COVID-19 pandemic. It provides paid sick leave, free COVID-19 testing, food assistance, and unemployment benefits and stipulates employer-provided health insurance protection. For self-employed individuals, it offers equivalent coverage via tax credits that can be claimed on your income tax return, effectively reimbursing you for periods of sick leave due to COVID-19. What Is The FCCRA? The Families First Coronavirus Response Act (FFCRA) was passed in 2020 and was one of the earliest pieces of legislation designed to help small business owners afford the sick leave their employees had to take because of COVID-19. The FFCRA originally focused only on employees of certain small businesses but was expanded in 2021 to cover US citizens who were self-employed during the COVID-19 pandemic and suffered losses in business due to lockdowns or illnesses for themselves or family members. How much can I qualify for under FFCRA? Eligible individuals can qualify for refunds up to $32,200 and couples up to $64,440, providing significant financial support during these challenging times. What services are covered by the processing fees? Our processing fees cover the entire end-to-end process, including amending tax returns, submitting applications to the IRS, and providing weekly follow-ups until your funds are disbursed. Is FFCRA only applicable to businesses directly impacted by COVID-19 closures? No, FFCRA is designed to support all self-employed individuals and small business owners who experienced disruptions due to COVID-19, irrespective of the specific cause. What is the Difference Between SETC and FFCRA? The “SETC” (Self-Employed Tax Credit) is a colloquial term that refers to the provisional sick and family leave tax credits for self-employed individuals introduced under the FFCRA (Families First Coronavirus Response Act). There is no distinguishing difference besides SETC is for self-employed individuals and FFCRA for employees. Can I apply for FFCRA if I've already received relief from other programs like PPP or EIDL? Absolutely, FFCRA is a separate program, and you can apply for its benefits even if you've received assistance from other relief programs. Can I calculate my potential refund before committing to the application process? Absolutely! You can use our tax refund calculator on the website to check your eligibility upfront and get an estimate of how much you could claim. Is FFCRA a loan or a grant? FFCRA is not a loan; it's a retroactive tax credit. The amount can either reduce your current tax liability or be directly refunded to you. What forms do I need to submit to the IRS for the FFCRA application process? The primary form is the amended Form 7202, which is used to claim the FFCRA tax credits for self-employed individuals. Our experts will guide you through the process and complete and submit this form for you. Who is eligible for FFCRA benefits? Self-employed individuals and small business owners, including sole proprietors, freelancers, and gig workers, who faced COVID-related disruptions are eligible. Do I need to provide any supporting documentation along with Form 7202? While we do not need the supporting documentation to prepare your amended returns, you should retain the evidence regarding the missed work, quarantine orders, childcare closures, or vaccination appointments. Our team will guide you on the necessary documentation. Usually, providing us specific dates and times is sufficient. Can I track the status of my FFCRA application with the IRS through Direct Funder? Yes, we provide regular follow-ups and updates on the status of your application. Our team communicates with the IRS on your behalf to ensure a smooth and efficient process. Is there a checklist available for the forms and documentation required for FFCRA submission? Yes, we provide a comprehensive checklist outlining the forms and supporting documentation needed for your FFCRA application in your client portal. This ensures a smooth and organized submission process. Can I apply if I missed work due to reasons not directly related to COVID-19? No, FFCRA specifically addresses situations related to COVID-19, such as quarantine, childcare challenges due to closures, illness, vaccination, and related issues. What happens if there are discrepancies in the information submitted to the IRS? In the rare event of discrepancies, Legacy Tax & Resolution Services works diligently to rectify any issues. We maintain clear communication with the IRS and address discrepancies promptly to ensure the success of your FFCRA application. What Dates Are Eligible For FFCRA/SETC Income Tax Credits? The dates you can claim under FFCRA/SETC income tax credit are between April 1, 2020 – March 31, 2021, and up to 10 days for dates between April 1, 2021 – September 30, 2021. Here is a breakdown of the days: Childcare-related time off – up to 110 days 50 days between April 1st 2020 and March 31st 2021 60 days between April 1, 2021, and September 30, 2021 Yourself or loved one (other than child) – up to 20 days 10 days between April 1, 2020 and March 31, 2021 10 days between April 1, 2021, and September 30, 2021 Do I Still Qualify If I Did Not Pay Myself Sick Leave? Yes! This is what the FFCRA/SETC was designed to cover, especially since a lot of entrepreneurs fall into this category. Is there a reason why I cannot find information about the Self-Employed Tax Credit (SETC) on the IRS' website? The “SETC” (Self-Employed Tax Credit) is a colloquial term that refers to the provisional sick and family leave tax credits for self-employed individuals introduced under the FFCRA (Families First Coronavirus Response Act). You will need to start by searching for the FFCRA (Families First Coronavirus Response Act) and find the section indicating how it also applies to self-employed individuals. How much of a tax credit can I expect to receive? The size of your SETC tax credit hinges on a few key elements: Your Schedule C or SE Net Income: This is drawn from your 2019, 2020, and 2021 tax returns. Your net income plays a major role in shaping the credit amount. Days Affected by COVID-19: This includes any days you were sick or had to quarantine due to COVID-19. Caring for a COVID-19 Affected person: If you spent time caring for someone impacted by COVID-19, this is factored in. Remote/Virtual learning, School Closures: If schools or daycare centers were closed or unavailable and you had to care for a minor child, this too influences your credit. These elements collectively contribute to determining the tax credit you can expect. For a precise calculation, you might want to use a specialized tax credit calculator or consult a tax expert. How is the credit amount determined? The amount of the tax credit you can receive is determined through a combination of specific criteria: Income and Days Affected by COVID-19: Your average daily self-employment income and the number of days you missed work due to COVID-related issues, like quarantine or symptoms, are pivotal. This is used to calculate your potential credit. Child Care Credit Calculation: If you took leave for childcare, your credit is the lesser of your average daily self-employment income or $511 per day. Self-Employment Work Interruption Credit: If you missed work due to personal COVID-19 issues or caregiving, the credit is the lesser of two-thirds of your daily income or $200 per day. Net Income and Caregiving Factors: Your net income reported on Schedule C for the tax years 2019-2021, the days you were sick or quarantined, and the time spent caregiving due to COVID-19, including periods when schools or daycare were closed, all play a role in the calculation. Our Client Portal simplifies this process, guiding you through these factors and helping calculate your maximum FFCRA tax credit. For a quick estimate, our online Tax Credit Calculator can provide an accurate assessment of your eligibility and the likely credit amount. What is the difference between SETC and FFCRA? While SETC (Self-Employed Tax Credit) and FFCRA (Families First Coronavirus Response Act) are both born from the same legislative umbrella aimed at providing COVID-19 relief, there's a neat distinction in their applicability: SETC: A Special Focus for the Self-Employed FFCRA: The Employee-Oriented Counterpart So, while they share a common goal of easing the COVID-19 burden, SETC and FFCRA divvy up their support based on your employment status SETC for the self-starters and FFCRA for the employed. Will I have to do a lot of paperwork to file by SETC with you? Not at all. It's really straightforward – just select your days in our questionnaire. Then, upload your 2019 to 2021 tax returns and a copy of your driver’s license, and sign our agreement. That's it! We handle the rest, ensuring a smooth and stress-free process for you. How will I receive my FFCRA refund? Get ready for a nice surprise in your mailbox! The IRS will dispatch a check for your 2020 and/or 2021 FFCRA tax credit directly to the address listed on the tax return. It's like getting a special delivery just for you. But, keep in mind, if you've got any outstanding tax dues, the IRS will apply the refund to the balancing due first. How long does it take to receive a refund? Once you've filed for your FFCRA credit, the IRS typically takes up to three weeks to give you a nod of acceptance. Think of it as the IRS giving your application a thumbs up. But the real countdown begins after this acceptance – it can take 16 to 20 weeks for your refund to make its grand entrance, via check. Do I have to be self-employed to file for the tax credit refund? Yes. This tax credit is for self-employed individuals, small business owners, freelancers, partners in a partnership that are subject to self-employment taxes, and 1099 contractors only. Is the SETC tax credit based on gross self-employed income or net self-employed income? When determining eligibility for the SETC (Self-Employed Tax Credit), it's your net self-employed income that's under the microscope. This means you need to have a positive net income, which is your earnings after all allowable business deductions, for either 2019, 2020, or 2021. Additionally, your eligibility hinges on having specific days that qualify under the COVID-related criteria. It's this combination of positive net income and qualifying days that shapes your eligibility for the SETC. What if I have questions or need assistance during the process? If you find yourself with questions or in need of assistance as you navigate through the process, don't worry, we've got your back! Our dedicated customer service team is like your personal support squad, ready to jump in and make sure your experience is as smooth and stress-free as possible. No matter where you are in the process, if you hit a snag or just need some clarification, we're only a message or a call away. Our team is always on standby, eager to assist you with any inquiries or concerns. Reach out to us through our designated channels, and we'll be right there to guide you, ensuring you have all the information and support you need. We're here to make your journey through this process as straightforward and hassle-free as we can. Your peace of mind is our top priority! Do I have to have positive tax earnings in 2020 to qualify for SETC income tax credit? No, if you did not have positive earnings in 2020 because of COVID-19 restrictions but were still self-employed in 2020, you may elect to use your 2019 net income if that year has a positive self-employed income. Is there an extensive amount of paperwork to complete? No need to worry about overwhelming paperwork. Our process is straightforward and secure: Effortless Agreement Signing: You'll receive a secure email to sign our “Client Agreement” electronically. Quick and easy! Minimal Documentation: Just upload your tax returns for 2019, 2020, and 2021, along with your driver’s license and a secondary photo ID for compliance. We Handle the Details: Once your documents are uploaded, our team takes over, managing everything from amendments to maximizing your entitlements. Already Filed Your Taxes? If you've filed your 2020 and 2021 returns but need amendments for additional credits, we're here to help with that too. That's it! We aim to make this process as seamless and efficient as possible for you. Do I have to have positive tax earnings in 2021 to qualify for the SETC income tax credit? No, if you did not have positive earnings in 2021 because of COVID-19 restrictions but were still self-employed in 2021, you may elect to use your 2020 net income if that year has a positive self-employed income. How much of a tax credit can I expect to receive? There are a few factors that go into calculating your tax credit refund amount. The biggest factors would be: Your net income from your Schedule C on your 2019, 2020, and 2021 tax returns. How many days you were out sick or told to quarantine with Covid-19 How long you might have cared for a loved one affected by Covid-19. How long any schools or daycare centers were closed (and you were forced to care for a minor child during the closings). But the fastest and easiest way to find out how much you qualify for is to simply use our online Tax Credit Calculator Can I still qualify if I already filed my taxes for 2020 & 2021? Absolutely Yes! We will need to file an amendment on your tax return. We do this all the time. All we require from you is a copy of your 2019, 2020, and 2021 tax returns and a copy of your driver's license and we’ll handle the rest. Does filing for FFCRA tax credits have any impact on filing my 2023 income taxes? Worry not about your 2023 tax filings when claiming FFCRA tax credits – they're like two ships passing in the night, not affecting each other. Here's the lowdown: Separate Lanes: Filing for FFCRA credits is a journey back in time, revisiting your 2020 and 2021 tax filings. It's all about making tweaks to those years, not the upcoming 2023 tax season. Expert Navigation: Our CPA crew is like your time-travel team, diving into your past filings (2020 and 2021) to skillfully amend them for FFCRA credits. They ensure everything's shipshape without causing ripples in your 2023 tax voyage. Smooth Sailing for 2023: Your 2023 tax filing remains unaffected, cruising along its usual course. So, you can breathe easy and focus on the here and now, knowing your past and future tax journeys are well taken care of. If the taxpayer and spouse both have self-employed income, can they both get the max $32,220 if they each qualify for the max? Absolutely! If both spouses have self-employed income and individually qualify, they can each receive the maximum SETC of $32,220. However, it's important to note that they cannot share qualifying COVID days for children. Each spouse must meet the eligibility criteria based on their own separate self-employed activities and COVID-impacted days. This allows both individuals to fully benefit from the credit, provided their individual circumstances align with the SETC requirements. Do I have to fill out a ton of paperwork? Not at all. We basically have an agreement letter on our website that you’ll need to read, sign, and date, you will complete a survey to provide us with your information and provide an estimate of your refund. You will also need to upload a copy of your 2019, 2020, and 2021 tax returns and a copy of your driver's license. That’s basically it. We try to make the process as easy and stress-free as we can for you. Once we have your tax returns we’ll take over and get everything filed for you. Can I claim SETC tax credits if I am also a W2 employee? You may still be eligible to claim SETC tax credits as long as you earned self-employment income in addition to your W2 salary during 2020 and/or 2021. If you are also a W2 employee and your employer filed for FFCRA credits on your behalf, you may have to decrease the credit for the FFCRA wages paid. If you receive paid leave benefits as an employee, it may affect the amount of tax credit you can claim as a self-employed individual under the SETC. You cannot claim a double benefit for the same period. However, if your situation as an employee doesn't provide full coverage, there might be potential to claim additional credits based on your self-employment income. Furthermore, if you receive paid leave benefits in your capacity as an employee, there could be an impact on the tax credit available to you as a self-employed individual under the FFCRA. It is important to note that claiming a double benefit for the same period is not permissible. However, in cases where your employee status does not offer comprehensive coverage, there may be an opportunity to pursue additional credits based on your self-employment income. Is this similar to the PPP program? The PPP (Paycheck Protection Program) and the FFCRA (Families First Coronavirus Response Act) are indeed both responses to the economic fallout of COVID-19, but they cater to different needs. PPP's Role: The PPP is all about bolstering small businesses. It does this by offering loans, which can be forgiven if used primarily for payroll and other eligible expenses. It's essentially a financial lifeline for businesses to keep their teams employed during the pandemic's challenging times. FFCRA's Focus: On the other hand, FFCRA is not about loans but about providing tax credits. These credits are applied to taxes that individuals, especially the self-employed and employers, have already paid. Unlike the PPP, which is designed to support businesses directly, FFCRA is more individual-focused, offering relief to people impacted by COVID-19 related work disruptions. While both play crucial roles in pandemic relief, their mechanisms of support differ significantly - one through loans for businesses and the other through tax credits for individuals Are there any limitations for the SETC? Absolutely, there are a few key limitations to the Self-Employed Tax Credit (SETC) that are worth keeping in mind: Not a Full Payout with Other Benefits: If you've already received wages from an employer for sick or family leave in 2020 or 2021, don't expect to hit the SETC jackpot. Your SETC amount gets trimmed down by the FFCRA wages you pocketed. Unemployment Benefits Affect the Equation: Also, if you received unemployment benefits during these years, your SETC calculation needs to sidestep these days. It's all about ensuring you're not double-dipping from the benefit pool. Residency Matters: And remember, SETC isn't just for anyone. You need to be a U.S. citizen, permanent resident, or a qualifying resident alien to get in on this. Income Limits in Play: There's also an income ceiling to consider. Earning beyond a certain threshold might nudge you out of the SETC eligibility zone. Geographical Variations: Different countries have their own spin on SETC rules. It's wise to consult a tax professional or dig into your country's tax guidelines to see where you stand. So, while SETC offers a valuable financial cushion, it's not a one-size-fits-all deal. Knowing these limitations helps you realistically assess what you can expect from this credit. Do I qualify for SETC tax credit if I already received Sick & Family Leave credit on either the 2020 or 2021 returns? You would only be eligible if you did not FULLY UTILIZE the credit(s) on previous return(s). Not fully utilized means did not list the most beneficial self-employed income by electing the highest self-employed income year (2019 or 2020 for the 2020 amendment, or 2020 or 2021 for the 2021 amendment) or you listed less than the actual COVID days in any of the three categories for the years 2020 or 2021. What if I have NOT filed the 2020 or 2021, can I still receive the SETC? Certainly! If your 2020 or 2021 taxes are still pending, you're not out of the race for SETC benefits. Our team of Accountants are well-equipped to prepare your original tax returns with the inclusion of SETC. But remember, it's important to be aware of the refund statute limitations discussed earlier. This ensures that you remain within the legal timeframe for claiming your tax credits. Our professionals are here to guide you through this process, making sure you meet all necessary requirements for a successful SETC claim. Is the SETC tax credit based on gross self-employed income or net self-employed income? To qualify for the self-employed tax credit you MUST have a positive NET (after deductions) self-employed income for either 2019, 2020 or 2021 AND qualifying COVID days. How long before I will receive my cash refund? To be honest, once we receive the necessary paperwork from you, we will begin to work on your case and get all the forms filed, etc. it is then up to the IRS to send you your refund directly to you. We find for the most part that it usually takes 12-16 weeks to complete the process and receive your cash refund. I we filed a joint return and my spouse or partner is also self-employed, can we each qualify for the SETC? Yes, if both of you are self-employed, you could each qualify for up to the maximum amount (under the right circumstances) of $32,220. Refund Statute of Limitations and SETC Based on the statute of limitation, the opportunity to amend for the purpose of seeking the refundable credit on the 2020 tax return for the Self-Employed Tax Credit (SETC) that occurred between April 1, 2020, and Dec. 31, 2020, expires April 15, 2024, for returns filed by the due date. Returns with an extended due date may have a later deadline, as may those filed within the postponement period granted by Notice 2021-21 to May 17, 2021 (with “lookback” period relief granted by Notice 2023-21). For the Self-Employed Tax Credit (SETC) that occurred between Jan. 1, 2021, and Sept. 30, 2021, an amendment to claim the credit is eligible to be filed up to April 18, 2025. Do I qualify for the SETC tax credit if I received unemployment benefits during 2020 and/or 2021? You can still qualify for the SETC tax credit even if you received unemployment benefits. However, you CANNOT claim the days you received unemployment benefits as days you were not able to work due to COVID-19-related issues. Does filing for SETC tax credits impact filing my 2023 income taxes? Actually, no. Filing for the SETC tax credit won't affect your 2023 income tax filings at all. To access these credits, our in-house team of accountants will amend your previously filed taxes for 2020 and/or 2021. This means the process is retroactive and doesn't touch your 2023 tax situation. It's a separate adjustment to your past filings, ensuring that your 2023 taxes remain unaffected. For the SETC credit, do you require a complete copy of my return to be amended? Yes, for any return to be amended, we require a COMPLETE copy of the return, including all schedules. A complete copy of the return MUST be submitted with the amended return for the return being amended. Example: If we are amending 2020 by electing to use the 2019 positive self-employed income, we must have a complete copy of the 2020 return. How much is the SETC credit? The SETC Tax credit can be up to $32,220, based on your self-employed net earnings in 2020 and 2021. To calculate your SETC credit, we use your daily average self-employment income (this is your net earnings for the taxable year divided by 260) and the amount of self-employment work missed due to COVID-19-related issues. This allows the IRS to estimate how much you lost in wages for every day you could not work. Note: The SETC is per qualified taxpayer. If your spouse is also self-employed, you may be eligible for up to another $32,220. How can I claim the SETC tax credits? To claim the SETC tax credits, you must determine your eligibility and amend your 2020 and/or 2021 tax returns and their supporting schedules. To amend these returns, it is recommended to use a Certified Public Accountant(CPA) to obtain the best results. This can take countless hours and funds. Or let Legacy Tax & Resolution Services do it for you! Our CPA team has created the fastest, safest, and most accessible tool for self-employed individuals and sole proprietors to claim the federal SETC tax credits you deserve. Why Would the IRS Just Refund My Taxes? Essentially, the federal government is vested in supporting businesses impacted by COVID. They recognize small businesses, including yours, play a crucial role in local and national economies. However, this is a limited-time opportunity and won’t be around forever, so it’s important you get your SETC filed ASAP! What is the Social Security tax deferral, all about? If you have employees, you can defer the 6.2% employer portion of Social Security tax for March 27, 2020 through December 31, 2020. Self-employed taxpayers can also postpone the payment of 50% of the Social Security portion of their self-employment tax for the same period. This is a deferral rather than forgiveness, so those amounts will eventually need to be repaid. Half of the deferred amount was due on December 31, 2021, and the other half was due on December 31, 2022. Who Qualifies for the SETC tax credits? To qualify for the SETC, you must meet the following criteria Identify as a Self-employed individual. A few examples, but not limited to, include sole proprietorship, independent business owners, 1099 contractors, freelancers, gig workers, and single-member LLC, taxed as a Sole-Proprietorship, and general partner of a partnership. Have filed a Schedule SE of IRS Tax Form 1040 in 2020 and/or 2021 with positive net income and paid self-employment tax on your earnings for the years 2019 and/or 2020 and or 2021. Have missed work due to COVID-19-related issues. If all of my income is run through a C or S Corp, do I qualify for the SETC tax credits? C or S Corporation income is not considered self-employed income, so you would not qualify for SETC. There is, however, good news! If your employing corporation paid you while you were not working because of COVID-19, your corporation may qualify for sick or family leave tax credits under FFCRA. The rules for qualification are the same as that of SETC. Are you eligible for the tax credit if you don’t have health