4Thought Blog

Although some companies that sent workers home during the pandemic have returned them to the office, many businesses continue to rely on remote workers. At the same time, companies in a range of industries are struggling to find and keep employees.

This unusual business environment has spawned some innovative fringe benefits — or expanded traditional offerings — from counseling to pizza deliveries to birthday gifts. What are the tax consequences of offering them? It depends.

"Fringe benefit" typically is used to describe services, property or some other item of value an employer provides its employees. Normally, a fringe benefit constitutes taxable income to the recipient unless a statutory exclusion applies. For some employees, the special tax-exempt perks are the real fringe benefits.

The list of statutory exclusions in the tax code includes common benefits, such as health insurance and retirement plan matching contributions. But other less-known benefits may fit your company's current needs. Here are eight to consider — and their potential tax treatment:

The Biden Administration recently released detailed tax proposals through the so-called Green Book. If approved, there would be big changes for high-income earners, on capital gains and for some business taxes.

While these proposals would all have to go through the legislative process and therefore may not pass or may be changed, it’s possible some of these may become law and therefore warrant tax planning considerations.

Even if Biden’s proposals don’t become law, there are some automatic taxes changes coming down the road as tax changes in President Trump’s Tax Cuts and Jobs Act only run through 2026. While five years feels like a long time, it’s not when it comes to tax planning.

Here’s what the Biden administration has proposed:

The choice of entity is among the most important decisions facing taxpayers when starting a business or investment activity.

The choice of tax entity generally includes a C corporation, S corporation or partnership, each having its own advantages and disadvantages that must be evaluated in terms of how the entity’s tax and legal characteristics align with the goals of the business and its investors.

Existing businesses should also evaluate their choice of entity—especially now, in light of President Biden’s proposals to increase the tax burden on corporations and high-wealth individuals. Depending on the circumstances, it may make sense to consider converting an existing entity to a different type of tax entity or structure in order for businesses and their owners to better manage their overall tax obligations.

Cash flow preservation remains an important focus for many companies as the COVID-19 pandemic continues to create uncertainty for businesses.

Accounting method changes provide a valuable opportunity for taxpayers to reduce their current tax expense and increase cash flow by accelerating deductions and/or deferring income.

Changing to an optimal method of accounting often results in a taxpayer claiming a favorable “catch-up” adjustment on the federal tax return for the year of the change, which can significantly reduce taxable income or generate a net operating loss that can be carried back to higher tax rate years.

Good news - business taxpayers may still be able to take actions to lower their federal income tax liabilities for 2020, as well as for future years.

Consider these ideas before you file last year's return.

Pennsylvania has approved legislation clarifying tax rules on PPP loans and also providing $912 million in COVID relief aid.

The legislation, approved Friday, clarifies that Paycheck Protection Program loans that are forgiven are not taxable in Pennsylvania and that businesses may deduct eligible expenses paid with PPP loan proceeds. This aligns Pennsylvania’s PPP rules with federal rules approved in December and is very beneficial to businesses and individuals with PPP loans.

Restaurants have struggled mightily during the COVID-19 pandemic.

Thankfully, they're specifically targeted for a new tax relief measure found in the massive Consolidated Appropriations Act (CAA), which became law on December 27, 2020. The new provision creates a temporary but meaningful tax incentive to spend more on business-related food and beverage costs.

Preexisting tax breaks for certain food and beverage and entertainment costs are available in other limited circumstances. Here are the details.  

The Employee Retention Tax Credit (ERTC) provision of the 2020 CARES Act was overshadowed by the PPP loan program, primarily because the original ERTC provisions prohibited an employer with a PPP loan from claiming ERTCs.

The 2021 Consolidated Appropriations Act, passed just weeks ago and most known for allowing businesses a tax deduction for the expenses paid with tax-free PPP funds, made sweeping changes to the ERTC rules as well. Most notably, lawmakers removed the provision disallowing businesses with PPP loans to participate in the ERTC program.

As a result, these valuable credits are now available to more business owners for wages paid in Q1 & Q2, 2021 (and possibly for wages paid in 2020). For more information about the original provisions of this program, see our article here.

With its $900 billion price tag, the second federal stimulus bill includes a multitude of benefits for businesses – so many we couldn’t fit them in one article.

Our first article on the bill focused on the new Paycheck Protection Programs rules and additional allocation (you can read it here if you missed it) but there are other provisions businesses should learn about, including the extension and expansion of the Employee Retention Credit and Families First Coronavirus Response Credit.

Read on below for more details on both credits along with other new and extended tax provisions:

Congress has approved a second COVID-19 stimulus deal with both business and individual benefits. 

Top on the list may be the deductibility of businesses expenses paid with Paycheck Protection Program loans. This was Congress’s original intention and the new stimulus deal remedies the problem. It’s great news for anyone with a current PPP loan.

Each state would now have to act to allow these expenses to be deductible on your state income taxes, as well. We’ll be following the situation in all the many states where our clients are located and will keep you up to date.