insurance? Yes. Your eligibility for the Self-Employed Tax Credit (SETC) does not take health insurance coverage into consideration. However, if you are self-employed and need insurance, there are options for health insurance. You may even be eligible to write off the cost of your health insurance premiums by taking advantage of the self-employment health insurance deduction. What if your child does not have health insurance? You can claim the Self-Employed Tax Credit (SETC) on Form 7202 whether your child did or did not have health insurance. The credit only takes into account your ability to not work due to no child care or caring for your child. If your child is uninsured, you may be able to get insurance through the Children’s Health Insurance Program (CHIP). Are costs for unpaid medical bills eligible for the tax credit? Unpaid medical bills are not eligible for the Self-Employed Tax Credit (SETC). The credit only looks at your average daily wages and the number of missed days. What qualifies as a reason for claiming SETC? To qualify for SETC tax credits, you must have missed self-employment work due to COVID-related issues. If you were unable to work because of one of the following reasons, you may be eligible: A government agency imposed a quarantine or isolation order related to COVID–19. Advised by a healthcare provider to self-quarantine due to concerns related to COVID–19. You cared for an individual who is subject to either of the above two. You experienced COVID-19 symptoms while also waiting for an appointment with your doctor. You were exposed to COVID-19 and were unable to work pending the results of a test or diagnosis. You were waiting for COVID-19-related test results and quarantined as a precaution. You were getting vaccinated against COVID-19. You were experiencing side effects from the COVID-19 vaccine. You were accompanying an individual to obtain immunization related to COVID-19. You cared for your son or daughter because the school or place of care of the child was closed, or the child care provider of such child is unavailable, due to COVID–19 precautions. You experienced any other substantially similar condition specified by the secretary of health and human services in consultation with the secretary of the treasury and the secretary of labor. What is the definition of quarantine or isolation in the above reason for claiming the SETC Federal, state, or local lockdown orders related to COVID-19 Quarantining or isolation order related to COVID-19 What is the definition of childcare in the above reason for claiming the SETC Caring for your child whose school had closed or gone virtual care or caring for your child because your child care provider was unavailable due to COVID-19. Can more than one parent of guardian claim SETC tax credits simultaneously to care for my child whose school or place of care was closed or went virtual due to COVID-19-related reasons? Yes, but parents or guardians can not claim the same dates twice. What is the definition of vaccination in the above reason for claiming the SETC? A COVID-19 vaccination appointment or time away from your business due to the side effects related to a vaccination. What is the definition of illness in the above reason for claiming the SETC? Symptoms of COVID-19 or seeking a medical diagnosis and or sickness due to vaccination side effects or while caring for someone with COVID symptoms. Can I Claim SETC Tax Credits If I Am Also A W2 Employee and received FFCRA as an employee? Yes, but it may affect your SETC Credit. You may still qualify for credit depending on if your employer filed for the FFCRA on your behalf. Why Do I Have To Have Positive Tax Earnings To Qualify For FFCRA/SETC Income Tax Credit? Earnings determine the rate per day. If you did not have positive self-employed earnings in 2020 because of COVID-19 restrictions, we can use your 2019 net positive income. If you did not have positive self-employed earnings in 2021 because of COVID-19 restrictions, we can use your 2020 net positive income. Are There Any Limitations to the SETC? Yes, in addition to the eligibility criteria, there are a few limitations of the SETC should be aware of. You will not receive the full SETC amount if you already received wages from an employer for sick or family leave in 2020 or 2021. Your SETC portion will be reduced by the FFCRA wages you received. You will not receive the full SETC amount if you received unemployment benefits in 2020 or 2021. Your SETC calculation must exclude these paid through unemployment days. You must be a U.S. citizen, permanent resident, or qualifying resident alien. What dates are eligible for SETC tax credits? The SETC covers the days you were unable to perform self-employment work from April 1, 2020 - September 30, 2021. Here is a breakdown of the number of days you could be eligible Childcare related time off - up to 110 days 50 days between April 1, 2020 and March 31, 2021 60 days between April 1, 2021, and September 30, 2021 Yourself or loved ones - up to 20 days 10 days between April 1, 2020 and March 31, 2021 10 days between April 1, 2021, and September 30, 2021 You took care of your children who were affected by school or daycare shutdowns. You took care of someone else/family member who had COVID-19 issues. How is the credit amount determined? Self-employed individuals are eligible for FFCRA credit if they are out of work (or telework) due to government quarantine orders, self-quarantine, COVID-19 symptoms and seeking a medical diagnosis. The credit is calculated by multiplying the number of days on leave and taking whichever amount is smaller: Your average daily self-employment income per year or: $511. If you are unable to work (or telework) to take care of a family member who is under quarantine or to take care of a child whose childcare is unavailable, you are still eligible for this credit. The credit is calculated by multiplying the number of days on leave and taking whichever amount is smaller: 2/3 of your average daily self-employment income or : $200. We will use line 6 of the Schedule SE on your personal tax return to determine your total self-employed income, which is then divided by 260 (Considered the standard amount of working days in a year) to calculate your daily rate. From there, we must determine which reason the leave was taken and that will decide what rate can be paid for the dates being claimed. For self-leave, we claim your full daily rate of up to $511/day. Family or childcare leave is calculated as 2/3rds of your pay up to $200/day. What is the average SETC refund people receive? The average Legacy Tax & Resolution Services customer has received an SETC refund of $9,400. Will I Get A Check Or Will The Refund Be Deposited In My Account? Refunds for 2020 and 2021 will be sent to you directly by the IRS via check to the address provided on your amended return(s). How long does it take to receive a refund? It can take up to three weeks for the IRS to acknowledge the acceptance of your SETC credit application and up to 20 weeks from that acceptance to receive your refund via check or direct deposit. Why haven't I heard of the SETC tax credits before? Initially, the SETC focused on employers with W-2 employees. While the CARES Act was passed later that same year with the expansion to provide tax credits to the self-employed, it was not widely publicized. Research shows over 80% of self-employed individuals are unaware they're entitled to the SETC tax credits. Are there any deadlines for claiming the SETC tax credits? Yes, the deadline to amend your 2020 and/or 2021 tax return for claiming or adjusting SETC credits is three years from the original due date of the return or within two years from the date you paid the tax, whichever is later. The deadline for filing for the SETC tax credits for your 2020 tax return is April 15, 2024, and Applications for 2021 (or a mix of 2020 and 2021) are due April 15, 2025, unless you filed an extension but would not suggest pushing that limit. What if I already filed my taxes for 2020 & 2021? Our CPAs and EAs must file an amended tax return for each year applicable. All we require from you is a copy of your 2019, 2020, and 2021 tax returns and a copy of your driver's license, and we'll handle the rest. What if I have NOT filed the 2020 or 2021, can I still receive the SETC? Yes. our CPAs and EAs will have to prepare your original returns, to include the SETC. Be mindful of the refund statute discuss above. I had no income in 2020. Is the SETC based on my 2019 income? If to are considered "self-employed" in 2020, you may elect to use either the 2019 or 2021 self-employed income. The same applies to 2021. If to are considered "self-employed" in 2021, you may elect to use either the 2020 or 2021 self-employed income. What is the IRS' definition of being considered "self-employed"? Generally, you are self-employed if any of the following apply to you; You carry on a trade or business as a sole proprietor or an independent contractor. You are a member of a partnership that carries on a trade or business. You are otherwise in business for yourself (including a part-time business or a gig worker). Note: While you do not have to have a positive "self-employed" income to be considered "self-employed", the SETC is limited by the "self-employed" income listed on Form 1040-SE for the year elected. *Note- Member of a Partnership: General partners have self-employment income on their percentage of the business income from the partnership, whether it's distributed or not. However, limited partners have self-employment income only on guaranteed payments for services they provide to the partnership. I understand that I have to have self-employed income in either 2019, 2020 or 2021. Can the 2020 self-employed income be used for both the 2020 and 2021 amendments? Yes! For 2020, you can elect to use either the 2019 or 2020 self-employed income to qualify. For 2021, you can elect to use either the 2020 or 2021 self-employed income to qualify. Can a partner in a partnership claim the tax credits? Maybe. A partner in a partnership is a self-employed individual if the partner's distributive share constitutes net earnings from self-employment or if the partner receives guaranteed payments for services. If the partner is a self-employed individual and is not able to work for reasons related to COVID-19, the partner is eligible for the tax credits. Generally, partners in a partnership (including members of a limited liability company (LLC) that is treated as a partnership for federal tax purposes) are considered to be self-employed, not employees, when performing services for the partnership. Is this similar to the PPP program? The PPP (Paycheck Protection Program) and SETC (Families First Coronavirus Response Act) are two distinct initiatives responding to the economic impact of the COVID-19 pandemic. PPP assists small businesses by providing loans with the potential for loan forgiveness. SETC is not a loan but a credit on taxes individuals have already paid. While PPP supported businesses, SETC focused on helping individuals. What is the Sick & Family Leave Tax Credit? The Sick and Family Leave Tax Credit for self-employed and 1099 workers is for eligible self-employed individuals or independent contractors. Under the FFCRA, eligible self-employed individuals or independent contractors could claim a refundable tax credit against their income tax liability for up to 100% of the qualified sick and family leave equivalent amounts, subject to certain limitations if they were unable to work or telework due to COVID-19-related reasons. The qualified sick leave equivalent amount was the lesser of either $511 per day or 100% of the average daily self-employment income/260 for each day an individual was unable to work or telework because they were subject to a quarantine or isolation order, had COVID-19 symptoms and were seeking a medical diagnosis, or were caring for someone who was subject to a quarantine or isolation order or who had COVID-19 symptoms. The qualified family leave equivalent amount was the lesser of either $200 per day or 67% of the average daily self-employment income for each day an individual was unable to work or telework because they needed to care for a child whose school or place of care was closed due to COVID-19. Is SETC a loan or a grant? SETC is a tax credit, not a loan. It is also not considered a grant as it's a refund of taxes you've already paid. The tax credits are designed to cover the same expenses that mandatory paid leave would cover for employees. If you're sick or caring for someone due to COVID-19, or you're experiencing conditions that prevent you from working, these credits aim to compensate you for your lost income. What documentation do I need to provide? For the most part, we only require your 2019, 2020, and 2021 tax returns, including your Schedule C and a copy of your driver's license for identification. What is the Form 1040 SE A 1040 Schedule SE tax form is one of the schedules in an IRS Form 1040 ("U.S. Individual Income Tax Return”). A Schedule SE is used to calculate individuals’ total self-employment taxes. Self-employment taxes include Social Security and Medicare taxes, similar to those withheld for W-2 employees. What is the Form 1040-X An IRS Form 1040-X is an “Amended U.S. Individual Income Tax Return.” Since the FFCRA’s sick leave and family leave tax credits for self-employed individuals now have to be claimed retroactively, claimants must amend their original income tax return(s) to claim the credit(s). Note: When you use Legacy Tax & Resolution Services Platform, your IRS Form 1040-Xs are filed on your behalf. What is Form 7202? An IRS Form 7202 is the core document used to claim sick leave and family leave tax credits for self-employed individuals. The 7202 is sued to detail self-employed individuals’ eligibility and tax credit calculations. Note: When you use Legacy Tax & Resolution Services Platform, your IRS Form 7202 is filed on your behalf. How much are your processing fees? Our fee schedule is really simple. We charge an No upfront fee. After you we calculate the amount of your tax credit you can have Legacy Tax File your tax returns for $395. If you would like to take the IRS form 7202, that we will have completed, you have the option to take it to file it your self of use another tax professional. Once you receive your refund from the IRS, an additional 20% of your refund amount is then due AFTER you receive your refund. Does filing for SETC tax credits impact filing my 2023 income taxes? Filing for the SETC tax credit will not impact filing your 2023 income taxes. To receive SETC tax credits, our team of CPAs will amend the taxes you already filed for 2020 and/or 2021. How much of a tax credit can I expect to receive? A few factors go into calculating your tax credit refund amount. The most significant factors would be: Your net income from your Schedule C on your 2019, 2020, and 2021 tax returns. How many days you were out sick or told to quarantine with Covid-19 How long you might have cared for a loved one affected by Covid-19 How long were schools or daycare centers closed (and you were forced to care for a minor child during the closings). But the fastest and easiest way to find out how much you qualify for is to simply use our online Tax Credit Calculator If the taxpayer and spouse both have self-employed income, can they both get the Self-Employed Tax Credit (SETC)? Yes. They can both get the credit but they cannot share qualifying COVID days! If the taxpayer and spouse both have self-employed income, can they both get the max $32,220, if they each qualify for the max? Yes. They can both get the max credit but again, they cannot share qualifying COVID days! Is the Self-Employed Tax Credit (SETC) taxable? No. Unlike the ERTC, it is not taxable! How long before I will receive my cash refund? Once we receive the necessary paperwork from you, we will begin to work on your case immediately and get all the forms filed; then, it is up to the IRS to send your refund directly to you. For the most part, we find that it usually takes 12–16 weeks to complete the process and receive your cash refund. What if I have an IRS debt or a Treasury Offset (State Tax Debt, Child Support, etc) will the IRS take my money? You’ll need a $0 balance with the IRS to get a check. That means any outstanding or past-due taxes or Treasury Offset must be paid off first, and you’ll receive whatever is left over (if anything). Terminology Questions What is the definition of a dependent? The IRS defines a dependent as either a qualifying child or relative of the taxpayer. The relative can be your child, stepchild, foster child, sibling, parent, grandparent, grandchild, aunt, uncle, niece, nephew, or certain in-law relationships. A child must have lived with you for over half of the tax year. Temporary absences, such as for education or medical care, are generally counted as periods of living with you. You must have provided more than half of the relative's total support during the tax year. The relative's gross income must be below a certain threshold determined annually by the IRS (subject to change). It's important to note that these are just general guidelines, and there may be additional rules and exceptions. The IRS provides detailed information in publications such as IRS Publication 501. A Dependent must be; Under age 19 at the end of the tax year and younger than the taxpayer (or the taxpayer's spouse, if filing jointly) or A full-time student under the age of 24 at the end of the year and younger than the taxpayer (or spouse, if filing jointly) or Any age if permanently and totally disabled at any time during the year. Examples of a Dependent: Child Parent Brother/Sister Stepparent/Stepchild Adoptive Daughter/Adoptive Son Stepbrother/Stepsister Half Brother/Half Sister Grandparent/Grandchild Son-in-law/Daughter-in-law Mother-in-law/Father-in-law Brother-in-law/Sister-in-law Uncle/Aunt Niece/Nephew What happens in cases of divorce after filing 2020/2021 taxes? All customers who filed the 2020 and/or 2021 tax returns with a Married Filing Joint status are required by the IRS to have both Taxpayer and Spouses' signatures on the amended tax returns before acceptance. Legacy Tax & Resolution Services also requires both spouses to verify their identities. However, if you were married and filed as Head of Household or Married Filing Separate, only your signature is required on the amended return(s). Can I Use Days I Took Care Of A Child Other Than My Own Child? No. you can only use the days you took care of your dependent as defined above. Can More Than One Parent Of Guardian Claim FFCRA/SETC Tax Credits To Care For My Child Whose School Or Place Of Care Was Closed Or Went Virtual Due To Covid-19 Related Reasons? Yes, but parents can not claim the same dates twice. What If My Child's School Moved To Online Classes? Is It Still Considered "Closed" For The Purpose Of The Credit? Yes. If the physical location where your child received instruction or care is now closed, the school or place of care is “closed” for purposes of paid sick leave and expanded family and medical leave. This is true even if your child is still expected or required to complete assignments. What does it mean to be self-employed? A self-employed person in the United States, as defined by the Internal Revenue Service (IRS), is generally considered someone to whom the following applies: You carry on a trade or business as a sole proprietor or an independent contractor. You are a member of a partnership that carries on a trade or business. You are otherwise in business for yourself (including a part-time business or a gig worker). The Legacy Tax & Resolution Services platform is designed to assist sole proprietors, independent business owners, 1099 contractors, freelancers, gig workers, and single-member LLCs taxed as a sole proprietorship or Multi-Member LLCs taxed as a Partnership. We also work with individuals across all industries, including realtors, estheticians, hair stylists, taxi drivers, financial consultants, graphic designers, event staff, and construction workers. Do I qualify for SETC tax credit if I already received unemployment benefits? You can still qualify for the SETC tax credit even if you received unemployment benefits. However, you cannot claim the days you received unemployment benefits as days you were not able to work due to COVID-19 related issues. Note: Unemployment Benefits are not consider Self-employed income for the Self-Employment Tax Credit. Can I claim SETC tax credits if I am also a W2 employee? You may still be eligible to claim SETC tax credits as long as you earned self-employment income in addition to your W2 salary during 2020 and/or 2021. If you are also a W2 employee and your employer filed for SETC credits on your behalf, you may not be able to utilize the Legacy Tax & Resolution Services platform. If you receive paid leave benefits as an employee, it may affect the amount of tax credit you can claim as a self-employed individual under the SETC. You cannot claim a double benefit for the same period. However, if your situation as an employee doesn't provide full coverage, there might be potential to claim additional credits based on your self-employment income. Do weekends count as days I can claim? Yes, if you missed self-employment work that you would have normally worked on a weekend, then you can claim weekends as days missed. If you normally don’t work on weekends or your child does not go to school on weekends, you cannot claim credits for weekends that they would not have worked or taken leave anyway. The credits are only available for the days that you would have worked or taken leave if not for the COVID-19-related reasons. Can I use days I took care of a child other than my own child? Yes, you may qualify for taking care of a child other than your own under the "Caring for others" section of our portal. What if my child's school moved to online instruction/classes? Is it considered "closed" for the purpose of the credit? Yes, if the physical location where your child received instruction or care was closed, the school or place of care is "closed" for purposes of paid sick leave and expanded family and medical leave. This is true even if your child is still expected or required to complete assignments. Will I get a check or will the refund be deposited in my account? Refunds for 2020 and 2021 will be sent to you directly by the IRS via check to the address provided on your SETC Amendment Package. Why do I have to have positive net earnings to qualify for SETC income tax credit? Positive net earnings are a requirement from the IRS to qualify for the SETC income tax credit. Positive net earnings indicate taxable income against which a credit can be applied. We understand the Covid-19 pandemic effected everyone globally. If you did not have positing earnings in 2020 because of Covid-19 restrictions, we may use your 2019 net income. Can I call and talk to someone about my situation? Absolutely. Just head on over to our Contact Us page and you can contact us via the online form or give us a call at (855) 829-5877. We’re happy to talk to you and answer any questions you may have. Form Questions What is a Form 1040? IRS Form 1040 is the standard individual income tax form in the United States, used by taxpayers to report their annual income and calculate their tax liability. To file for the SETC tax credits, Legacy Tax & Resolution Services will amend your previously filed IRS Form 1040. What is a Form 1040X? IRS Form 1040X is used to amend your previously filed individual tax return. To file for the SETC tax credits, Legacy Tax & Resolution Services will amend your previously filed IRS Form 1040 by completing Form 1040-X. What is a Schedule SE Form 1040? Schedule SE is a tax form self-employed individuals use to calculate the self-employment tax owed. This tax covers Social Security and Medicare taxes for individuals who work for themselves. Although all businesses may qualify for the SETC tax credits, Legacy Tax & Resolution Services can only process self-employed individuals now. To be eligible for the SETC tax credit, a self-employed individual must have self-employment income listed on line 6 of Schedule SE (2020 and 2021) and line 4 of Schedule SE (2019). What is a Schedule C? Schedule C is a tax form used by sole proprietors, single-member LLCs, and other self-employed individuals to report their business income and expenses. The form is filed as part of the individual's income tax return (Form 1040), and it helps calculate the net profit or loss from the business, which is then used to determine the individual's overall taxable income. Net income (line 31) from Schedule C calculates self-employment income on line 2 of Schedule SE (Form 1040). This does not appear in the application. However, it is essential to know that Schedule C feeds into the overall self-employment income calculation on Schedule SE (Form 1040). What is a Form 7202? IRS Form 7202 is a tax form used to claim the Families First Coronavirus Response Act (SETC) credits for self-employed individuals. This form must be completed to calculate the total amount of SETC credit self-employed individuals qualify for COVID-19-related reasons. What is a Form 8821? IRS Form 8821 is the Tax Information Authorization form. Taxpayers use this form to authorize the release of their tax information to a third party, such as a tax professional, for a specified period. Once signed, Form 8821 allows Legacy Tax & Resolution Services to pull your required tax information to accurately calculate your SETC credit and amend the 2020 and/ or 2021 tax returns to file for your SETC tax credits. This form does not authorize the designee to represent the taxpayer before the IRS; it only allows Legacy Tax & Resolution Services to receive and inspect confidential tax information. If representation before the IRS is necessary, a separate form, such as Form 2848 (Power of Attorney and Declaration of Representative), would be required.

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The Families First Coronavirus Response Act FAQs

The Families First Coronavirus Response Act FAQs The FMLA Amendments and Paid Sick Leave Requirements of the New Law Covered Employers Question 1. Which employers must comply with the new leave provisions in the EFMLEA and EPSLA? How do I know how many employees I have, and when do I count? Answer 1. After December 31, 2020, employers are no longer required to provide leave under the EPSLA or the EFMLEA. The following law provisions now determine whether employers can recover tax credits for leave. Both the EFMLEA and EPSLA apply to governmental agencies (some federal government employees are excluded). As for private companies, the new laws apply only to employers affecting commerce (see question 3 below) with fewer than 500 employees in aggregate (this includes non-profit organizations and religious organizations according to question 58 of the U.S. Department of Labor’s (DOL) “Families First Coronavirus Response Act: Questions and Answers” guidance) at the time the employee needs to take the leave. This means the definition of “employer” includes employers that have fewer than 50 employees (see question 13 below), even if those employers were not previously covered under the FMLA (traditionally, the FMLA requires an employer to have 50 or more employees over 20 or more calendar weeks in 1 year). The EPSLA requirements are new and use the same definition above for private employers and non-federal governmental entities. To determine whether a company is covered, add the employees who receive a W-2 and who are working in the United States or a U.S. territory (see question 4) and the persons providing labor or services to the company, even if being paid by another company (including temporary employees (see question 5), leased employees, day laborers, and any “shared” employees (that are working for two different employers, including the one counting). These would be the employer’s joint employees. This sum is usually the number of relevant employees for determining whether the FFCRA applies to an employer. Absent the integrated employer test (see question 6), if a W-2 employer still has fewer than 500 employees after adding joint employees, that W-2 employer will still have to comply with the FFCRA. For example, suppose a parent company with 50 employees has two subsidiaries (Company A and Company B). Each has its own EIN, and each pays its employees. Company A has 300 employees but uses 190 temporary employees. Approximately 15 of the parent company employees regularly work for and provide support for Company A. Company A’s total, therefore, is 505 employees. It does not have to comply with the leave provisions of the FFCRA. However, Company B is much smaller. It has only 150 employees. And, it does not use nearly as many temporary workers. The parent company shares some of its employees who regularly work for Company B, but not enough for the total count to be 500 or more. Company B and the parent company will need to comply with the leave provisions of the FFCRA, unless the parent company, Company A, and Company B are considered an integrated employer. (See question 6 below for a discussion on the integrated employer test.) Q2. At what point in time should employers take a count? A2. Employers should count their employees when the employee’s leave is to be taken. This means if an employer is hovering around 500 employees, it will need to keep a close watch on its employee count. It also means that if, at the time the employee needs leave, the employer has 500 or more employees, but then the headcount subsequently drops and the employee still needs the leave, the employer is now a covered employer and will need to comply. The reverse, however, is not true. If an employee needs leave, and the employer has less than 500 employees when they begin the leave, a subsequent increase in employee headcount will not affect that employee’s right to continue on the leave. Q3. What if I believe my business does not affect interstate commerce? A3. Congress has the power to pass the FFCRA according to the commerce clause of the United States Constitution, which limits the FFCRA’s reach to only those employers operating in interstate commerce. Governmental agencies are assumed to affect commerce. For private employers, “commerce” means “any activity, business, or industry in commerce or in which a labor dispute would hinder or obstruct commerce or the free flow of commerce, and include ‘commerce,’ and any ‘industry affecting commerce, as defined in paragraphs (1) and (3) of section 501 of the Labor Management Relations Act of 1947 …” Based on examples provided by the National Labor Relations Board (NLRB), these provisions operate to exclude: Retailers with a gross annual volume of business under $500,000 (“This includes employers in the amusement industry, apartment houses and condominiums, cemeteries, casinos, home construction, hotels and motels, restaurants and private clubs, and taxi services.”) Note: Shopping centers and office buildings have a lower threshold of $100,000 Non-retailers are excluded if “the amount of goods sold or services provided by the employer out of state (‘outflow’) or purchased by the employer from out of state (‘inflow’)” (including indirectly, “passing through a third company such as a supplier”) is less than $50,000 per year. Channels of commerce (“trucking and shipping companies, private bus companies, warehouses and packing houses”) with less than $50,000 in gross annual volume “Hospitals, medical and dental offices, social services organizations, child care centers and residential care centers with a gross annual volume of” less than $250,000 Nursing homes and visiting nurses associations with less than $100,000 gross annual volume “Private and non-profit colleges, universities, and other schools, art museums and symphony orchestras” the threshold is $1 million.” Of note, however, federal contractors at any level are within NLRB jurisdiction, which would likely mean they are covered by the FFCRA. Also, the NLRB “will not assert jurisdiction over employees of a religious organization who are involved in effectuating the religious purpose of the organization, such as teachers in church-operated schools.” The NLRB “has asserted jurisdiction over employees who work in the operations of a religious organization that did not have a religious character, such as a health care institution.” It is unclear, however, whether this broad interpretation is because the NLRB believes religious organizations do not affect “commerce.” Q4. Do employees not working in the United States count toward an employer’s total? A4. Yes, if they are working in a U.S. territory. However, if they are working in another country, then they do not count towards the total. Q5. Do temporary employees count toward an employer’s total? A5. Yes, employers are required to count all temporary employees in their total, even if paid by a temporary services agency. The temporary staffing agency and the client company may have different statuses under the FFCRA. For example, a staffing agency with over 500 employees would not be covered under the FFCRA. But if its customer has less than 500 employees, it would be covered under the FFCRA. If the two entities are joint employers of a particular worker, the customer/employer would be obligated to provide leave to the employee under the FFCRA. The DOL states in its FFCRA Q&As, “[t]o determine whether the second employer exercises such control [to be a joint employer], the Department of Labor would consider whether it exercises the power to hire or fire you, supervises and controls your schedule or conditions of employment, determines your rate and method of pay, and maintains your employment records.” Processing the paid leave and recovering the tax credit may require the customer/joint employer to collect documentation that it would not usually keep on a temporary employee (like a leave request form). Moreover, temporary staffing agencies may want to note that if a client provides temporary employees with EPSLA leave as a joint employer, the temporary staffing agency is prohibited from discharging, disciplining, or discriminating against employees taking such leave, even if the temporary staffing agency is not required to provide EPSLA leave. Similarly, suppose a client offers EFMLEA leave as a joint employer. In that case, the temporary staffing agency is prohibited from interfering with the employee’s ability to take leave and from retaliating against employees for taking such leave, even though it is not required to provide EFMLEA leave. Q6. What if a subsidiary has fewer than 500 employees, but when its employee count is aggregated with that of its parent company, the total exceeds 500 employees? A6. The DOL applies the FMLA’s integrated employer test to the EFMLEA and the EPSLA. This test, if met, means a parent company and its subsidiaries would aggregate their employees into one headcount, even if they have different EINs. In short, the companies would be viewed as one employer—a single enterprise. A parent company and its smaller subsidiaries are considered integrated employers when, on balance, the following four factors suggest they should be integrated: Whether the companies operate under common management The amount of interrelation between operations The amount of centralized control of labor operations Note that this is the most critical factor. Relevant considerations include whether both companies use the same handbooks, have standard policies and procedures, maintain joint management of hiring and firing decisions, centralized human resources departments, etc. The degree of shared ownership and financial control This is viewed as the least important factor. If an employer claims that it is an integrated employer to get over the 500-employee threshold, and it is wrong, then it is denying leave to employees who may be entitled to it. If the employer is actually an integrated employer with 500 or more employees and offers its employees leave under the FFCRA anyway, it may be denied the tax credits provided under the law, because only employers of less than 500 employees get the tax credits associated with the leave. Thus, making mistakes using the integrated employer test can be risky. EFMLEA Leave Q7. What type of emergency leave does the EFMLEA provide? A7. The FFCRA amends the FMLA to grant emergency FMLA leave when an employee is needed to care for a son or daughter when the need is related to a public health emergency (PHE) that results in a school closure, place of care closure, or unavailability of the son or daughter’s normal childcare provider. Of note, the leave offered here is the same as the leave provided for under the EPSLA’s leave entitlement for school and childcare closures (see question 35). Note: Beginning April 1, 2021, leave is also available under the EFMLEA for all the reasons covered initially only under the EPSLA (a quarantine order, a doctor’s recommendation to quarantine, caring for someone under a quarantine order or doctor’s recommendation to quarantine, COVID-19 symptoms and seeking a diagnosis) and when the employer requires the employee to remain out of work while pursuing a COVID-19 diagnosis or when the employee is obtaining a COVID-19 immunization or dealing with side effects of a COVID-19 vaccination. Here is more information and relevant definitions related to this leave: The mandatory leave was available between April 1, 2020, and December 31, 2020. Leave provided before April 1, 2020, did not count as EFMLEA leave. (See questions 42 and 48.) Leave after December 31, 2020, is not mandatory but may be eligible for reimbursement through the tax credit. “Son or daughter” means a minor (or an adult who is 18 or older that is incapable of self-care because of a mental or physical disability) and the employee is his or her parent by virtue of (1) biology; (2) adoption; (3) being a foster parent; (4) being a legal ward; or (5) standing in loco parentis (i.e., the individual provides day-to-day care and financial support). Needed to care for means there is no other suitable person available to care for the son or daughter during the leave period (which, pursuant to the Internal Revenue Service (IRS) guidance, the employee should state in writing). Of note, the IRS, in its guidance, indicates that if the child is over 14, the employee should explain that exceptional circumstances exist requiring the employee to provide care. The leave is offered to employees who are able to work (including telework, if offered) but for needing to care for the son or daughter. If telework is offered, the employee should explain why he or she is unable to telework. “School” means elementary or secondary school (up to grade 12). (Note: the DOL has stated that a school offering only virtual learning for a particular period of time or a specific student is still closed for purposes of the FFCRA for that period of time and/or concerning that student.) “Place of care” means the physical location where care is provided while the employee is usually working. Examples are daycare facilities, preschools, before- and after-school programs, schools, homes, summer camps, summer enrichment programs, and respite care programs. “Child care provider” means a provider who receives compensation for providing child care services regularly, including a center-based provider, a group home child care provider, or another licensed child care provider. But, it can also mean someone who is not customarily compensated or licensed if it is a family member or friend (such as a neighbor) who regularly cares for the employee’s child. The applicable federal, state, or local authorities can declare a public health emergency (PHE). If a school is providing in-person education on only a part-time basis or using a hybrid schedule combining in-person instruction on some days and virtual learning other days, the school is deemed to be “closed” on the days that the child is not scheduled to attend in person and the employee may use leave under the FFCRA on those virtual learning days. The DOL’s updated rules provide that an employee using leave under the FFCRA to care for a child whose school is operating on a hybrid schedule, i.e., in which instruction is conducted in person on some days and times but virtual on other days and times may use leave on this hybrid schedule (and does not require the employer’s agreement to the hybrid schedule). If a parent has the option to choose between sending his or her child to school in-person or attending virtually, and the parent elects virtual learning, the school is not considered “closed” and EFMLA leave is not available. (If a doctor recommends that the student stay home because of an underlying health condition, the employee may be eligible for two weeks’ of EPSL based on the quarantine recommendation.) Employers may want to keep in mind that the other provisions of the FMLA are still in effect. A typically covered employer (that has greater than 50 employees in 20 or more calendar weeks) with commonly defined eligible employees (who have worked for one year, worked for 1,250 hours in the year preceding leave, and worked at a worksite that has 50 or more employees within 75 miles) also needs to analyze requests for leave related to COVID-19 under the standard provisions of the FMLA (i.e., an employee’s serious health condition or an employee’s need to care for a first-degree relative with a serious health condition). Q8. Who is eligible to take EFMLEA leave? A8. For EFMLEA, any employee who has been employed (been on payroll) for the 30 calendar days prior to the leave (including any time worked for the company as a temporary employee) is eligible to take EFMLEA leave. If the employee was laid off or otherwise discharged by the employer on or after March 1, 2020, and rehired or otherwise reemployed by the employer on or before December 31, 2020, the employee will be eligible provided the employee was on the employer’s payroll (plus any time worked as a temporary employee for the employer) for 30 or more of the 60 calendar days prior to the date the employee was laid off or otherwise discharged. Q9. What qualifies as 30 calendar days for purposes of employee eligibility? A9. The employee must have been on payroll (again, any time worked as a temporary employee for the employer also counts as being on payroll) for 30 calendar days, no matter how many days he or she worked. Q10. Are healthcare workers and emergency responders eligible to take EFMLEA leave? A10. Note: After December 31, 2020, employers are not required to offer EFMLEA leave to any employees. The information below describes treatment between April 1, 2020, and December 31, 2020. Under the FFCRA, Congress expressly stated that an employer “may elect to exclude” health care providers and emergency responders from applying the EFMLEA and the EPSL. It is important to note that the “health care provider” or “emergency responder” is the employee, not the employer. Therefore, employers can give leave under the EFMLEA or EPSLA to healthcare providers and emergency responders under current regulations. Moreover, the language of the FFCRA appears to permit employers to make case-by-case determinations. The DOL has confirmed in its updated Q&As that “[f]or example, an employer may decide to exempt these employees from leave for caring for a family member, but choose to provide them paid sick leave in the case of their own COVID-19 illness.” Note, the FFCRA also gives the DOL the right to issue regulations deeming “health care providers” and “emergency responders” ineligible to take the leave, which would mean these employees may not get the leave at all. The DOL did not do that. Instead, the DOL defined the relevant terms. Under the EPSLA, Congress also gave the DOL the right “to exclude certain healthcare providers and emergency responders from the definition of employee under [the EPSLA], including by allowing the employer of such healthcare providers and emergency responders to opt-out.” (Emphasis added.) The DOL appears to have done neither. It defined the terms and left the decision to exclude healthcare providers and emergency responders up to employers. Q11. Who is a healthcare provider? A11. The FMLA defines the term “health care provider” as “(A) a doctor of medicine or osteopathy who is authorized to practice medicine or surgery (as appropriate) by the State in which the doctor practices; or … (B) any other person determined by the Secretary to be capable of providing health care services.” According to the DOL, these are still health care providers for purposes of certifying certain types of leave under the EPSLA, but it is not the definition the DOL is using for purposes of deciding which employees may be exempted from getting leave under the FFCRA. For purposes of which employees an employer may exclude from the EFMLEA and/or EPSLA, the definition from the new temporary regulations, updated in response to a decision by a court in the Southern District of New York, is as follows: Any other employee who is capable of providing health care services, meaning he or she is employed to provide diagnostic services, preventive services, treatment services, or other services that are integrated with and necessary to the provision of patient care and, if not provided, would adversely impact patient care. 826.30(c)(1)(B). The rules clarify that: “Diagnostic services include taking or processing samples, performing or assisting in the performance of x-rays or other diagnostic tests or procedures, and interpreting test or procedure results.” “Preventive services include screenings, check-ups, and counseling to prevent illnesses, disease, or other health problems.” “Treatment services include performing surgery or other invasive or physical interventions, prescribing medication, providing or administering prescribed medication, physical therapy, and providing or assisting in breathing treatments.” “Services that are integrated with and necessary to diagnostic, preventive, or treatment services and, if not provided, would adversely impact patient care, include bathing, dressing, hand feeding, taking vital signs, setting up medical equipment for procedures, and transporting patients and samples.” The DOL rule identifies employees who could qualify for the exemption, to include only: “Nurses, nurse assistants, medical technicians, and any other persons who directly provide” [diagnostic services, preventive services, treatment services, or other services that are integrated with and necessary to the provision of patient care and, if not provided, would adversely impact patient care]; “Employees providing services described … under the supervision, order, or direction of, or providing direct assistance to a person described [above]”; “Employees who are otherwise integrated into and necessary to the provision of health care services, such as laboratory technicians who process test results necessary to diagnoses and treatment.” 826.30(c)(1)(B)(ii). The DOL specifies that employees who do not provide “health care services” as described in the rules are not health care providers under the rule, even if their work affects the provision of health care services, including “IT professionals, building maintenance staff, human resources personnel, cooks, food services workers, records managers, consultants, and billers.” The DOL also clarified that the location of an employee’s work does not determine whether the employee qualifies as a “health care provider.” The DOL guidance advises to use the above definition judiciously to minimize the spread of COVID-19. Of note, as of August 3, 2020, the United States District Court for the Southern District of New York struck down the DOL’s rule defining the term “health care provider.” The DOL responded to the court’s decision by updating its rules implementing the FFCRA, effective September 16, 2020, to provide the definition of “health care provider” described above. If an employee who did not meet the definition of “health care provider” under the FMLA was deemed exempt from leave under the FFCRA between August 3, 2020, and September 16, 2020, employers may want to consider whether leave was available under the law.” Q12. Who is an emergency responder? A12. The DOL has defined “emergency responder” as follows under the temporary regulations: Anyone necessary for the provision of transport, care, healthcare, comfort and nutrition of such patients, or others needed for the response to COVID-19. This includes but is not limited to military or national guard, law enforcement officers, correctional institution personnel, fire fighters, emergency medical services personnel, physicians, nurses, public health personnel, emergency medical technicians, paramedics, emergency management personnel, 911 operators, child welfare workers and service providers, public works personnel, and persons with skills or training in operating specialized equipment or other skills needed to provide aid in a declared emergency, as well as individuals who work for such facilities employing these individuals and whose work is necessary to maintain the operation of the facility. This also includes any individual whom the highest official of a State or territory, including the District of Columbia, determines is an emergency responder necessary for that State’s or territory’s or the District of Columbia’s response to COVID-19. The guidance advises judicious use of this definition to minimize the spread of COVID-19. Of note, several members of Congress have complained that the DOL’s definition is too expansive and undermines the FFCRA. Q13. Are employees of small businesses (i.e., those with fewer than 50 employees) eligible to take EFMLEA leave? A13. The DOL’s temporary regulations exempt small businesses with fewer than 50 employees, including a religious or non-profit organization, from having to provide EFMLEA leave, or the EPSLA leave for school or childcare closures (which mirrors the EFMLEA) when the imposition of such leave requirements would jeopardize the ongoing viability of the business. The DOL’s temporary regulations allow for this exemption if an authorized officer of the business has determined that: Providing the leave “would result in the small business’s expenses and financial obligations exceeding available business revenues and cause the small business to cease operating at a minimal capacity;” “The absence of the employee or employees requesting paid sick leave or expanded family and medical leave would entail a substantial risk to the financial health or operational capabilities of the small business because of their specialized skills, knowledge of the business, or responsibilities; or” There are not sufficient workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services provided by the employee or employees requesting paid sick leave or expanded family and medical leave, and these labor or services are needed for the small business to operate at a minimal capacity.” Remember, this exception is only for the EFMLEA and EPSLA leave for situations in which the employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions. To elect this small business exemption, the employer must document that a determination has been made pursuant to the above criteria. The employer is not required to send such documentation to the DOL, but should retain the records in its files for four years. Q14. Is EFMLEA leave paid or unpaid? A14. After April 1, 2021, all leave under the EFMLEA is paid leave, subject to the statutory cap of $200 per day and $12,000 in the aggregate. The following applies to leave between April 1, 2020, and December 31, 2021, under the original EFMLEA. It is both. The first two weeks (usually ten days) of leave are unpaid. The FFCRA also includes EPSLA leave (for school and childcare closures) that covers the same event, covering the first two weeks unless the employee’s EPSLA leave has been exhausted for other reasons. The EPSLA provides for leave in a much more comprehensive array of scenarios related to COVID-19 than the EFMLEA does, so it could be exhausted before an employee seeks EFMLEA leave. Alternatively, the employee can substitute any other form of available paid leave he or she may have during the first ten days. (See question 35 below.) After the first 2 weeks of EFMLEA (Congress said 10 days, but the concept of days does not align with the FMLA), the EFMLEA offers paid leave for up to another 10 weeks (depending upon need and whether the employee has already exhausted some FMLA leave for other qualifying reasons). During the last 10 weeks of leave, an employer must pay the employee two-thirds of the employee’s average rate of pay (i.e., total compensation other than discretionary bonuses) over the past six months (see question 39), subject to a statutory cap of $200 per day and $10,000 total (the aggregate maximum of all paid FMLA leave under this provision). An employer may choose to pay more, but tax credits will be limited to the amount required. Employers with unions can use multiemployer collective bargaining agreement plans to pay out these amounts so long as the plans are amended to make the payments provided, and the employer funds the plan to pay for the leave. Q15. If the EPSLA is not available to cover the first two weeks an employee is out, can an employee use other paid leave to cover that time? A15. Note: After April 1, 2021, leave during the EFMLEA is paid. Prior to April 1, 2021, yes. An employee can elect to use other paid leave that is applicable, although these other benefits would not be eligible for tax credits. An employer may not require an employee to use other paid leave provided by the employer during this two-week period. If EPSLA is not available, the initial two weeks of EFMLEA may be unpaid. The leave an employee uses during the first 10 days must be applicable to the circumstances surrounding the leave request. Normal sick leave is probably not available for use if no one is sick. An employer can liberally amend its normal sick leave policy to make it applicable, but unless it does, regular sick leave is likely not available. Q16. Can other paid leave be used to compensate employees at their regular salaries or rates (sometimes called a “true -up”)? A16. Basically, yes, but the rules are different for the EPSLA and the EFMLEA. If the EPSLA leave for school and childcare closures is being used for this purpose, it is paid at the same rate as EFMLEA leave. The DOL states that an employer and employee can agree to allow the employee to use another available paid leave to bring his or her pay to 100 percent of the employee’s wages. Once the EFMLEA starts providing pay (on the third week of an employee’s leave), however, the rule switches. That is, either the employer or the employee can demand a “true-up” by exhausting other forms of leave. Q17. Is all FMLA leave now paid leave? A17. No, only EFMLEA leave is paid. The usual rules apply for traditional FMLA leave. Q18. Can an employee supplement the pay provisions of the EFMLEA and the EPSLA with any paid leave he or she may have accrued? A18. See questions 15 and 16. Q19. Are employees entitled to reinstatement to their position under the EFMLEA and EPSLA? A19. Except as discussed below, normal reinstatement rules apply to most employers. This means that an employee who is on FMLA leave is entitled to no greater protection from layoffs, furloughs, terminations, or otherwise than he or she would have had but for taking the leave. Therefore, provided an employer is not influenced by the employee being on leave, an employee could be furloughed or discharged if the employer implements a reduction in force. If a layoff occurs, the employee’s ability to take leave (and the pay that comes with it) effectively ends, and he or she may be entitled to unemployment benefits (which may be enhanced under state action to provide funds according to an executive order). Additionally, because standard reinstatement rules under the FMLA apply, a “key” employee (that is, a salaried employee who is a top 10 percent wage earner within 75 miles) may be denied reinstatement if it would result in grievous economic injury to reinstate him or her. (See question 43 of the DOL’s Q&As on this topic.) Additionally, Congress enacted specific rules for employers with fewer than 25 employees, which are more restrictive than classic reinstatement rules. Employers with fewer than 25 employees may not be required to reinstate an employee if all the following elements are proper: “The position held by the employee when the leave commenced does not exist due to economic conditions or other changes in operating conditions” that affect employment and are caused by the public health emergency. (This exception is narrower than the general rule on reinstatement.) “The employer makes reasonable efforts to restore the employee to a position equivalent to the position the employee held when the leave commenced.” If the employee’s job is gone, and the employer cannot provide a substantially similar position, the employer must make reasonable efforts over a period of one year after the employee’s EFMLEA leave concludes to contact the employee if a substantially equivalent position becomes available. Q20. How much EFMLEA leave is allowed? A20. EFMLEA leave is just another form of FMLA leave, and the FFCRA lumps it together with all other forms of leave—so an employee gets a total of 12 weeks in the aggregate. Any FMLA leave an employee has already taken in the employer’s FMLA year reduces the amount of FMLA leave that employee has available under EFMLEA. Thus, EFMLEA leave is limited to 12 weeks, minus any other FMLA leave taken by an employee during the employer’s FMLA year. In addition, any amount of EFMLEA leave an employee uses will reduce the amount of FMLA leave an employee can take for other reasons during the applicable FMLA year. EFMLEA leave is treated like FMLA leave, and the employee is entitled to use it while the law is in effect, provided other requirements are met. Any EFMLEA leave taken impacts the employee’s ability to take FMLA leave for other reasons thereafter (especially if the employer is using a rolling calendar year). The mandatory leave requirements under the FFCRA expired on December 31, 2020, but EFMLEA leave is still available at an employer’s discretion. Even though the law is essentially a tax credit law after December 31, 2021, nothing on the face of the amended law alters the structure that causes EFMLEA leave to count against the total FMLA leave bank. There is some speculation among commenters that EFMLEA leave should no longer count against the FMLA bank, but until the DOL issues further guidance, it appears that it does. Q21. How is the amount of EFMLEA leave taken calculated? A21. FMLA leave is calculated in weeks. An employee has a total of 12 weeks to use (including other forms of FMLA) during the employer’s FMLA year. Employees who work for employers to which the FMLA does not apply are entitled to 12 weeks of EFMLEA leave. If an employee is taking EFMLEA leave continuously (not intermittently), the calculation is fairly simple: Count down the weeks of leave taken. In this scenario, the calculation rules below are really to determine how much to pay the employee. For purposes of pay, and where the employee is taking EFMLEA intermittently, the employee’s hours are the “number of hours the eligible employee is normally scheduled to work on that workday” or workweek. If the employee has a work schedule that varies to such an extent that the employer is unable to determine the number of hours the employee would have worked, then the rules are as follows: If the employee has been employed for at least six months, the employee’s workweek is calculated by adding all hours worked to the leave the employee has taken for the last six months and dividing by 26 weeks (which is half of 1 year). If the employee has not worked for at least six months, employers should base the workweek on any agreement entered into at hiring, regarding the expected number of hours the employee was supposed to work. If there was no such agreement or understanding, then employers can calculate the employee’s workweek for the duration of time the employee has been employed using the above method. Q22. Can an employee take EFMLEA leave intermittently? A22. Employees may take intermittent leave under the FMLA for certain types of leave by statute. The FFCRA does not have a statutory designation about whether the leave may be taken intermittently, but the DOL states that intermittent leave (or reduced schedule leave) is permitted by agreement between the employer and employee if and only if intermittent leave is appropriate under the circumstances. Neither party can mandate or demand intermittent leave. Notably, the DOL has said that leave for a hybrid school schedule does not constitute intermittent leave: [t]he employer-approval condition would not apply to employees who take FFCRA leave in full-day increments to care for their children whose schools are operating on an alternate day (or other hybrid-attendance) basis because such leave would not be intermittent…. For the FFCRA, each day of school closure constitutes a separate reason for FFCRA leave that ends when the school opens the next day. The employee may take leave due to a school closure until that qualifying reason ends (i.e., the school opened the next day) and then take leave again when a new qualifying cause arises (i.e., school closes again the day after that). Of note, the rule allowing intermittent leave by agreement would apply under the EPSLA for leave to care for a child home from school. But, for any other reasons for taking EPSLA leave, intermittent leave is not appropriate or permitted unless the employer offers telework, the employee accepts, and both agree to take the leave intermittently. Such an agreement can be memorialized by a writing, or the parties can come to a clear understanding. If the parties come to an agreement, intermittent leave can be taken in whatever increments work for both parties. Importantly, time worked is not leave, so any time worked will not count towards EPSLA or EFMLEA leave.<="" li=""> Q23. Are spouses who work together for the same employer required to share EFMLEA? A23. The FFCRA does not address this issue. The rule that narrows FMLA usage for spouses who work for the same employer is statutory and only applicable to certain types of FMLA leave. This rule does not apply to the EFMLEA or the EPSLA. Q24. What about leave that employees have already been granted, and what if an employer wants to provide EFMLEA leave or EPSLA leave and the pay associated with it? A24. The DOL and courts have consistently stated that leave given that is not FMLA leave cannot be considered FMLA leave. Accordingly, any leave that an employer gave an employee prior to when the FFCRA took effect does not count toward the total amount of leave to which the employee is entitled under the EFMLEA and EPSLA. The same is true of the reasons for leave that were added as of April 1, 2021, including vaccination. Leave provided for those reasons before April 1, 2021, would not be counted as EFMLEA leave. The same is true for an employer with 500 or more employees that wants to offer employees the functional equivalent of EFMLEA leave. Nothing stops a large employer from providing leave similar to EFMLEA leave (and some state and local laws require it), but it will not be eligible to receive the tax credits for providing that leave. The same is true for the EPSLA. The FFCRA made very clear (as does the DOL guidance and regulations), that any leave provided to an employee prior to April 1, 2020, for reasons related to the six types of EPSLA leave will not count towards the sick leave entitlements offered by the FFRCA. The FFCRA and the regulations also make clear that EPSLA leave is in addition to any type of leave the employer is already providing, and the employer cannot comply with the EPSLA by using already existing leave. Q25. What notice do covered employers need to give employees? A25. See question 52. Q26. What if an employee is furloughed? Does he or she qualify for leave? A26. According to the DOL, furloughed employees do not qualify for leave regardless of whether the furlough started before April 1, 2020. An employee who is furloughed, even if the furlough is considered temporary, will not be entitled to take leave once furloughed. The DOL’s position is that the EPSLA and EFMLEA are designed to cover hours the employee is expected to work. If an employee is not expected to work (because of a layoff, furlough, temporary business closure, or otherwise) the employee does not need leave due to an FFCRA-covered reason and thus is not entitled to leave under the law. Of note, as of August 3, 2020, the United States District Court for the Southern District of New York struck down the DOL’s rule that employees on furlough for whom work is unavailable are not eligible for leave under the FFCRA. The DOL responded to the court’s decision by updating its rules implementing the FFCRA, effective September 16, 2020, to clarify that employees are not eligible under any of the bases for FFCRA leave, if the employer does not have work available for them. If an employee furloughed requested leave under the FFCRA between August 3, 2020, and September 16, 2020, employers may want to consider whether leave was available under the law for that period. Q27. What are the penalties for violating the EFMLEA provisions of the FFCRA? A27. The penalties for failure to adhere to the provisions of the amendment are the same as those under the FMLA. Both companies and individuals can be sued by private individuals affected or by the DOL. However, the FFCRA includes a provision (section 3104) that states that an employer that does not meet the normal covered employer test under the FMLA (i.e., an employer that does not have 50 or more employees within 20 or more workweeks during this calendar year or last calendar year), is not subject to private civil actions by employees. However, these employers would be subject to private civil actions under the jurisdiction of the DOL, which could bring an enforcement action for violations. Q28. Can employees qualify for leave under the FFCRA to care for a child whose school or place of care is closed due to COVID-19 even if they have been teleworking successfully? A28. Yes. The DOL has stated in its Q&As that an employee may be eligible for leave under the FFCRA to care for a child if, for example, the employee determines that he or she has not “been able to care effectively for the children while teleworking” or to allow a spouse to work or telework. Employers may “ask the employee to note any changed circumstances … as part of explaining why the employee is unable to work.” This is arguably required to substantiate the leave, because leave under the FFCRA is not available if the employee is able to telework. However, the DOL notes that employers should exercise caution in making such inquiries to avoid denying leave inappropriately, which could give rise to a claim of interference with the employee’s rights. Q29. Can an employee use leave under the FFCRA to care for a child when school is available virtually some or all of the time? A29. Yes. When school is only available virtually and the child cannot attend in person, the FFCRA would apply. This may be the case if a school is providing in-person education on a reduced schedule, part-time basis, or a hybrid schedule. An employer’s agreement is not required for employees to use leave on such a hybrid schedule. However, if the school is open but an employee elects a virtual option, the DOL has confirmed in its Q&A that EFMLEA leave would not be available, because the school is not closed. The IRS guidance regarding tax credits under the FFCRA requires employers to maintain a statement from the employee identifying “the name of the school that has closed or place of care that is unavailable.” So, to substantiate the claim for a tax credit, if an employer knows that a summer program has ended or a school or child care provider has reopened, it may want to ask the employee to complete a new request form to identify the provider that is unavailable for the school year.<="" li=""> EPSLA Leave Q30. Which employers are covered? A30. See questions 1 and 3-6. Q31. Are healthcare workers and emergency responders eligible to take EPSLA leave? A31. See questions 10-12. Q32. Are employees of small businesses (i.e., those with fewer than 50 employees) eligible to take EPSLA leave? A32. See question 13. Also note that leave after December 31, 2020, is not mandatory. Regarding leave before January 1, 2021, the small business exemption applies to the EPSLA only in the limited context of leave when the employee is caring for a son or daughter whose school or place of care is closed, or if the child care provider is unavailable due to the COVID-19 outbreak. (See question 37.) Employers that meet the qualifications for the small business exemption described in question 13 above must nevertheless offer the other types of leave available under the EPLSA and must provide the required notices. (See question 51.) Q33. Do employees not working in the United States count toward the employee total, and do they get EPSLA leave? A33. No. See question 4. Q34. Can an employer with 500 or more employees offer EPSLA leave? A34. An employer with 500 or more employees can offer paid leave and often must do so given state and local requirements. However, employers with 500 or more employees are not required to provide EPSLA leave under the act and are not eligible for tax credits provided by the FFCRA. Q35. What if a subsidiary has fewer than 500 employees, but when aggregated with the parent, it exceeds 500 employees? Does the FFCRA apply to that subsidiary? A35. See question 6. Q36. Which employees are eligible for EPSLA leave? A36. In short, all employees of covered employers who are not subject to the health care worker emergency responder exemption or the small business exemption are eligible, regardless of length of employment. Unlike the EFMLEA, the EPSLA does not have a requirement that employees have worked a specified number of calendar days, fulfilled an hours-of-service requirement, or fall within a geographic area prior to eligibility. The EPSLA is also different than other state and local paid sick leave laws that typically have a waiting period prior to employees’ eligibility to use accrued paid sick leave. Likewise, unlike many state and local paid sick leave laws, EPSLA leave does not provide different amounts of available sick leave based upon the size of a covered employer. Q37. When must leave be provided, and what does the EPSLA provide? A37. After December 31, 2021, leave is no longer mandatory under the EPSLA. Between April 1, 2020, and December 31, 2020, employers were required to offer employees paid sick leave according to the EPSLA. Any leave an employer provided to its employees before April 1, 2020, does not count as leave provided under the EPSLA. (See questions 13, 32, and 46 of the DOL’s Q&As.) The EPSLA offers eligible employees with EPSLA leave in the number of hours that are equivalent to 2 weeks (80 hours for full-time employees) of paid leave, which bank of 2 weeks will refresh as of April 1, 2021, for any of the following reasons: Quarantine/Isolation Order—when the employee is subject to a federal, state, or local quarantine or isolation order related to COVID-19; Note, if the order is a closure or a “shelter in place” order, and the employer is deemed an essential business, then the order may not stop the employee from working. Suppose the order is a closure order, and the company must shut down business operations (meaning that the company does not have a job for employees to perform). In that case, employees are not entitled to EPSLA leave. Those employees may, however, be eligible to receive unemployment benefits. The type of order that might trigger this provision would be, for example, a government issued mandatory quarantine of all persons who are traveling from another country. In that case, an employee who has traveled internationally and therefore must self-quarantine, would be eligible for leave under this provision, because the employer is still open and has a job for the employee to perform, but the employee is unable to do it because of the order. Self-Quarantine—when a health care provider has advised the employee to self-quarantine due to concerns related to COVID-19; This provision is applicable when a healthcare provider (as defined by the FMLA) suggests an employee to self-quarantine based on the belief that the employee has COVID-19; the employee may have COVID-19; the employee is particularly vulnerable to COVID-19; and but for the healthcare provider’s advice, the employee could work or telework (if offered). COVID-19 Symptoms—when the employee is experiencing symptoms such as a fever, dry cough, shortness of breath, or other COVID-19 symptoms recognized by the U.S. Centers for Disease Control and Prevention and is seeking a medical diagnosis; Under this provision, any EPSLA leave available is limited to the time the employee cannot work because he or she is taking affirmative steps to obtain a medical diagnosis, such as making, waiting for, or attending an appointment for a test for COVID-19. Employees with a positive test result may be eligible for EPSLA leave due to a self-quarantine recommended by a healthcare provider or an isolation or quarantine order from the government. (See “Self-Quarantine” above.) Care for Others—when the employee is caring for an individual who is subject to a quarantine or isolation order or whose health care provider has advised the individual to self-quarantine due to concerns related to COVID-19; “Individual” means an immediate family member, a person who regularly resides in the employee’s home, or a similar person with whom the employee has a relationship that creates an expectation that the employee would care for that individual when quarantined or self-quarantined. The employee may not take leave under this provision unless, but for the need to care for the individual, the employee would be able to work (or telework if offered). School/Childcare Closure—when the employee cares for a son or daughter because the school or place of care of the son or daughter has been closed, or the childcare provider of such son or daughter is unavailable due to COVID-19 precautions. Note that this is the only provision that overlaps with the EFMLEA. See question 7 above for the requirements for taking the leave. Similar Conditions—when the employee is experiencing a “substantially similar condition” as specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor. These conditions have not been identified yet. After April 1, 2021: Leave for COVID-19 Testing Required by Employer—when the employee is seeking or awaiting the results of a test for or diagnosis of COVID-19 at the employer’s request. COVID-19 Vaccination—the employee is obtaining immunization related to COVID–19 or recovering from any injury, disability, illness, or condition related to such vaccination. Note employees get only one tranche of leave. If an employee takes 80 hours of sick leave for one reason, he or she cannot accept additional leave for a different reason. (Question 9 of the DOL’s Q&As covers this topic.) Additionally, if an employee takes EPSLA leave while working for one employer, he or she will not get it should the employee go to work for a different employer.Q36. May employees be required to use other paid leave before EPSLA leave under FFCRA, or can the employer use already existing paid sick leave to comply with the EPSLA? Q38. May employees be required to use other paid leave before EPSLA leave under FFCRA, or can the employer use already existing paid sick leave to comply with the EPSLA? A38. No. An employer may not require employees to use other paid leave before they use EPSLA leave. Q39. Can employers require employees to look for replacements to do their work while they are out on EPSLA leave? A39. Consistent with prior state and local paid sick leave requirements, the FFCRA prohibits employers from requiring employees to search for or find a replacement employee to cover their EPSLA leave hours. Q40. Can an employee take EPSLA leave intermittently? A40. See question 22. Intermittent leave is available only by agreement unless the Southern District of New York opinion applies to void the DOL rule and only during telework or for leave to care for a child whose school or childcare provider is closed due to COVID-19. The DOL’s temporary regulations clarify that intermittent leave under the EPSLA is subject to three primary considerations: (1) the FFCRA’s objective in slowing the spread of COVID-19; (2) an agreement between the employer and the employee concerning intermittent leave (i.e., employers are never required to allow intermittent leave); and (3) whether the employer allows or directs the employee to telework. Employees who telework Suppose an employer directs or allows an employee to telework, and the employer and the employee agree. In that case, the employee may take EPSLA leave intermittently while teleworking because the employee presents no risk of spreading COVID-19. On the other hand, employees who do not telework may take EPSLA leave intermittently, upon agreement, only where there is minimal risk of spreading COVID-19 at the employer’s worksite. As such, employees who do not telework may take EPSLA leave only to care for a son or daughter whose school or place of care is closed or whose childcare provider is unavailable due to COVID-19. (See question 35 above.) In this context, the absence of confirmed or suspected COVID-19 in the employee’s household reduces the risk that the employee will spread COVID-19 by reporting to the employer’s worksite while taking intermittent paid leave. This is not true, however, when the employee takes paid sick leave for other qualifying reasons. Employees who do not telework Employees who report to an employer’s worksite may not take EPSLA leave intermittently, even with the employer’s agreement, if the leave is taken for any EPSLA leave purposes other than to care for a son or daughter whose school or place of care is closed, or whose childcare provider is unavailable, due to COVID-19. (See question 39.) The reason is that the other EPSLA leave purposes create an unacceptably high risk of further COVID-19 spread. As such, employees who continue to report to an employer’s worksite once they begin taking EPSLA leave for any qualifying reason or reasons must exhaust available EPSLA leave or may return only when the employee no longer has a qualifying reason for taking EPSLA leave. Leave for hybrid school schedules. The DOL has said that if a “child’s school, place of care, or child care provider was closed or unavailable on only Monday, Wednesday, and Friday, as opposed to the entire week, then [an employee] would not need to take intermittent leave if working on the schedule in the example above. Each day of closure or unavailability is a separate reason for leave; thus, [the employee] would not need to take leave intermittently for a single reason. As such, [an employee] would not need employer permission to take paid leave on just the days of closure or unavailability.” Q41. What must eligible employees be paid under the EPSLA? A41. Suppose an employee is eligible for EPSLA leave due to his or her own inability to work (i.e., for reasons 1-3 in question 37). In that case, the employer must compensate that employee for any paid sick time he or she takes at the higher of the employee’s average regular rate, the federal minimum wage, or the local minimum wage. To determine the employee’s average regular rate, employers can use the Fair Labor Standard Act (FLSA) methods (subject to the six-month rule below) to determine an employee’s regular rate of pay (i.e., combine his or her hourly wage or salary, plus any non-discretionary wages, such as commissions, tips, piece rates). An employer should look back over the past six months to determine the employee’s average regular rate. If the employee has not been working for six months, the employer should look back over the employee’s entire employment period. Once the employer determines the employee’s total compensation, it can divide that number by the number of hours the employee worked to determine the employee’s wages for purposes of the regular rate of pay. This amount, however, is capped at $511 per day ($5,110 in the aggregate). For employees absent from work to care for others (reasons 4-6 in question 37), employers must compensate them for any paid sick time they take at two-thirds of their average regular pay rate. This amount, however, is capped at $200 per day ($2,000 in the aggregate). Unlike the amendments to the FMLA in the FFCRA, the EPSLA does not contain any provision for an initial period of unpaid leave. Full-time employees—i.e., those scheduled to work 40 hours or more per week (see questions 9 and 48 of the DOL’s Q&As) are eligible for 80 hours of pay. Employees working or scheduled to work less than 40 hours per week are eligible for the number of hours they typically work or are scheduled to work in a two-week period. (See questions 9 and 49 of the DOL’s Q&As.) If these employees’ typically scheduled hours are unknown or their schedules vary, employers should use a six-month average to calculate their average daily hours. Suppose the employee has not been employed for six months. In that case, employers may use the number of hours the employee agreed to work upon hiring or, if there was no such agreement, employers may calculate the appropriate number of hours of leave based on the average hours per day the employee was scheduled to work over the entire term of his or her employment. (See question 5 of the DOL’s Q&As.) However, suppose the employer reduces an employee’s scheduled hours (or furloughs the employee temporarily) due to a lack of work. In that case, the employee may not be paid for hours the employee is not scheduled to work. (See question 28 of the DOL’s Q&As). In these situations, for purposes of EPSLA leave, the employee’s leave is an hours bank. The hours are not adjusted if the schedule is reduced, but the employee can only use those hours for work actually scheduled. Because EPSLA leave is an hours bank, if an employee misses overtime work that he or she would have otherwise worked but for the leave, his or her EPSLA leave hours bank will be reduced, and the amount of pay for the hours missed must be provided. (See question 6 of the DOL’s Q&As.) Q42. What about employees with varying schedules? A42. See question 41. Q43. What notice must employees give to request leave? A43. The FFCRA requires employees to notify employers of their request to take leave as soon as practicable. Suppose an employee fails to give proper notice. In that case, the employer should give him or her notice of the failure and an opportunity to provide the required documentation before denying the leave request. A spouse, adult family members, or other responsible party can give notice. The contents of the notice should be enough to give the employer knowledge that the employee may qualify for leave. According to the DOL’s updated rules, effective September 16, 2020, notice of the need for EPSL may not be required in advance and only after the first workday for which an employee takes leave. After the first workday, it is reasonable for the employer to require notice as soon as practicable. Q44. What documentation may an employer require from an employee to support a request for EPSL? A44. The DOL’s updated rules, effective September 16, 2020, provide that documentation in support of leave under the FFCRA should be provided “as soon as practicable, which in most cases will be when the Employee provides notice [of the need for leave].” The DOL’s guidance in connection with its temporary rule provides that documentation in support of a request for leave under the FFCRA “must include a signed statement containing the following information: (1) The employee’s name; (2) the date(s) for which leave is requested; (3) the COVID-19 qualifying reason for leave; and (4) a statement representing that the employee is unable to work or telework because of the COVID-19 qualifying reason.” The employee must provide additional documentation depending on the qualifying reason for the leave. The DOL went on to explain, “[a]n employee requesting paid sick leave [based on a government quarantine or isolation order] must provide the name of the government entity that issued the quarantine or isolation order to which the employee is subject. An employee requesting paid sick leave [based on a health care provider’s recommendation to quarantine] must provide the name of the health care provider who advised him or her to self-quarantine for COVID-19 related reasons.” An employee requesting paid sick leave to care for an individual must provide either (1) the name of the government entity that issued the quarantine or isolation order to which the individual is subject or (2) the name of the health care provider who advised the individual to self-quarantine, depending on the precise reason for the request. An employee requesting to take paid sick leave or expanded family and medical leave to care for his or her child must provide the following information: (1) the name of the child being cared for; (2) the name of the school, place of care, or child care provider that closed or became unavailable due to COVID-19 reasons; and (3) a statement representing that no other suitable person is available to care for the child during the period of requested leave. The DOL temporary rule also allows employers to collect any other documentation needed to substantiate a claim for a tax credit with the IRS. The IRS guidance states, “with respect to the employee’s inability to work or telework because of a need to provide care for a child older than fourteen during daylight hours, a statement that special circumstances exist requiring the employee to provide care.” Employers must retain documentation supporting leave or tax credits under the FFCRA for four years. The DOL stated in its Q&As that employers may not require employees to provide further documentation or certification from a health care provider to confirm that they sought a diagnosis or treatment for COVID-19 symptoms. The employer can only require written information identifying the need for leave and the date for a test or doctor’s appointment. However, if an employee requests another type of leave, like FMLA or another paid leave benefit concurrently, employers may require the documentation typically asked in connection with those leaves. Q45. What if an employer previously provided paid sick leave? A45. EPSLA leave under the FFCRA is in addition to any paid sick leave already offered by an employer (including paid sick leave available under state and local laws). Even if an employer had a generous paid sick leave policy offering more than the 80 hours required by the act, the act required employers to offer employees additional EPSLA leave for COVID-19 purposes between April 1, 2020, and December 31, 2020. (See question 32 of the DOL’s Q&As.)<="" li=""> Q46. Does the FFCRA provide employees with job protection? A46. The DOL has adopted the FMLA’s restoration rules for EPSLA leave. (See question 19.) The FFCRA does not protect employees from layoffs, furloughs, etc. If an employer can show that an employee would not have been employed when reinstatement is requested, reinstatement is not required. Q47. Does unused EPSLA leave carry over to subsequent years? A47. No. The original bank of leave was to expire on December 31, 2020. It was extended voluntarily through March 31, 2021, but does not carry over after that date. As of April 1, 2021, employers may offer a refreshed bank of 10 days of EPSLA leave, but that leave currently expires September 30, 2021. Q48. Must accrued and unused EPSLA leave be paid to employees upon termination or resignation? A48. No. Consistent with prior state and local paid sick leave requirements, the act does not require employers to pay out unused EPSLA leave to eligible employees at termination, resignation, retirement, or other separation from employment. Q49. What are the penalties for violations? A49. Employers that do not provide EPSLA leave under the FFCRA to eligible employees when required are subject to damages and penalties as under the FLSA for minimum wage violations, including unpaid wages, an additional equal amount as liquidated damages, and attorneys’ fees and costs. Employers that unlawfully discharge, discipline, or otherwise discriminate against an eligible employee under the FFCRA are subject to injunctive relief under the FLSA, including reinstatement, as well as damages and penalties for unpaid wages, an additional equal amount as liquidated damages, and attorneys’ fees and costs. Provisions Applicable to Both the EFMLEA and the EPSLA Q50. What is the effective date for EFMLEA and EPSLA leave? A50. The FFCRA went into effect on April 1, 2020. The EFMLEA and EPSLA went into effect on April 1, 2020, and the mandatory leave expired on December 31, 2020. The law was extended voluntarily through March 31, 2021, and extended further and expanded through September 30, 2021. Note the Southern District of New York vacated certain of the DOL’s rules implementing the FFCRA as of August 3, 2020, and the DOL issued new rules effective September 16, 2020. These rules relate to the use of leave during a furlough, the use of intermittent leave, the timing of providing documentation in support of leave, and the definition of “health care provider” for purposes of the exemption from FFCRA leave. Q51. Are the EPSLA’s and the EFMLEA’s requirements retroactive? A51. No. (See question 13 of the DOL’s Q&As.) Additionally, employers are not entitled to tax credits for leave given before April 1, 2020. Q52. Are there any notice posting requirements? A52. The FFCRA requires eligible employers to maintain, in a conspicuous location, where notices to employees are customarily posted, in all work locations, a notice prepared or approved by the Secretary of Labor. In addition, and particularly given the prevalence of employees working remotely due to COVID-19, employers may provide notice through email or direct mail to employees or by posting on an employee-facing intranet or external website. The model notice posting applicable to private employers is now available in English, Spanish, and Korean. The DOL permits emailing the poster to those already teleworking. Of note, employers with fewer than 500 employees who employ all healthcare providers and emergency responders are still covered employers and must post the notice. Additionally, employers of fewer than 50 employees who intend to deny leave for school/childcare closures are also still covered employers. So, they must still offer employees leave for quarantines and isolation orders, self-quarantines, employees experiencing COVID-19 symptoms, employees caring for others, and employees experiencing similar symptoms as one would experience if he or she had COVID-19 (see question 37), and must post or issue a notice. Q53. What tax credits are available to employers? A53. Fortunately, payments for EPSLA and EFMLEA leave and benefit costs during periods of leave under the FFCRA are subject to tax credits. Employers are entitled to a refundable tax credit equal to 100 percent of the qualified EPSLA and EFMLEA leave wages paid to eligible employees each quarter. Currently, it does not appear employers will be entitled to any tax credits for any EPSLA leave payments made before the effective date of the EPSLA. Note that the IRS has provided guidance on tax credits under the FFCRA. Q54. How should an employer treat an employee’s benefits while on leave? A54. The FMLA benefit protections are in place, and employers should follow them for EFMLEA leave. (See question 30 of the DOL’s Q&As.) The DOL also indicates that employee benefits should be maintained while on EPSLA leave. (See question 30 of the DOL’s Q&As.) If the employee already has healthcare, the employer should treat the employee as if he or she is working. For employees who are not yet eligible for benefits (because they were recently hired, for example), employers should count the time away from work towards eligibility if they are on leave for their health condition. (See question 30 of the DOL’s Q&As citing non-discrimination rules under the Health Insurance Portability and Accountability Act (HIPAA).) For reasons other than the employee’s own health condition, HIPAA non-discrimination rules do not apply, and the FMLA discusses benefits being “maintained.” So, for EPSLA leave involving leave to care for others, and for EFMLEA leave, employers should follow the plan’s eligibility rules. Q55. Do the EPSLA and EFMLEA contain non-discrimination requirements? A55. Yes. As of April 1, 2021, the law imposes non-discrimination rules, so employers may not discriminate in offering leave in favor of highly compensated or full-time employees or based on tenure. Q56. May employers provide less than the full amount of leave permitted under the FFCRA? A56. After December 31, 2021, leave became voluntary for employers. So, an employer could provide one type of leave and not the other or a shorter period of leave than the amount for which the employer could recover the tax credit. If an employer intends to offer leave on a more limited basis, it may be prudent to inform employees of any limits that the employer will impose. If an employer is inconsistent, without a neutral explanation for any differences in providing leave, it may face discrimination claims. Finally, the law also requires employers to follow all provisions under the applicable law to remain eligible for the tax credit. This would seem to include the requirements as to employer and employee eligibility, how to calculate the rate of pay, reinstatement rights, benefit protections, etc. General Questions Below are our updated FAQs and answers to help employers navigate and understand their obligations under the FFCRA, which include the newest information provided by the DOL. As always, Buchanan Ingersoll & Rooney is available to assist you during this unprecedented and challenging time. Generally Q57: What is the current status of the Families First Coronavirus Response Act (FFCRA)? A: President Trump signed into law H.R. 6201, the FFCRA, on March 18, 2020. Q58: Who does the Act cover? A: The FFCRA covers private employers with fewer than 500 employees in the United States, the District of Columbia, or any Territory or possession of the United States. Q59: Does the FFCRA impact private employers with more than 500 employees? A: The FFCRA has no effect on private employers with over 500 employees. Q60. What workers do you count for purposes of the 500 cap? A. You count all active employees, employees on leave, temporary employees who are jointly employed by you and another employer (such as a staffing company), and day laborers supplied by a temporary agency at the time that your employee’s leave is to be taken. Q61: We have several commonly owned companies. Will each of them be considered a separate employer or will they be treated as one employer for purposes of the 500-employee threshold? A: Generally, separate companies will be treated as separate employers unless they are sufficiently integrated to be considered a single employer. The test for determining whether related companies will be considered a single employer or separate companies is the one used under the FMLA, which can be found at 29 CFR 825.104. Generally, separate companies will be treated as separate employers unless they are sufficiently integrated to be considered a single employer. That test considers the following factors: (i) common management; (ii) interrelation between operations; (iii) centralized control of labor relations; and (iv) degree of common ownership/financial control. Note, however, that taking the position a group of companies is a single enterprise or single employer for purposes of the FFCRA may have implications under other laws that use a similar tests. Q62: How does the FFCRA impact my leave policies? A: The FFCRA creates new emergency paid sick leave and paid FMLA obligations. As a result, employers will need to amend their PTO and FMLA polices to reflect these new obligations. Q63: When does the FFCRA apply to private employers? A: The FFCRA took effect on April 1, 2020 and expired on December 31, 2020. However, under the C.A.A. 2021 (signed into law on December 27, 2020), employers will continue receiving tax credits until March 31, 2021 if they voluntarily choose to allow their employees to use any remaining FFCRA leave from January 1, 2021-March 2021. Q64: Do I have to provide emergency paid sick leave or paid FMLA leave if my employees are not able to work because I have decided to close my business or made a business determination that employees should not be working? A: If an employer makes a decision to close or cancel work shifts for business reasons (i.e. lack of work), neither emergency paid sick leave nor paid FMLA leave will apply as they are available only to employees who are not working due to specified reasons, not including their employer’s decision to cease or reduce operations. Q65: Will I receive a tax credit for the emergency paid sick leave or paid FMLA and, if so, how do I secure it? A: Yes. See the separate advisory we issued on this topic. Q66: What information must I collect from an employee to substantiate the employee’s request for sick pay or emergency paid FMLA leave and secure a tax credit? A: An employee must provide the following information prior to taking paid sick leave or emergency FMLA leave: Employee’s name; Date(s) for which leave is requested Qualifying reason for the leave;1 Oral or written statement that the employee is unable to work because of the qualified reason for leave. The name of the government entity that issued the quarantine or isolation order. The name of the health care provider who advised the Employee to self-quarantine due to concerns related to COVID-19. The name of the son or daughter being cared for; The name of the school, place of care, or child care provider that has closed or become unavailable; and A representation that no other suitable person will be caring for the son or daughter during the period for which the employee takes paid sick leave or expanded FMLA leave. Emergency Paid Sick Leave Act Q67: Under the Emergency Paid Sick Leave Act (which is part of the FFCRA) how much paid leave must employers provide? A: Full-time employees are entitled to a maximum of 80 hours over a two-week period and part-time employees are entitled to a number of hours equal to the number of hours that the employee normally works over a two-week period; however, the benefits are capped at certain amounts per employee. Emergency paid sick leave under this Act shall cease beginning with the employee’s next scheduled work shift immediately following the termination of the need for paid sick time for COVID-19 reasons (as outlined in the next question). Q68: Who is eligible for paid sick leave under the Emergency Paid Sick Leave Act? A: All employees of private employers with less than 500 employees, regardless of how long they’ve been employed, are eligible for emergency paid sick leave. Employees will be eligible if their employer has work for me, but they are unable to work (or telework) because: The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis. The employee is caring for an individual who is subject to paragraphs (1) or (2). The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor. Q69: What is teleworking? A: An employee is able to telework if: (a) his or her employer has work for the employee; (b) the employer permits the employee to work from the employee’s location; and (c) there are no extenuating circumstances (such as serious COVID-19 symptoms) that prevent the employee from performing that work. Q70: Who is considered “a son or daughter? A: A “son or daughter” is your own child, which includes your biological, adopted, or foster child, your stepchild, a legal ward, or a child for whom you are standing in loco parentis—someone with day-to-day responsibilities to care for or financially support a child. “Son or daughter” is also an adult son or daughter (i.e., one who is 18 years of age or older), who (1) has a mental or physical disability, and (2) is incapable of self-care because of that disability. Q71: Are any employers exempt from the Emergency Paid Sick Leave Act? A: Employers that employ health care providers or emergency responders may elect to exclude such employees from the Emergency Paid Sick Leave Act. Additionally, employers, including a religious or nonprofit organizations, with fewer than 50 employees (Small Businesses) are exempt from providing sick pay for reason No. 5 when doing so would jeopardize the viability of the small business as a going concern. A Small Business may claim this exemption if an authorized officer of the business has determined that:: The provision of sick pay for reason No. 5 would result in the Small Business’ expenses and financial obligations exceeding available business revenues and cause the Small Business to cease operating at a minimal capacity; The absence of the employee or employees requesting sick pay for reason No. 5 would entail a substantial risk to the financial health or operational capabilities of the Small Business because of their specialized skills, knowledge of the business, or responsibilities; or There are not sufficient workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services provided by the employee or employees requesting sick pay, and these labor or services are needed for the Small Business to operate at a minimal capacity. Q72: Can I require employees to use other paid leave before using the federal paid sick leave? A: No. Emergency paid sick leave under this Act must be available immediately starting as of April 1, 2020. Q73: If I’ve already provided paid sick leave to my employees for reasons identified in the Act prior to April 1, 2020, do I still have to provide two weeks of paid sick leave after April 1, 2020? A: Yes. The Act imposes a new leave requirement on employers that is effective beginning on April 1, 2020. Q74: Can I require employees to find a replacement employee to cover their hours if they want to use emergency paid sick leave? A: No. Q75: At what rate of pay must I provide paid sick leave under the Emergency Paid Sick Leave Act? A: If an employee is out for the reasons listed below, sick leave must be paid at the employee’s required compensation (as defined below), but is capped at $511/day and $5,110 in the aggregate per employee: The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19. The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19. The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis. If an employee is out for the reasons listed below, sick leave must be paid at 2/3 the employee’s required compensation, and is capped at $200/day and $2,000 in the aggregate per employee: The employee is caring for an individual who is subject to paragraphs (1) or (2). The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID-19 precautions. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor. An employee’s required compensation shall not be less than the greater of: (1) the employee’s regular rate of pay, (2) the minimum wage rate in effect under Section 6(a)(1) of the FLSA, or (3) the minimum wage rate in effect for such employee in the applicable state or locality where the employee is employed. Q76: How do I calculate emergency paid sick leave for part-time employees? A: If the part-time employee has been employed for at least six months, the employee is entitled to up to the number of hours of paid sick leave equal to 14 times the average number of hours that the employee was scheduled to work each calendar day over the six-month period ending on the date on which the employee takes paid sick leave, including any hours for which the employee took leave of any type. If the part-time employee has been employed for fewer than six months, the employee is entitled to up to the number of hours of paid sick leave equal to 14 times the number of hours the employee and the employer agreed to at the time of hiring that the Employee would work, on average, each calendar day. If there is no such agreement, the employee is entitled to up to the number of hours of paid sick leave equal to 14 times the average number of hours per calendar day that the employee was scheduled to work over the entire period of employment, including hours for which the employee took leave of any type of leave. Q77: How much notice do my employees have to give me to take emergency paid sick leave? A: After the first workday (or portion thereof) an employee receives paid sick leave under this Act, an employer may require the employee to follow reasonable notice procedures in order to continue receiving such paid sick leave. Q78: Do I need to inform employees of their right to take paid sick leave under the Emergency Paid Sick Leave Act? A: Yes, employers must post and keep posted, in conspicuous places on the premises of the employer where notices to employees are customarily posted, a notice, approved by the Secretary of Labor, describing the requirements of this Act. Employers also may satisfy this requirement by emailing or mailing the notice to current employees. If an individual employee is not currently working, but is receiving benefits, the individual likely will be considered a current employee. Q79: What if I already provide paid sick leave? A: The Act’s paid leave benefits are in addition to whatever paid sick leave an employer already provides under any state or local law, collective bargaining agreement, or policy. Q80: If the employee’s employment is terminated, do I have to pay them for any unused paid sick leave? A: No. The Act does not require financial or other reimbursement to an employee upon the employee’s termination, resignation, retirement, or other separation from employment for unused paid sick leave. Q81: Am I required to permit employees to carry over paid sick time if it is not used in 2020? A: No. Q82: What are the penalties for failure to comply with the Emergency Paid Sick Leave Act? A: Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation. Willful violations will result in greater penalties; however, the DOL will not bring enforcement actions against private employers for violations of the Act through April 17, 2020, provided that the employer has made reasonable, good faith efforts to comply with the Act. Q83: How does this Act impact me if I am under a multi-employer bargaining agreement? A: An employer signatory to a multi-employer collective bargaining agreement may, consistent with its bargaining obligations and its collective bargaining agreement, fulfill its obligations under this Act by making contributions to a multi-employer fund, plan, or program based on the hours of paid sick leave each of its employees is entitled to under the Act while working under the multi-employer collective bargaining agreement, provided that the fund, plan, or program enables employees to secure pay from such fund, plan, or program for their emergency paid sick leave. Q84. Will I receive a tax credit for the paid sick leave I provide? A. Yes. See the advisory we issued on this topic here. Emergency Family and Medical Leave Expansion Act Q85: Who is eligible for expanded FMLA leave under the Emergency Family and Medical Leave Act? A: All employees (full- or part-time) who have been employed for 30 calendar days who have a “qualifying need related to a public health emergency.” The requirement that the employee must be employed for a year and work 1,250 hours in a location where there are 50 or more employees within a 75-mile radius does not apply to this benefit. The Act defines “qualifying need related to a public health emergency” as “the employee is unable to work (or telework) due to a need for leave to care for the son or daughter under 18 years of age of such employee if the school or place of care has been closed, or the child care provider of such son or daughter is unavailable, due to a public health emergency.” (Hereinafter, COVID-19 Qualifying FMLA Leave.) Q86: Who is considered a "son or daughter"? A: A “son or daughter” is your own child, which includes your biological, adopted, or foster child, your stepchild, a legal ward, or a child for whom you are standing in loco parentis—someone with day-to-day responsibilities to care for or financially support a child. “Son or daughter” is also an adult son or daughter (i.e., one who is 18 years of age or older), who (1) has a mental or physical disability, and (2) is incapable of self-care because of that disability. Q87: How does the Act define a “public health emergency”? A: The Act defines a “public health emergency” as “an emergency with respect to COVID-19 declared by a Federal, State, or local authority.” Q88: How does the Act define a “child care provider”? A: The Act defines a “child care provider” as: “a provider who receives compensation for providing child care services on a regular basis, including an ‘eligible child care provider’ (as defined in section 658P of the Child Care and Development Block Grant Act of 1990 (42 U.S.C. 9858n)).” Q89: How does the Act define a “school”? A: The Act defines a “school” as “an ‘elementary school’ or ‘secondary school’ as such terms are defined in section 8101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 7801).” Q90: If I employ health care providers or emergency responders, will COVID-19 Qualifying FMLA Leave apply to my business? A: Employers of health care providers or emergency responders may elect to exclude their employees from this Act. Additionally, the Act gives the Secretary of Labor the authority to issue regulations for good cause to exclude certain health care providers and emergency responders from the definition of eligible employee under the Act. Q91: How many weeks of COVID-19 Qualifying FMLA Leave do I need to provide and does it need to be paid? A: Employees are eligible for up to a total of 12 weeks of COVID-19 Qualifying FMLA Leave. The first two weeks are unpaid; however, as a practical matter, an employee may use Sick Pay or accrued but unused time off under an employer policy to be paid for the first two weeks. The remaining 10 weeks of COVID-19 Qualifying FMLA Leave must be paid at 2/3 the employee’s regular rate for the number of hours that the employee would otherwise be normally scheduled to work, with the paid leave capped at $200 per day and $10,000 in the aggregate per employee. Additionally, if you already provide regular FMLA leave to your workers, then an employee cannot take more than a total of 12 weeks of any FMLA leave (including COVID-19 Qualifying FMLA Leave) during the 12-month period the employer uses for calculating annual FMLA leave entitlements, i.e., an employee’s available COVID-19 Qualifying FMLA Leave will be reduced by other FMLA leave taken during the applicable 12-month period. Q92: If employees are on FMLA leave for non-COVID-19 reasons, do I now have to pay them? A: No. The 2/3 payment requirement only applies to COVID-19 Qualifying FMLA Leave. Q93: How much notice do my employees have to give me before taking COVID-19 Qualifying FMLA Leave? A: Where the necessity for leave is foreseeable, an employee shall provide the employer with such notice of leave as is practicable. Q94: Do I need to inform employees of their right to take COVID-19 Qualifying FMLA Leave A: Yes, employers must post and keep posted, in conspicuous places on the premises of the employer where notices to employees are customarily posted, a notice, approved by the Secretary of Labor, describing the requirements of this Act. Employers also may satisfy this requirement by emailing or mailing the notice to current employees. If an individual employee is not currently working, but is receiving benefits, the individual likely will be considered a current employee. Q95: Are any employers exempt from providing COVID-19 Qualifying FMLA Leave? A: Employers that employ health care providers or emergency responders may elect to exclude such employees from the Emergency Paid Sick Leave Act. Additionally, employers, including a religious or nonprofit organization, with fewer than 50 employees (Small Business) is exempt from providing COVID-19 Qualifying FMLA Leave when doing so would jeopardize the viability of the small business as a going concern. A Small Business may claim this exemption if an authorized officer of the business has determined that: The provision of COVID-19 Qualifying FMLA Leave would result in the Small Business’ expenses and financial obligations exceeding available business revenues and cause the Small Business to cease operating at a minimal capacity; The absence of the employee or employees requesting COVID-19 Qualifying FMLA Leave would entail a substantial risk to the financial health or operational capabilities of the Small Business because of their specialized skills, knowledge of the business, or responsibilities; or There are not sufficient workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services provided by the employee or employees requesting COVID-19 Qualifying FMLA Leave, and these labor or services are needed for the Small Business to operate at a minimal capacity. Q96: Is the COVID-19 Qualifying FMLA Leave job protected? A: Yes. However, employers with less than 25 employees may be exempted from protecting the job if the position held by the employee when the leave commenced does not exist anymore due to the economic conditions or other changes in operating conditions of the employer. The employer must engage in reasonable efforts to restore the employee to a position equivalent to the position the employee held when the leave commenced, with equivalent employment benefits, pay, and other terms and conditions of employment. If the employer’s reasonable efforts fail, the employer must contact the employee if an equivalent position becomes available in the one-year period following the date of the public health emergency’s conclusion or 12 weeks after the date when the employee’s COVID-19 FMLA leave commences, whichever is earlier. Q97: How does this Act impact me if I am under a multi-employer bargaining agreement? A: An employer signatory to a multi-employer collective bargaining agreement may, consistent with its bargaining obligations and its collective bargaining agreement, fulfill its obligations under these amendments by making contributions to a multi-employer fund, plan, or program based on the paid leave each of its employees is entitled to under such section while working under the multi-employer collective bargaining agreement, provided that the fund, plan, or program enables employees to secure pay from such fund, plan, or program based on hours they have worked under the multi-employer collective bargaining agreement for COVID-19 Qualifying FMLA Leave. Impact on Unemployment: Emergency Unemployment Insurance Stabilization and Access Act of 2020 Q98: What impact does the FFCRA have on unemployment insurance? A: The FFCRA provides $1 billion in emergency unemployment insurance relief to the states, allocating half for costs associated with increased administration of each state’s unemployment insurance program and the other half to be held in reserve to assist states with a 10 percent increase in unemployment. To receive a portion of this grant money, states must temporarily relax certain unemployment insurance eligibility requirements, such as waiting periods and work search requirements. Q99: Do I have any new unemployment-related obligations under the Act? A: No. But, for states to get funding, they must take the following steps, so employers should watch for state-mandates on the following: Requirement for employers to provide notification of the availability of unemployment compensation to employees at the time of separation from employment. Such notification may be based on model notification language issued by the Secretary of Labor. State must ensure that applications for unemployment compensation, and assistance with the application process, are accessible in at least two of the following: in-person, by phone, or online. State must notify applicants when an application is received and is being processed, and in any case in which an application is unable to be processed, provides information about steps the applicant can take to ensure the successful processing of the application. Q100: What about health care providers and emergency responders? A: An Employer whose employee(s) is a health care provider or an emergency responder may exclude such employees from the EPSLA’s Paid Sick Leave requirements and/or the EFMLEA’s Expanded Family and Medical Leave requirements. The DOL regulations construe the list of healthcare providers and emergency responders extremely broadly, and includes not only physicians and nurses, but also all doctor’s office employees, laboratory workers, and those manufacturing medical products. Simultaneously, however, the FAQs encouraged employers to be “judicious” in using the exception at the risk of spreading the virus. Q101: What will trigger entitlement to benefits? A: This is an important area where the two acts diverge. The shorter sick leave coverage under the EPSLA applies to a wider range of COVID-19 related absences. The longer durational benefits under the EFMLA apply in a narrower range of instances and may pay lesser benefits. For ease of reference, we’ll treat them separately. Q102: What triggers entitlement to paid sick leave? A: As to sick leave under the EPSLA, employers with fewer than 500 employees must provide paid sick leave to employees who are unable to work, or telework, because they: Are subject to a federal, state or local quarantine or isolation order. Have been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19. Are experiencing symptoms of COVID-19 and seeking a medical diagnosis. Are caring for an individual who is subject to a quarantine or isolation order or has been advised by a healthcare provider to self-quarantine as described above. Are caring for his or her child whose school or place of care has been closed or whose childcare provider is unavailable due to COVID-19 precautions. Are experiencing any other substantially similar condition specified by the Secretary of Health & Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor. All of these are related to the COVID-19 virus. Among the provisions causing concern for employers, however, are those relating to payments for employees who take time to care for a child whose school or place of care has closed. These concerns stem primarily from students who are old enough, such as 17, not to need parental supervision at home, but the requirement to provide leave exists in the statute nonetheless. As will be noted below, absences for the first three reasons above (such as being under a quarantine order) are treated somewhat differently from the second three (such as staying at home to care for a child whose school or daycare provider has closed). Note: the shorter list of reasons triggering entitlement to the longer EFMLEA benefits are discussed further below. Q103: When determining how many hours of paid sick leave to pay to an employee under the EPSLA, should I count overtime? A: Yes. But, there are two very important caveats. First, an employee is entitled to a total of 80 hours of paid sick leave under the EPSLA. So, let’s say that an employee takes EPSLA sick leave for a week in which she would have worked 10 hours of overtime, for a total of 50 hours. She is owed 50 hours of paid sick leave for that week, with a remaining balance of 30 hours. If the employee takes EPSLA leave for the next week, she will be capped at 30 hours of paid sick time regardless of how many hours she would have worked. Second, the employee is not owed the normal time and one-half overtime premium on paid sick leave under the EPSLA. So, in the above example, the employee would be owed 50 hours of paid sick leave, all of which would be paid at straight time. Q104: Can an employee take paid sick leave under EPSLA for more than one reason? A: Yes, but the overall 80-hour cap applies regardless of how many qualifying reasons the employee experiences. So, if an employee takes 48 hours of EPSLA paid sick leave because his doctor advised him to self-quarantine after exposure to COVID-19, he will have 32 remaining hours of paid sick leave to use under the EPSLA. As a result, if he subsequently needs additional sick leave because his childcare provider closes due to COVID-19, he will be capped at 32 hours. But, remember—an employee in this circumstance (i.e., in need of childcare) may still be entitled to 10 weeks of partially paid leave under the EFMLEA after exhausting EPSLA leave. Q105: What are the sick leave benefits under the EPSLA? A: As to the EPSLA, full-time employees are eligible for 80 hours of leave. Part-time employees are eligible for the number of hours they work, on average, over a two-week period. If the normal hours scheduled are unknown, or if the part-time employee’s schedule varies, you may use a six-month average to calculate the average daily hours. The rate of pay depends in large part on the reason for the leave. For the first three reasons stated above (such as being under a quarantine order), the employee is entitled to their regular rate of pay, subject to certain caps. For the remaining reasons (such as caring for a child due to a school closure), the pay is at two-thirds of the employee’s regular rate of pay. These amounts, however, are subject to fairly generous caps on the amounts paid to employees. Specifically, leave taken for the first three reasons above, such as the employee’s own COVID-19 related condition, is capped at $511 per day. Leave for the remaining reasons, such as leave taken to care for an individual or child, is capped at $200 per day. Q106: How do I figure out the regular rate of pay under the FFCRA? A: Keep in mind that both the EPSLA and EMFLEA entitle the employee to a measure of sick or leave pay based upon the employee’s regular rate of pay. The regular rate of pay is based on the employee’s average rate of pay over the six months prior to the leave. If the employee has been employed for less than 6 months, you can use the average over the time that the individual has been employed. Generally, this is a straightforward calculation. You divide the employee’s total compensation over the past 6 months (or the period of employment, for newer employees) by the total number of hours worked. Where the employee has earned non-discretionary bonuses, commissions, tips or piece rates, these amounts typically must be included in the calculation. The rules in these circumstances vary, however, and will depend on the particular facts involved. Q107: If my employee already meets one of the six conditions above, and I provide paid sick leave to the employee before the EPSLA goes into effect April 1, will the paid sick leave I am already providing count toward the 80 hours of EPSLA sick time? A: No. The DOL’s FAQs indicate that employers are required to provide 80 of paid sick leave to qualifying employees starting April 1, even if the employer – acting out of kindness – has provided the employee with paid sick time beginning before April 1. The 80-hour clock starts April 1, and employers will get no credit for sick leave provided before that date. If an employee has an EPSLA-qualifying condition and is out of work before April 1, employers may require the use of ordinary PTO consistent with the employer’s regular policy; or the employer may allow the employee to take unpaid leave; or the employer may allow additional sick days to be taken. But none of that time will be credited toward the 80 hours of paid sick time required under the EPSLA. Q108: What circumstances trigger coverage under the EFMLEA for longer benefits? A: As to the longer coverage under the EFMLEA, the circumstances are narrower (and, as will be explained, the level of pay may be less). Coverage under the EFMLEA exists only when the employee is unable to work (or telework) because the employee’s child’s school or care center is closed, or the child’s care provider is unavailable due to COVID-19. It isn’t available for the remaining five reasons, such as the employee’s own illness from the coronavirus. Thus, it applies in a much narrower range of instances – only those related to the closing of schools or day care centers. Q109: What are the EFMLEA (expanded FMLA) benefits? A: As noted above, these last somewhat longer than the 80 hours of sick pay, but they apply in fewer instances and at a potentially lower rate of pay. The EFMLEA first provides a measure of job protection, much like that already contained in the FMLA that, like the FMLA, lasts for a total of 12 weeks. Leave under the EFMLEA is unpaid for the first 10 workdays. Please note, however, that pay might be available during those 10 workdays under the sick leave provisions of the EPSLA. After the first 10 workdays, leave is paid at two-thirds of the employee’s usual pay, with a cap of $200 per day. For employees with schedules that vary from week to week, a six-month average is to be used to calculate the number of hours to be paid. If this calculation cannot be made because the employee has not been employed for at least six months, you should use the number of hours that the parties agreed that the employee would work upon hiring. An employee, if they satisfy both the EPSLA and EFMLEA, will be entitled to benefits under both statutes and thus receive some measure of paid benefits both for the first 10 workdays (under the EPSLA) and then the remaining ten weeks under the EFMLE with a cap of $10,000 in the aggregate, for a total of no more than $12,000 when combined with two weeks of paid leave taken under the EPSLA. The DOL guidance appears to permit employers and employees to agree that accrued paid leave may be used to supplement the 1/3 portion of expanded family and medical leave that is unpaid. Q110: Do employees have a right to return to their positions after taking expanded leave? A: Generally, yes. Employers are prohibited from firing, disciplining, or refusing to reinstate employees because they took expanded sick leave or family and medical leave. However, employees returning from such leave are not protected from employer actions (such as layoffs or furloughs) that are unrelated to the employee(s) taking leave. Q111: How do we afford this? A: Congress was well aware of this issue, and it is part of the reason the bill was written the way it was. Subject to certain caps and restrictions, covered employers are eligible to receive refundable tax credits for paid sick and protected leave based on the type of leave and whether the leave is for the employee or the employee’s family member. Although the DOL notes that it does not administer this portion of the act, it has described it as “dollar for dollar” reimbursement for covered employers through tax credits. The IRS guidance on how the credits will work can be found here. As explained by the IRS, the tax credits for the paid sick leave benefits and expanded family and medical leave benefits will be provided for “each calendar quarter in an amount equal to 100 percent of the ‘qualified sick leave wages’ and ‘qualified family leave wages’ required to be paid” under the FFCRA. With the April 1, 2020 effective date, the IRS has further noted that “the refundable tax credits for employers apply to qualified sick leave wages and qualified family leave wages paid for the period from April 1, 2020 to December 31, 2020.” Put another way, the IRS guidance seems to comport with that given by the DOL, which is that dollar for dollar tax credits will apply to the amount of paid leave properly provided under the statute. Accordingly, to qualify for such credits, employers must maintain the following records for four years: Documentation to show how the employer determined the amount of paid sick leave and expanded family and medical leave paid to eligible employees, including records of work, Telework and Paid Sick Leave and Expanded Family and Medical Leave; Documentation to show how the employer determined the amount of qualified health plan expenses allocated to wages; Copies of any completed IRS Forms 7200 submitted to the IRS; Copies of the completed IRS Forms 941 submitted to the IRS or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third-party payer regarding the employer’s entitlement to the credit claimed on IRS Form 941, and Other documents needed to support its request for tax credits pursuant to IRS applicable forms, instructions, and information for the procedures that must be followed to claim a tax credit. This is a continually evolving area, with Congress considering and debating additional legislation to deal with the COVID-19 pandemic. Please also see programs that might ease the cost under the heading “What tax or other benefits are available to offset the cost?”, below. Q112: This is really hard. How do we approach these issues? A: It is hard. Part of this difficulty arises from the fact that the two sets of benefits are so different that they must be analyzed separately. In general, one way is to approach it like this: Is the employer covered? If private, does it have fewer than 500 employees? If so; Is the employee covered? This will likely be true of all employees for 80 hours of sick leave under the EPSLA and those of 30 days’ tenure under the EFMLEA. For the first 10 workdays, what has triggered the absence? If it is one of the six items above, the employee will be entitled to sick leave benefits under the EPSLA. To determine the amount, look at the reason why they are seeking benefits (i.e. is the reason among the first three listed above, or the second three?). Afterwards (i.e. weeks three through twelve), the question is much more limited, whether they are absent to care for a child home because of the closure of a school or loss of day care due to the virus. It’s probably easiest to start with the EPSLA sick leave benefits and then, if necessary, look to those under the EFMLEA. Q113: This is still really hard. Can you give me a simple example? A: Sure. Let’s say employer has between 50 and 500 employees (and therefore is covered by both statutes. An employee has two grade-school aged children and the school has closed (as it has in many states). The employee has worked for over 30 days and is a full-time employee. They will stay home to watch their children as there is no available daycare. What do they get? For the first 10 work days, an employee can use existing vacation, personal, medical or sick leave provided under an employer’s policy OR use the 80 hours of sick pay under the EPSLA The pay under the EPSLA is at 2/3 the employee’s regular rate, capped at $200 per day and $2,000 in the aggregate. For the remaining 10 weeks after that they are on 2/3 pay under the EFMLEA, subject to caps of $200 per day and $10,000 in the aggregate. In three months, the employer will be entitled to tax credits for the amounts paid. Q114: Is the analysis different if the employee is sick themselves? A: It sure is. Let's assume now that the employee himself or herself is actually diagnosed with the coronavirus. The employee gets the same benefits as described above, except that they receive all of their regular rate (not just two-thirds) subject to higher caps of $511 per day or $5111 per employee in the aggregate for the first 80 hours. The same would be true if the employee was asked by a health care provider to self-quarantine, or if they were having COVID-19 symptoms and are seeking a diagnosis. They would not, however, have sick pay under the EFMLEA beyond the first 80 hours as the EFMLEA does not apply to the employee’s own illness. Thus, they would have higher benefits for the first 80 hours, but none afterwards. Q115: Can employees get both EPSLA and EFMLEA benefits? A: Yes. As noted above, an employee absent from work to care for a child as a result of a virus-related school or day care closing could get 10 days of EPSLA sick leave benefits during the first 10 work days and then 10 weeks of lesser EFMLEA benefits for the following ten weeks, until coverage is exhausted. Some have noted confusion over the first two weeks of leave because of the interaction of the two statutes. The DOL explains that Congress intended the two to work together—to permit an employee to have a continuous income stream while taking FFCRA paid leave to care for his or her child whose school or place of care is closed, or whose child care provider is unavailable, for a COVID-19 related reason. Admittedly, it still can be confusing, but it’s easier if you consider the goal of giving employees a reliable income stream during these uncertain times. Q116: We require employees to use sick/accrued PTO etc. for FMLA absences. Can we do so here? A: We would urge caution here. Part of the answer is clear and part is currently somewhat more clouded. Two issues are clear. First, the employer cannot require employees to use accrued sick/ PTO time for paid sick leave under EPSLA. Second, the employer cannot require employees to use accrued sick/ PTO time for the first two weeks of leave under the EFMLEA. The question is more complicated for the remainder of the EFMLEA leave period (i.e., after the first two weeks). The statute itself permits the employee to elect to substitute any accrued paid leave for expanded family and medical leave, but neither permits nor prohibits an employer from requiring such substitution. The DOL’s original regulations contained conflicting provisions on this point, but were revised on April 10 with little explanation of the DOL’s motives in making the relevant change. In any event, following the April 10 revisions and additional FAQs, the DOL’s view now appears to be that the employer can require concurrent use of accrued PTO/vacation time after the first two weeks of EFMLEA leave. But, if the employer does so, it must pay the employee at least the full amount to which he or she is entitled under the employer’s paid leave policy. The DOL’s view, however, may not be the final word on the matter. Although courts typically defer to an agency’s interpretation of a statute that is within the agency’s jurisdiction, they will reject agency guidance if the agency is found to have acted contrary to the statute’s requirements. Thus, whether the DOL’s position on substitution of paid leave under the EFMLEA stands will ultimately depend on how courts interpret the Act in the future. Accordingly, for the present time, the safest answer may be to permit employees to use accrued time under the employer’s policies for expanded medical leave, but not to require them to do so. The employer and employee can also agree to let the employee use accrued paid leave time to supplement their EFMLEA leave to pay the 1/3 portion of their compensation that the expanded family and medical leave does not. Stay tuned. Q117: Can the employee voluntarily use their employer-provided leave benefits (such as PTO/vacation/sick time) if they want? A: This is largely a question of state law and the language of the employer’s own policies. In general terms, however, an employee can take advantage of their accrued sick, vacation, or PTO benefits in accordance with the terms of the employer’s policies. This means that, in the examples cited above, those benefits would generally be in addition to their leave rights under the EPSLA and EFMLEA. It appears that the employee could also choose to use their accrued sick/vacation/PTO policies first (if such leave is available) before using their paid sick leave under EPSLA. The total combined paid leave under EPSLA and EFMLEA would not exceed 12 weeks, but the employee may be able to take longer leave by using the accrued benefits under the employer’s sick/vacation/PTO policies if available. The DOL considers the employer’s own PTO/sick pay/vacation benefits as a potential source of funds, but also takes care to avoid potential double-dipping for the same hours. Typically, the employee must decide which type of leave they want to take (to the extent the different types are available). The statute gives some flexibility – for example the employee could decide during the first ten days/80 hours to use accrued sick pay rather than paid sick leave benefits under the EPSLA – but rights under different programs cannot be claimed for the same hours. One exception is that an employer may allow employees to supplement hours where FFCRA benefits aren’t available. The most common example would be where an employee is receiving 2/3 pay and the employer can, if it wants, permit the employee to tap accrued paid leave time to make up for the other 1/3. This is one area to proceed with a little care. Nothing prevents the employer from going above the FFCRA leave requirements, but it will only receive tax credit for the leave the FFCRA actually required, not the use of its own accrued leave time policies. Q118: What about part-timers? A: They are covered, but receive lesser benefits based on the number of hours they have worked. Please see the questions about the amount of benefits above. Q119: If an employee cannot work on site for a COVID-19 qualifying reason, can we require that they telework? A: Yes, but only if the employee is actually able to telework. Otherwise, they are entitled to FFCRA benefits. One approach to these issues is to adopt an interactive approach to determine, if the employee is reluctant to telework, the reasons and how they may be addressed. The possibility of flexible scheduling and intermittent use of leave, by agreement of the parties, and permitted by the regulations, may provide a tool to enable the employee to telework. The use of intermittent leave in teleworking is discussed below. Q120: What if the employee wants to work a different schedule because they need to care for a child home from school? A: If a COVID-19 qualifying reason prevents an employee from working a specific schedule, then he or she is entitled to the paid leave. One solution would be, if possible, to agree with the employee that he or she can work a modified schedule that allows for COVID-19 childcare during the day. In other words, if the employee is able to work early in the morning and late at night while taking care of a child or children during the day, then as the DOL explains the employee is “able to work and leave is not necessary.” Moreover, as the DOL further notes, to the extent an employee is able to telework while caring for a child, “paid sick leave and expanded family and medical leave is not available.” Practically speaking, whether a given employee can telework may be fact specific, including the nature of the work as well as the employee’s COVID-related circumstances. For this reason, the Department of Labor recommends that the employer engage in a collaborative interactive process with the employee to determine if and to what extent a telework situation is feasible. To accommodate the flexible nature of teleworking, the DOL regulations define “telework” to allow for creative arrangements. The regulations permit teleworking to be performed either during normal business hours or during other times that the employer and employee agree upon. They even permit schedules that would largely have been unthought of by most employees or workers even weeks ago. For example, the DOL supplemental commentary notes that and an employer and employee could agree on the following telework schedule: “7-9 a.m., 12:30-3 p.m., and 7-9 p.m. on weekdays” to permit the employee to juggle family commitments with work. Of course, the employer must compensate the employee for all hours actually worked, but not for significant gaps in work during the day. The precise contours of such arrange would be subject to the agreement between the employer and the teleworking employee. Q121: Can the employee take leave intermittently? A: This is a common question and the answer depends largely on why the employee needs the leave, which benefit they are seeking (sick leave or expanded FML leave), whether they are permitted to telework, and what the parties are willing to agree to. We’ll break it down for ease of use. General rule: With some commonsense limits, the temporary regulations permit, but do not require, the employer and employee to agree upon an intermittent leave schedule while teleworking. These rules apply to a lesser extent when the employee must come into the worksite. In a departure from its usual stance in the past, the DOL encourages flexibility in these arrangements, especially in teleworking situations. Teleworking employees. If the employer permits the employee to telework or the employee normally works from home it can permit intermittent leave, but it is not required to permit sick leave to be taken on an intermittent basis. The employer and employee can also agree to a modified work schedule, such as permitting the employee not to work for two hours mid-afternoon, with intermittent leave taken to cover that period. The temporary regulations permit, and even encourage, the use of creative schedules at home, such as the employee working in 2-hour blocks throughout the day or on weekends. The same rules appear to apply to both sick leave under the EPSLA and expanded leave under the EFMLA. Employees who must come into the worksite. These rules look a more complicated, but the additional requirements are there for logical reasons. First, for common sense reasons, employees absent for reasons other than to care for a child who is home due to the closing of a school or daycare cannot take intermittent leave. They should not come into the workplace at all due to the risk of transmitting the virus. Instead, they should be using paid sick leave and not coming into work. As to absences to take care of a child due to the closing of a school or unavailability of day care, intermittent leave can be taken in any increment of time the parties may agree upon. One example would be to permit, if the parties want, the employee to work a different or shorter schedule, such as 10:00 to 2:00 instead of 9:00-5:00. Please note that as a practical matter these arrangements will be less creative than teleworking arrangements in that the employee will need to travel to home and work between working periods. Documentation. The DOL only requires a “clear and mutual understanding of the parties” as to what intermittent schedule they might agree upon. It does not need to be in writing, but employers should consider doing so, even briefly, to avoid misunderstandings. Q122: If an employee is unable to work or telework because a child’s school is closed, does that mean the employee is automatically eligible for both kinds of leave? A: Not necessarily. Leave under the EFMLEA is only available to employees who have been employed for 30 days before the start of the need for leave. Emergency paid sick leave under the EPSLA is available to employees regardless of the amount of time they have been employed. Q123: Hold on. What if a private employer has over 500 employees? A: The new acts (EPSLA and EFMLEA) do not apply. The employees get whatever they would have received under the employer's pre-existing leave policies. As no benefits are being paid, there are also no tax credits. The same would not be true for many public employers. All public agencies that are subject to the Fair Labor Standards Act are covered employers under both the EPSLA and EFMLEA, regardless of their number of employees. Please note that Congress continues to work on COVID-19 legislation. Some in Congress have proposed removing the cap for employers with over 500 employees, potentially without the offsetting tax credits. Larger employers should continue to monitor legislative developments to ensure that they aren’t covered by subsequent enactments. Q124: What if the employer has fewer than 50 employees? A: The FFCRA permitted the DOL to create an exception for employers with fewer than fifty employees if the imposition of the leave requirements “would jeopardize the viability of the business as a going concern.” To meet the exception, the employer must show one of three things: The provision of sick pay or expanded family and medical leave would result in the business’s expenses and financial obligations to exceed its revenues, and cause it to cease operating, even at a minimal level; OR In the case of an employee, that the absence of that employee, because of his or her specialized skills, knowledge, and responsibilities, would entail substantial risk to the company’s financial health or operational capabilities; OR There are not sufficient workers who are able, willing, and qualified to do the work to keep the business operating at even a minimal capacity. An “authorized officer of the business” should make the determination and document the reasons based on the factors identified above. That document should be kept in the employer’s records, but need not be submitted to the DOL. Employers, particularly smaller employers, will not want employees coming into work if they have been advised not due by their health care provider for COVID-19 reasons. Thus, this issue is of concern for paid sick leave only where the employee is caring for a child whose school or daycare has been closed, or a childcare provider is unavailable, because of COVID-19 precautions. For all other reasons for leave under the EPSLA, employers with fewer than 50 employees are not exempt, even if the status of the business as a going concern is in jeopardy. Q125: Which individuals should be counted (or not counted) in determining whether the employer has more than 500 employees? A: The DOL regulations specify that the 500-employee threshold includes all full-time and part-time employees employed as of the date that the leave will begin, regardless of how long they have been employed. The 500-employee threshold includes any employees on leave of any kind. Aside from its own employees, an employer also may count any individuals for whom it is a joint employer. In some circumstances, this may include employees and/or day laborers provided by a temporary placement agency, depending on the level of control that the employer exercises and the length of the assignment. An employer may also count individuals employed by related entities (i.e., separate corporate parents, subsidiaries and affiliates), if the employer and the related entities constitute a single, “integrated employer.” Common corporate ownership is but one factor in the integrated employer analysis, and not even the most important one. Rather, this determination involves a detailed, fact-based analysis involving multiple factors that include centralized control over labor and employment relations. This is a complex analysis that is highly fact-specific and will need to be considered carefully on a case-by-case basis. As noted below, there could be significant risks for the employer in conceding single employer status. If it combines operations for purposes of avoiding FFCRA coverage through the end of 2020, it may find itself bound to obligations under a host of other statutes, including in particular the FLSA, FMLA, and NLRA. In terms of who should not be counted, employers should only count employees in the United States or its territories or possessions. Employees overseas should not be counted. Independent contractors also must be excluded in determining whether the employer employs more than 500 employees. Q126: Given the above, aren't I better off being a large (500+) employer? Should I concede that related operations are a single employer to take advantage of that? A: Probably not, but you will need to consider the matter carefully. The 500-employee threshold was created to be in tandem with what the DOL has described as “dollar for dollar” tax credits, the idea being that employers will be compensated for the FFCRA benefits they pay. Moreover, some in Congress have suggested that they intend to turn to large employers (i.e., those with more than 500 employees) with the next round of COVID-19 legislation, and there is no guarantee that tax credits will be made available in future measures. So, conceding status as a single enterprise to fall within the FFCRA exemption may ultimately result in an employer becoming subject to future legislation under which no offset is available for any increased benefits that are required. Conceding single enterprise status for FFCRA purposes furthermore could have ramifications that ripple across a host of federal and state laws ranging from the FMLA and FLSA through NLRA union issues and ERISA benefit rights, obligations and liabilities, as well as state workers compensation and unemployment compensation rules. It may also affect other non-employment laws. Thus, the benefit of claiming to be a single enterprise to reach the 500-employee threshold in many cases will be outweighed by the risk of being found to be a single enterprise in other contexts. An employer considering taking the position that it and its related entities are a single enterprise to meet the 500-employee threshold should therefore conduct a very detailed assessment of its operations and consult with counsel regarding the factors above, as well as others, and the inherent risk. Q127: Will these acts apply to other illnesses or FMLA absences? A: No. The expansion is limited to COVID-19 related absences. The ten-day sick leave provisions of the EPSLA apply to the seven types of absences caused by the coronavirus. The longer EFMLEA provisions apply only to school/day care closings occasioned by the virus. Illnesses for other reasons are governed by the employer’s sick leave policies, the FMLA, and state law. Both EPSLA and EFMLEA expire on December 31, 2020. Q128: So, how do these leave provisions coordinate with FMLA leave? Is it 12 weeks, 24 weeks, or something else? A: Paid sick leave under the EPSLA is in addition to the 12 weeks of leave required under the FMLA. Extended family medical leave under EFMLEA is more complicated. In general, it is treated as FMLA leave for purposes of counting the entitlement to 12 total weeks of FMLA/EFMLEA leave. Accordingly, an employee is entitled to a total of 12 weeks of FMLA leave during the annual period chosen by the employer (such as a calendar year or a rolling year), regardless of the reason(s). So, if an employee has used 10 weeks of FMLA leave thus far in the respective calendar/rolling year, that employee will have only two weeks of available EFMLEA leave to use during that year, assuming he/she is qualified for such leave. The details will not always be so simple. First, of course, coverage under the EFMLEA is broader than that under the FMLA. It applies (absent an exemption) to employers with fewer than 50 employees. And the EFMLEA applies to employees after only 30 days, as opposed to the FMLA’s one year. Many employees, particularly newer hires and those working for smaller employers, will be covered by the EFMLEA and not the FMLA. Second, the FMLA focuses, among other things, on an employee or family members with a “serious health condition.” That term goes far beyond COVID-19, but would not include leave to take care of a child whose school has closed due to COVID-19 concerns. Leave under the EFMLEA is available for different reasons, and those reasons are related to the COVID-19 virus. But assuming that the employee is eligible for both FMLA and EFMLEA time, the employee is entitled to 12 weeks (10 of them with some pay) between April 1 and December 31, 2020, but that time is also credited against their FMLA entitlement in whichever 12-month period the employer has chosen for FMLA purposes. Put another way, EFMLEA time counts against the employee’s FMLA “bank” and traditional FMLA time may cut into the employee’s EFMLEA entitlement. Q129: We may have to lay employees off in the future. Will we have to offer paid leave under the FFCRA to the employees who are laid off? What if the layoff is due to the consequences of the virus? A: No, an employer is not required to offer FFCRA leave to employees who are laid off. The temporary regulations issued by the DOL specifically note that an employee is not entitled to take paid leave under the EPSLA or the EFMLEA “where the Employer does not have work for the [employee].” In other words, an employee is entitled to FFCRA leave if and only if he/she would be performing work for the employer but for the qualifying reason. So, even if an employee’s childcare provider is closed or the employee is subject to a quarantine/isolation order, the employee still is not entitled to FFCRA leave if his/her employer would not have work to perform even if the employee was available. Q130: We’ve had to let employees go for lack of work due to the virus. Do we have to go back and offer them sick or family leave under the FFCRA? A: No. Both acts provide benefits for absences based on specific, qualifying reasons (i.e., medical conditions or school/day care provisions caused by the coronavirus). The DOL has confirmed that a lack of work is not a qualifying reason, even where the lack of work is generally attributable to the COVID-19 pandemic. Q131: Do these new provisions have a “shelter in place” provision? A: This is a very good and common question, and the answer for most employees at present will likely be “no,” but the answer is far from clear. Perhaps because the language of the many shelter-in-place or stay-at-home orders varies not only by state, but by city as well, the regulation on this point is more general and less helpful than it might be. It states: For the purposes of the EPSLA, a quarantine or isolation order includes quarantine, isolation, containment, shelter-in-place, or stay-at-home orders issued by any Federal, State, or local government authority that cause the Employee to be unable to work even though his or her Employer has work that the Employee could perform but for the order. This also includes when a Federal, State, or local government authority has advised categories of citizens (e.g., of certain age ranges or of certain medical conditions) to shelter in place, stay at home, isolate, or quarantine, causing those categories of Employees to be unable to work even though their Employers have work for them. While this regulation is not especially well-written, it does provide a measure of clarity on several issues. First, of course, the issue is only of importance for the 80 hours of paid leave under the EPSLA, not the longer period under the EFMLEA (because it doesn’t have a quarantine provision – benefits are not payable in quarantine/isolation order circumstances). Second, it does seem to recognize the existence of such orders, but also notes both that, for this situation to apply, the employee must be unable to work because of the order and the employer must otherwise have work for the employee. Among other things, this underscores that benefits are not payable if the employer does not have work for the employee to do. Of particular concern are the state travel orders that impose mandatory 14-day quarantines on individuals arriving from another state. Several states have implemented these types of orders, including Texas, Montana, Alaska, and Hawaii, and more continue to be released, seemingly every day. If an employee engages in personal travel outside the state and then returns home, having traveled with knowledge that one of these orders is in place, it would seem unfair for the employee to then be eligible for 80 hours of Paid Sick Leave – in effect allowing the employee to turn a weekend drive into 10 days of stay-at-home pay. More clarity on this issue from the DOL would be welcome. The discussion accompanying the temporary regulations sheds some light. It provides the example of a coffee shop that is not designated an “essential business.” A lay-off due to a loss of business caused by the virus or a “stay-at-home” order is not considered a “quarantine” order under the statute and does not trigger a right to FFCRA benefits. That is also true if the order closes the business (e.g. an order that all restaurants close, apart from take-out) rather than being directed towards individual or specific groups of people. FAQs released by the DOL on April 2 and on April 20 seem to underscore the distinction between orders directed at a business versus those directed at particular individuals. The most recent FAQs provide some examples. If an employee is laid off or furloughed for lack of work, even if that loss of work is due to the virus, no paid leave is available. Similarly, if the employer closes a location due to the application of an isolation or quarantine order, no leave is available. The employee may be entitled to paid leave by contrast if, for example, they are ordered to stay home by a government official for 14 days because they were on a cruise ship where other passengers tested positive for the virus. Another example where the employee would be entitled to leave is where a government order designates a containment zone and the employee is unable to work because they are within that zone. Again, the distinction lies between orders affecting the employer versus those affecting the employee themselves. Again, however, it is not a well-written or clear regulation in many respects. Unfortunately, it may require a review of which “stay-at-home” or “shelter-in-place” orders apply, how they might apply to the employee or business, and what work the employer might otherwise have for the employee to do. Q132: What if the employee just believes they might have the coronavirus? A: Many employees are justifiably concerned about either contracting or spreading the virus, but the statute requires more than just a suspicion, even a reasonable one, that the employee has become ill with COVID-19 symptoms. Employers should certainly encourage and require employees who think they have the virus to stay home, but to obtain paid sick leave benefits under the FFCRA, the employee must be under a quarantine or isolation order, have been advised by a health care provider to self-quarantine, or, if they have symptoms, actively seek a diagnosis from a health care provider. These are largely commonsense rules. Keep in mind that if the employee has COVID-19 symptoms he or she may also have benefits available under the employer’s own paid leave policies. Where feasible, the DOL suggests consideration of teleworking as an alternative. Q133: Are there limits on paid sick leave to care for another person? A: This is an area where some employers have been concerned about potential abuse. That abuse may exist in some cases, but at the same time it is an important area for both employers and employees. First, of course, this only applies to the 80 hours of paid sick leave under the EPSLA. There is no corresponding provision for extended family and medical leave under the EFMLEA (although if the individual is suffering from a serious illness, whether COVID-19 or not, they might be eligible for unpaid FMLA time). Second, the FAQs look to whether the employee is taking the time “to care for an individual who genuinely needs [the employee’s] care.” They also suggest a relationship (such as immediate family member or someone living in the same home) where there is an expectation that the employee would take care of the individual if ill. As a practical matter, this may prove difficult for employers to enforce, but it provides at least some limits. The regulations also suggest that the need for care also rises to the level where the employee is unable to work or telework. Third, this issue does not arise for care of a “child” due to the closing of a school or unavailability of day care. Leave in those instances is available only for the employee’s own son or daughter. Q134: I see that both paid sick leave (EPSLA) and extended family and medical leave (EFMLEA) are available if a “child care provider” is unavailable for a child. What does that mean? A: The idea behind this part of the statute is that parents may have to stay home from work to care for children where day care is not available, the alternative potentially being employees being forced to choose between their job or income and leaving children at home unsupervised. The DOL tries to strike a balance of sorts between the desire to provide leave and determining whether it is actually needed. Recognizing the wide array of child care arrangements, the DOL notes that a “child care provider” includes many kinds of paid and unpaid arrangements, including licensed day care centers, nannies, babysitters, and relatives such as grandparents, aunts, uncles, or even neighbors. It may be that such a provider becomes unavailable due to COVID-19 concerns, but the definition is not limited to paid child care centers. Q135: Do both parents get paid sick leave or extended family and medical leave to care for children in the case of a school closure or the unavailability of day care? A: This is a common question, and the simple answer is “no” as ordinarily only one parent is needed to stay home with the child. If both parents are employed, they would each have entitlement to both paid sick leave benefits and extended family medical leave benefits, but not for the very same hours and will likely have to work out between themselves how to handle the arrangements and/or consider arrangements such as flexible schedules, teleworking, and intermittent leave as part of that process. Employers should also take care to avoid stereotyping in the case of conflicts regarding which parent should be taking leave and which should be working. Q136: What if the child’s school has moved to on-line instruction? A: On-line instruction does not take the place of classroom supervision. A school that is closed but providing on-line or similar instruction is still “closed” for purposes of the statute, giving rise to entitlement to leave under the FFCRA. Q137: How do we treat seasonal employees? What if their hours are irregular? A: This is one of the more confusing areas under the statute. Many seasonal workers may not even be employed at this time of the year, and thus may have no entitlement under the statute. But if they are, there are several touchpoints. Part-time employees are still employees, so they are covered and entitled to benefits. As noted above, entitlement to paid sick leave under the EPSLA is available immediately upon employment. To be entitled to extended family and medical leave under EFMLEA, the employee must have had 30 days of employment. As the number of hours may vary, the DOL recommends a complex calculation that takes into account: (a) the average number of hours the employee worked over the last six months; (b) the average hourly rate of pay over that same period; and (c) the type of leave being requested (and whether it is a full base pay or only 2/3 base pay. The DOL’s April 20 FAQs contain several pages of how those calculations might play out in particular instances. Employers facing these issues should look to the most recent DOL guidance in this area. Q138: What if the employee was previously on a leave of absence? A: Both types of leave (paid sick leave and extended family and medical leave) are intended to apply in circumstances that are related to COVID-19. If the employee is not able to work for an unrelated reason, such as disability leave due to an illness that predated the pandemic, then they do not qualify for benefits. Once that condition ends, they may or may not be entitled to benefits depending on whether their situation fits within one of the six COVID-19 related reasons giving rise to leave. If the employee was on a voluntary leave of absence, they may choose to return to work and collect benefits if they otherwise qualify for them. Q139: We’ve had to close (or we may have to close) our business because it isn’t an “essential business” or “critical infrastructure” under our state’s stay-at-home or shelter-in-place order. Are we required to offer our employees paid leave under the FFCRA for any portion of the time that the business is closed? A: The temporary regulations, as noted above, are not well written and leave some room for ambiguity. As the DOL has recognized, the new leave provisions only apply where the employer has work available for an employee that the employee is unable to perform for one of the qualifying reasons (i.e., medical conditions or school/day care provisions caused by the coronavirus). If an employer’s business is closed under a general stay-at-home or shelter-in-place order, there is no work available for the employee to perform, so the leave provisions arguably do not apply. However, if the employer is operating and has work available for an employee, the employee will be entitled to EPSLA leave if he/she is unable to work (or telework) due to a stay-at-home or shelter-in-place order. Typically, this situation will only arise where the employee lives in a different jurisdiction than the facility where he/she is employed (i.e., near a state line), and the employee’s jurisdiction is subject to more restrictive stay-home requirements. The precise restrictions will turn on how the state or local government has worded its stay-at-home or shelter-in-place order. Extended family and medical leave under the EFMLEA isn’t available as it does not provide benefits for quarantine or isolation orders, only leave required because the employee is home caring for a child whose school has closed or childcare is unavailable due to the COVID-19 virus. In any event, Congress did adopt the Emergency Unemployment Insurance Stabilization and Access Act, which will provide emergency funding to state unemployment trust funds and expanded unemployment benefits. Many states have relaxed their filing rules for unemployment as well. Q140: We may have to lay employees off in the future, after the FFCRA goes into effect, due to a lack of work caused by the pandemic. Will we have to offer paid leave under the FFCRA to the employees who are laid off? A: No. A layoff for lack of work does not qualify an employee for benefits under the FFCRA, even if the lack of work is attributable to COVID-19 pandemic. Q141: If we have to close our business in the future, and employees are receiving paid sick or family leave under the FFCRA, do they continue being paid even after the business closes? A: No. Once there is no work available for an employee to perform, he or she is no longer qualified for the paid leave benefits available under the FFCRA. That’s the case even if the lack of work is due to the COVID-19 pandemic. Q142: If we need to put employees on reduced schedules due to business slowdown are we required to provide employees with the newly expanded benefits to cover the reduced hours? No. If you reduce employee hours because of a lack of work, you should not provide employees with the newly expanded benefits to make up for the reduced hours even if the lack of work is somehow related to COVID-19. If you do, you risk not receiving the associated tax benefits for this leave. Employees may be eligible for partial unemployment benefits due to a reduction in their work hours and states now have additional flexibility to provide such benefits. However, you should still provide employees the expanded benefits if a COVID-19 qualifying reason prevents them from working a full schedule. Q143: Can employees receive unemployment benefits AND the newly expanded benefits? A: No, at least not for the same time. For example, if you provide an employee with 10 weeks of qualified leave under the EFMLEA, the employee cannot also obtain unemployment benefits for those same 10 weeks. Although the DOL encourages employees to use unemployment where applicable, it looks at unemployment benefits as a distinct source of funds from those under the EPSLA and EFMLEA. Q144: Are employees still entitled to their employer provided health care coverage while on approved FFCRA leave? A: Yes, so long as the employees are on qualified leave under the FFCRA, the employer must maintain coverage during the leave period. Employees are generally still required to make any normal contributions to the cost of the health care coverage while on such leave. If an employee does not return to work at the end of the leave period, the employer will need to consult their benefit plans to determine the employee’s continued eligibility (if any) for benefits under the plan. Q145: Does the Emergency Unemployment Insurance Stabilization and Access Act you just described require an employer to take any affirmative steps related to unemployment? A: No immediate employer action is necessary. This provision expands unemployment benefits and provides grants for processing and paying claims to states who meet certain conditions, including taking steps to ease eligibility requirements and access to unemployment compensation for people directly impacted by COVID-19 (e.g., by waiving work search requirement and waiting periods). Q146: If we are laying off more than 50 employees and the Federal WARN Act applies, can we avoid providing 60 days’ notice due to “unforeseeable business circumstances”? A: Maybe. Under federal law, there is a strong argument that a sudden loss in business due to closures, quarantines, or a significant decrease in demand resulting from COVID-19 is an “unforeseeable business circumstance” or that COVID-19 is a “natural disaster,” either of which provides an exception to the 60-day notice requirement. But there are three important caveats. First, the longer you wait, the less likely the downturn was “unforeseeable.” The results of COVID-19 are rapidly becoming all too foreseeable. Second, even if there is an exception to the 60-day notice requirement, the other requirements in the WARN Act still apply. Third, the exceptions to the notice period are not the same everywhere. California’s WARN Act in particular does not have an exception for “unforeseeable business circumstances,” but an executive order dated March 17, 2020, suspends the 60-day notice requirement so long as other aspects of Cal-WARN are followed and the notice contains certain required information. You should consult with California counsel before undertaking mass layoffs or plant closings in that state. Q147: Do these two statutes override other federal and state law requirements? A: No. Everything else still applies. Moreover, in states that already require paid sick leave, the leave available under the EPSLA is in addition to what an employee is eligible for under state law. In regard to the EFMLEA, the regular FMLA might apply even if the expanded leave provisions do not, and your employee who is sick or caring for a sick relative may still be entitled to up to 12 weeks of unpaid FMLA leave. Reasonable accommodation requirements under the Americans with Disabilities Act and state law may apply too, depending on the employee’s condition. The new law provides employees additional leave rights, but the law does not reduce other protections that employees have under existing federal, state, or local laws. Executive and legislative responses have been swift and varied at all levels of government. You should ensure compliance with state and local law as these requirements evolve. Q148: Do these provisions override collective bargaining agreements? A: For the most part, no. Employers must continue to honor the sick leave provisions of labor agreements with their unions. The benefits under the FFCRA are in addition to employer-provided leave, including that under collective bargaining agreements. Q149: How about multi-employer collective bargaining agreements? A: Employers subject to multi-employer collective bargaining agreements may satisfy the FFCRA’s requirements for paid sick or FMLA leave by making contributions to a multi-employer fund, plan, or program consistent with the labor contract. Employees working under the multi-employer collective bargaining agreement must be able to secure payment from the fund, plan, or program based on the number of hours they have worked. It is important to note, however, that such a fund, plan, or other program must allow employees to secure or obtain their pay for the related leave they take under FFCRA. Alternatively, the employer can elect to satisfy its obligations under the Act by other means, provided they are consistent with the employer’s bargaining obligations and the pertinent bargaining agreement. Q150: When does the FFCRA become effective? A: The DOL has announced April 1, 2020 as the effective date. It will not apply retroactively, however. Q151: What tax or other benefits are available to offset the cost? A: As noted above, subject to certain caps and restrictions, covered employers are eligible to receive refundable tax credits for paid sick and protected leave and for allocable costs related to the maintenance of health care coverage under any group health plan. These will be based on the type of leave and whether the leave is for the employee or the employee’s family member. Employers should document what leave employees have taken and the reasons supporting the need for leave to assist in claiming those credits. the employer is not required to provide leave if materials sufficient to support the applicable tax credit have not been provided by the employee upon request. The DOL’s April 1, 2020 temporary regulations provide which documents an employer must keep (regardless of whether the leave was granted or denied) in order to claim tax credits. These records must be kept for four years. Those documents include: Documentation to show how the employer determined the amount of paid sick leave and expanded family and medical leave paid to employees eligible for the credit, including records of work, telework, and paid sick leave and expanded family and medical leave; Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages; Copies of completed IRS Forms 7200 that the employer submitted to the IRS; Copies of the completed IRS Forms 941 that the employer submitted to the IRS or, for employers that use third party payers to meet their obligations, records of information provided to the third-party payer regarding the employer’s entitled to the credit claimed on IRS Form 941; and Other documents needed to support its request for tax credits pursuant to IRS applicable forms, instructions, and information for the procedures that must be followed to clai ma tax credit. For information on the tax credits, go to: https://www.irs.gov/forms-pubs/about-form-7200 As part of the March 27, 2020 $2.2 trillion package passed by Congress, forgivable loans are available for a period of time for smaller employers, as well as some medium-sized employers in the hospitality industries. For more information on the COVID-19 related small business loans to cover the costs, go to: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources Q152: Are these programs permanent? As of now, no. They are scheduled to expire effective December 31, 2020. Q153: Can we count our non-U.S. employees towards the 500-employee threshold? A: No. The temporary regulations explicitly state that, “To determine the number of Employees employed, the Employer must count all full-time and part-time Employees employed within the United States at the time the Employee would take leave.” It goes further to explain that, “within the United States” means any State within the United States, the District of Columbia, or any Territory or possession of the United States. The summary provided in the annotation includes the following example: If an employer employs 1,000 employees in North America, but only 250 are employed in a U.S. State, the District of Columbia, or a territory or possession of the United States, that employer will be considered to have 250 employee and is thus subject to the FFCRA. Q154: Can I require documentation, such as under the FMLA? The regulations make clear that employers not only can but should document the reasons why an employee has been granted leave, in large part to assist in obtaining the corresponding tax credits. Both the DOL and IRS have released separate statements of the necessary types of documentation, which differ slightly. Combining the two sets of requirements, the documentation from the employee must contain: The employee’s name; The dates for which the leave is requested; The qualifying reason for the leave; Oral or written statement that the employee is unable to work because of the qualified reason for leave. A written notice is preferable, and if the employee provides only verbal notice, the employer should follow up to require a written notice as well;. If leave is being taken based on a school closing or child care becoming unavailable, the age of the child and, if the child is over the age of 14 and leave is sought to care for the child during daylight hours, a statement that special circumstances exist requiring the employee to provide care. Note that while an oral statement is sufficient for number 4 above for DOL purposes, the IRS requires a written statement. The employer should request a written statement from the employee, but if the employee provides only a verbal notice, the employer should attempt to confirm the conversation in writing, such as through an email. If the employee is seeking to take paid sick leave because of a government quarantine or isolation order, the employee must also provide the employer with the name of the government entity that issued the order. If an employee is seeking to take paid sick leave because of a health care provider’s instruction to self-quarantine or isolate, the employee must also provide the employer with the name of the health care provider who advised the employee to do so. Note that the employer should keep a record of the documentation as it may be needed to support a later request by the employer for tax credits. The reasons for extended leave under the EFMLEA are narrower than those for sick leave under the ESPLA, the most common of which will be the closing of a school/unavailability of child care. The employee must provide written documentation that includes information: The name of the son or daughter being cared for; The son or daughter’s age; The name of the school/place of care/child care provider that is now unavailable; A representation that no other suitable person will be caring for the son or daughter during the period for which the employee takes expanded family and medical leave; and If the child is over 14 and leave is sought to care for the child during daylight hours, a statement that special circumstances exist requiring the employee to provide care., When an employee is seeking leave to care for a child over age 14, the DOL guidance makes no reference to requiring a statement about special circumstances, but the IRS guidance says that that this information “should” be provided. Q155: I’ve heard that the DOL might delay enforcement of the act. Should I wait? A: Absolutely not! The DOL has indeed stated that it does not intend to bring enforcement actions for violations occurring between March 18 and April 17, 2020. Only 17 of those days occurred after the act took effect, and the DOL has indicated that its efforts before April 17 were directed to helping employers bring themselves into compliance. The DOL did so in large part by releasing the temporary regulations, poster, and the various sets of DOL FAQs discussed in this set of FAQs. These were intended to help employers begin their compliance efforts. In addition, both the EPSLA and EFMLEA have private enforcement provisions, so even if an employer may not but subjected to an enforcement action during the brief initial period, private litigants can and likely will commence suit if the employer denies benefits improperly. Employers should be working now to bring their policies into compliance. Q156: When were regulations released? A: The DOL promulgated temporary regulations on April 1, 2020 and then amended some of them on April 10. Many of the regulations track the FAQs the DOL released between March 24 and April 20, but others contained additional material. The significant new material included: the temporary regulations address the question of whether and when a state or local government’s “shelter-in-place” or similar order might constitute a “quarantine” or “isolation” order for purposes of determining entitlement to 80 hours of paid sick leave under the act; the regulations better define the kinds of familial or other relationships that might permit an employee to take leave for “caring for an individual” with a COVID-19 related condition; the provisions relating to the need for leave to care for a son or daughter due to the closure of a school or childcare includes consideration of whether others, such as family members, could watch the child; extended family and medical leave is under the FMLA and counts against the 12-week maximum in whatever 12-month period the employer is using for FMLA purposes; important rules for documentation, including a requirement to retain records relating to FFCRA leave for four years. The DOL introduced additional FAQs the following day reflecting many of the matters raised in the temporary regulations it had not fully explained before. Most of these new FAQs relate to specific situations and details about how leave may work in particular situations, such as the types of relationships that might give rise to entitlement to paid sick leave or extended family and medical leave, the rights of employees on medical leave for reasons other than COVID-19, and whether employees can take paid sick leave for their own COVID-19 illness without seeking medical advice. Due to the speed of the release, the temporary regulations included a number of mostly, but not entirely, minor errors that were corrected by subsequent revisions on April 10. Q157: What other guidance has the DOL provided? A: The DOL released a series of FAQs during the week of March 23, 2020 and into mid-April. These were intended to give employers advice in advance of the temporary regulations it issued on April 1, 2020. The material in those FAQs was largely also contained in the temporary regulations or its commentary and has been incorporated into the FAQs above. However, for those with specific questions, here are the primary areas they covered. Fifth Updated DOL FAQs (April 20, 2020) The fifth set covers a set of fairly narrow, but in some cases important, issues: Whether and how “shelter-in-place” and similar orders might trigger rights to paid leave; Whether and how employers can require concurrent use of accrued paid leave and expanded family and medical leave; and How to calculate the amount of paid leave when the employee has worked irregular hours. Fourth Updated DOL FAQs (April 3, 2020) The DOL introduced additional FAQs on April 3 reflecting many of the matters raised in the April 1 temporary regulations it had not fully explained before. Most of these new FAQs relate to specific situations and details about how leave may work in particular situations, such as the types of relationships that might give rise to entitlement to paid sick leave or extended family and medical leave, the rights of employees on medical leave for reasons other than COVID-19, and whether employees can take paid sick leave for their own COVID-19 illness without seeking medical advice. Third Updated DOL FAQs (March 28, 2020) The DOL released a third set of FAQs on March 28, 2020. While much of the material was directed toward how employees might enforce their rights and on issues that might not be of concern in most situations, it did provide helpful guidance to resolve several common problems raised by employers. Among other things, the March 28 FAQs: Made clear that expanded family and medical leave is counted much like time under the FMLA and thus, to determine the available number of weeks employers should look at the total amount of FMLA/EFMLEA time taken during the year they use to measure FMLA usage; Fleshed out the requirements for an employer to qualify for the exception available to employers with fewer than 50 employees under certain circumstances (although the procedure has not yet been spelled out); Set forth a long list of health care providers and emergency responders who might be excluded by the employer from paid sick leave or expanded family and medical leave. Second DOL FAQs (March 27, 2020) The DOL released a set of 14 FAQs on March 24, 2020, and then supplemented them three days later (on March 27) to address many areas not addressed in the language of the act itself. A number of these new FAQs relate to nuts-and-bolts, practical aspects of implementing the FFCRA. Among the March 27, 2020 supplemental FAQs: The FAQs describe the kinds of documentation employers can and should be requesting in connection with employee requests for FFCRA leave and pay; Several of the new FAQs address telework and scheduling issue; What circumstances will give rise to use FFCRA leave on and intermittent basis; Layoffs occurring before and after the effective date; The effect of stay-at-home and shelter in place orders on entitlement to FFCRA leave; Emphasis on unemployment compensation benefits being another pool of benefits affected employees can tap; Coordination of the employer’s own leave policies with FFCRA leave; Special rules applicable to employers subject to multi-employer collective bargaining agreements. The new FAQs clarify that the leaves provided for in the FFCRA generally can be taken on an intermittent basis only if the employer and the employee agree. They also confirm that employees who are laid off or furloughed due to a lack of available work are not eligible for FFCRA leave, even if the lack of work is due to the ongoing COVID-19 pandemic. Initial DOL FAQs (March 24, 2020) Previously, on March 24, 2020, the United States Department of Labor had released a shorter set of Q&A’s. While these do not have the same effect as the anticipated implementing regulations, they do shed light on a handful of issues of importance to employers. For the most part, the Q&A’s do not depart from the expected requirements, but they do make some small but significant changes. Most importantly the DOL moved the date of compliance up one day, to April 1, 2020. In separate guidance, the DOL has suggested that its efforts in the first 30 days will be directed to assisting employers in compliance, but that should not keep employers for planning for compliance now. The other significant matters touched upon include: The DOL has confirmed that employers with more than 500 employees are not required to comply with the Act. It has also issued guidance on when nominally separate employers can be combined, guidance that is largely derived from its past guidance under the FMLA and FLSA. Those are discussed further below. The 500-employee threshold is measured as of the time the leave is taken. The DOL appears to be creating an exception for employers for fewer than 50 employees if compliance would jeopardize the viability of their business as a going concern, but is leaving the exact criteria to forthcoming regulations that have not yet been released. The amount of benefits for hourly employees will be based on their “regular rate” (so it includes things such as commissions and nondiscretionary bonuses). It will also include overtime subject to the 80-hour cap for paid sick leave under the EPSLA. More about that below. Notice available (March 25, 2020) On March 25, the DOL released the model notices employers will be required to post conspicuously in the workplace, in a manner much as they have done for past posters under the FLSA and other employment laws. The poster is available here. Again, the FFCRA does not impose new unemployment compensation requirements on employers, but states may require employers to take steps so that they can meet the above goals. Additionally, the FFCRA provides that the Secretary of Labor may prescribe regulations, operating instructions, or other guidance necessary to carry this out, so employers should be on the lookout for that as well.

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ERC Audit FAQs

ERC Audit FAQs What is the statute of limitations for ERC audits? The IRS recently extended the statute of limitations from three years to five years for all tax amendments regarding ERC. This extension of the ERC audit period allows the IRS another two years to conduct ERC audits on businesses that, among others, may lack substantial documented evidence of their eligibility. Does claiming the ERC increase my audit risk? Claiming the Employee Retention Credit does not directly increase your business’ risk of being audited. As long as your ERC claim is calculated correctly and includes substantial evidence of your business’s eligibility, the IRS should have no reason to believe an audit is necessary. Omega can identify any potential holes in your ERC claim and ensure your calculations are correct. What is the penalty for ERC fraud? Miscalculated or improperly claimed ERC credits can be met with failure to deposit penalties and interest due on the late return of 20% to 40% of the underpaid tax, and up to 75% if the fraud was committed knowingly. Business owners are always responsible for the information reported on their tax returns — even if they used an outside tax preparer or tax credit specialist to claim ERC. How Long is the IRS’ ERC Audit process A full ERC audit may take three to six months or more to conclude. What’s more, the IRS will not reimburse you for time lost or legal representation, regardless of the outcome. It is considered your fiscal responsibility to always be prepared for an ERC audit. Can a business dispute the outcome of an ERC audit? Yes, if you disagree with your ERC auditor’s determination, you may file a written protest for an Appeals conference or hearing with the IRS’s Independent Office of Appeals. What happens if my business fails an ERC audit? If the IRS determines there are discrepancies in your ERC claim, they might adjust your tax liability, which could result in additional taxes, penalties, and interest. Do ERC processing firms offer audit protection? Yes, a select number of the best ERC processing companies offer ERC Audit Protection with their services. However, you should confirm that your ERC preparer’s coverage is more than basic assistance with IRS communications and documentation. ERC Audit Protection should be interpreted to mean your preparer will (1) defend their position, (2) reimburse their service fee(s) and cover the cost of any penalties assessed if your refund is disallowed, and (3) be operating until the statute of limitations expires. Can ERC claims be audited? The short answer is yes. Whether or not your ERC claim will be audited, however, depends on several factors, including the eligibility criteria applied, the accuracy of your qualified wage calculations, the size of your refund, and the credibility of your preparer. You may also be selected at random for an ERC audit. What if my CPA does not believe my business is eligible for the ERC program If your business was negatively impacted by the COVID-19 pandemic, but your CPA believes you’re ineligible — we still encourage you to apply. It is not uncommon for CPAs, accounting agencies, or even Chief Financial Officers (CFOs) to get it wrong. The Employee Retention Credit (ERC) is a complex program and the IRS has released a number of warnings. Legacy Tax & Resolution Services will not submit claims for businesses that are ineligible. We take the time necessary to conduct our due diligence, present our assessment, and let our clients decide whether or not to proceed.

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Cost Segregation- General FAQs

Cost Segregation- General FAQs What is involved in a cost segregation study? A quality Cost Segregation Study evaluates all information, including available records, inspections, and interviews, and presents the findings clearly and well-documented. Our process for conducting a detailed Cost Segregation includes a review of all cost details for the property, including but not limited to the general contractor's application for payment, construction invoices, change orders, depreciation schedules, and appraisals. When should a Cost Segregation study be conducted? A Cost Segregation study can be completed any time after the purchase, remodel or construction of a property. However, the optimum time for a study for new owners is during the year a building is constructed, purchased or remodeled. For investors who are in the planning phases of construction or remodeling, the best time to consider a Cost Segregation study is before the infrastructure of the building is set. LTRS offers a free preliminary analysis that can help determine the right timing and strategy for any investor. What should I consider when selecting a Cost Segregation provider? It would help if you always read the bio and resume of the persons signing your Cost Segregation study. Ensure they are certified with the American Society of Cost Segregation Professionals (ASCSP). The Certified Cost Segregation professional designation is CCSP and comes after the engineer's name. Any designation less than that is substandard. Just like you would only use a CPA to file your tax return, you should only use a CCSP to conduct your Cost Segregation study. Will the company be available if I get audited by the IRS? Any company can give you a Cost Segregation report with results that save you a lot of money; the real question is whether it will stand up to IRS scrutiny. The actual value of your fee is how easy (or painful) the audit process goes. Every Cost Segregation company will say they stand behind their work, but how can you know what will happen when the IRS audits the report? Using a larger company that has been in business for many years should help you understand that it can successfully defend your study against an IRS audit. Look at their client profile. Bigger, well-known clients are more likely to be audited by the IRS. A company without high-profile clients probably doesn't have much experience dealing with the IRS. Some companies mislead consumers by stating they've worked for companies like Walgreens, McDonald's, or Holiday Inn when they have only worked with smaller franchisees or landlords that lease their buildings to such companies. Does the LTRS have tax experts who can help if my CPA has questions? Yes, LTRS has tax experts on staff with over 100 combined years of experience filing tax returns. This is important because so many unique fact patterns and situations can impact how the Cost Segregation deductions will flow through on your tax return. A Cost Segregation engineer does not necessarily know enough about tax to truly understand how the Cost Segregation deductions will specifically impact you. Using a firm like LTRS with tax experts on staff will save you money if your CPA has any questions regarding your situation. How long will it take to complete the study? A Cost Segregation study will typically take 45-60 days to complete, depending on how quickly we receive the needed information. How much will a Cost Segregation study cost? The fee for a Cost Segregation study will vary depending on the building size, building type, number of tenants, and other physical characteristics. Typically, fees can range from $5,000 to $15,000. How is depreciation impacted under the Alternative Minimum Tax (AMT) system? Generally, for improvements placed in service after 1998, personal property identified in a Cost Segregation Study will require depreciation to be calculated using a 150% declining balance method instead of the 200% declining balance method. Although the acceleration of depreciation is slower under the 150% declining balance, the benefits of a Cost Segregation Study are not impacted significantly since the recovery periods remain the same. The calculations are more complex for improvements placed in service before 1998, and benefits from a Cost Segregation Study are likely to be somewhat lower than initially anticipated. I have just constructed a building; the general contractor's invoice has already broken down the costs. Can't my CPA conduct the study? In September 2004, the IRS released the first iteration of the Cost Segregation Audit Techniques Guide to clarify what they are looking for in a Study. Of the 13 essential elements, the very first item the IRS lists is "Preparation By An Individual With Expertise And Experience." They further explain the following: "The preparation of cost segregation studies requires knowledge of both the construction process and tax law involving property classifications for depreciation purposes." "… a study by a construction engineer is more reliable than one conducted by someone with no engineering or construction background. However, the possession of specific construction knowledge is not the only criterion. Experience in cost estimating and allocation and knowledge of the applicable law are other important criteria." "A quality study identifies the preparer and always references his/her credentials, experience, and expertise in the cost segregation area." The IRS stresses experience and expertise as being so important because they recognize that there are no set rules you can use to determine if the property is eligible. For example, a light fixture in one room may qualify as 1245 property (property eligible for a shorter accelerated depreciable life), while the same light fixture in the next room may not qualify because of various facts and circumstances on how and why it's being used. This applies to every asset in the building, and the onus (to prove and substantiate that each asset qualifies) is on the taxpayer. This is done by understanding each asset's characteristics and the circumstances for which legal authority can support your position on each asset. Because this is both a time-consuming and confusing task, it is the exact reason why all the major accounting firms in the country have specially trained non-CPA professionals performing these studies. Below are citations from the IRS on this issue. "Determining whether an asset is a structural component or tangible personal property is a facts-and-circumstances assessment, and as such, no bright line test exists." CCA 199921045; 5/28/1999 "A plethora of legislative acts, court decisions, and Service rulings have produced complex and often conflicting guidance concerning property qualifying" ATG; Section 1 "It cannot be overemphasized that the classification of assets is a factually intensive determination." ATG; Section 2 Taxpayers or CPAs attempting to perform a study will likely misclassify assets, resulting in lower tax benefits and/or more exposure during an audit. Additionally, an engineer can provide significantly more tax benefits by further breaking down construction costs through an analysis of the blueprints, a thorough facility inspection, and proprietary software and tools. Finally, another difficulty for a non-qualified professional is the allocation of construction "soft costs." These "soft costs," also known as "indirect costs," are intangible costs that are incident to the construction of a facility. Indirect costs must be allocated proportionately to the basis of the specific assets to which they relate. For instance, a cost for HVAC design work must be allocated pro-rata to particular HVAC "hard costs" (tangible costs). Because of the intermixing of services from various vendors within a construction project, it's challenging to determine the appropriate allocation and then correctly apply those calculations without a software program designed specifically for that purpose. The IRS has reviewed these studies for various tax purposes since the 1950's. They have concluded (and stated on record) that this type of analysis is too complex for a non-qualified professional to perform. Below are just some of the many additional citations where the IRS states that a third-party qualified professional should conduct a study. "Therefore, it is proper for the taxpayer to use a third party cost analysis to allocate costs to a building's structural components" Private Letter Ruling 7941002, 6/25/1979 "The use of cost segregation studies must be specifically applied by the taxpayer" CCA 199921045; 5/28/1999 What's the benefit of addressing abandonment issues in a Cost Segregation Study? By quantifying all property, including "structural components" by suite, our analysis will allow for identifying costs that can be written off for future tenant abandonments. For a fully improved property acquired after 1996 with no cost documentation on those improvements, it's impossible to take advantage of these benefits without a Cost Segregation Study. Although this is beyond the scope of the regular study, it is standard in our product and can significantly increase total tax benefits by as much as three times! I did a 1031 exchange on my property. Will a Cost Segregation Study still save me money? Nearly half of the Cost Segregation Studies conducted at LTRS involve properties in a 1031 exchange. However, there are situations where a 1031 exchange will negate the benefits of a Cost Segregation Study. Our CPAs have an in-depth knowledge of how a study interacts with an exchange and will let you know how using both tax strategies will affect your cash flow. I plan on selling my property very soon. Does Cost Segregation make sense to me? If you conduct a Study on a property you plan to sell in a taxable transaction, you may have to recapture your accelerated depreciation deductions. However, this depends on when the property was acquired and the value of the accelerated depreciation property upon disposition (i.e., you may be able to create a significant deduction and only have a smaller amount of recapture). Better still, if you intend to enter into a like-kind exchange (a non-taxable transfer of your property for another), you will not have depreciation recapture issues until you sell the replacement property. In this situation, a Cost Segregation Study could be highly beneficial. In addition, conducting a Study in the year of exchange could allow you to pull out some cash (taxable boot) without creating any tax liability. Our tax experts will work with you or your CPA to assess your situation and inform you of your options. How long do I need to hold on to the property for Cost Segregation to make sense? If the intention is to sell for cash, we generally recommend Cost Segregation for clients holding a property for a minimum of 3-5 years. We can calculate the "break-even" point to determine the benefits of a Cost Segregation Study based on how long you plan to hold the property. I have several partners in this property. There's no way they will all agree to amend their returns to take advantage of the study. Is there another way? Yes. An amended return is no longer necessary to fix depreciation in the prior year. The IRS has recently issued Revenue Ruling 2004-11, which allows a taxpayer to file a form 3115 Automatic Change in Accounting instead of an amended return. This allows the taxpayer to take any missed deductions in the current year. The same form is also used to fix depreciation on assets acquired as far back as 1987. Will a Cost Segregation Study increase my chances of getting audited? Not if you are taking depreciation, but you are allowed to, as identified by the IRS. The IRS has: Issued revenue procedures specifically outlining how Cost Segregation can be used Identified appropriate asset-class lives that can be taken Specified guidelines on how the accountant should file for an automatic change in accounting method to account for missed depreciation Why has my accountant not performed a Study already? The IRS recognizes that a Study requires engineering expertise. While an accountant may know about taxation, an engineer must interpret blueprints, assess construction methods, inspect the building, and estimate components. Additionally, since the same asset can qualify in one building and not another, knowledge of numerous IRS rulings is needed to ensure assets are being depreciated correctly for a specific situation.

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