No one willingly leaves money on the table—or at least we’d like to think that it’s the case. You have other priorities vying for your attention, but there are thousands of dollars at stake for your business for each employee that you employed in 2020 and 2021. Although all employers can benefit from the program, special emphasis was placed on helping small businesses. Those with less than 100 workers in 2020 or less than 500 workers in 2021 more easily qualify for funds than larger businesses.

If you’re not certain that employee retention credits (ERC) were taken for every quarter that your business or nonprofit qualified for them, take the time now to understand the program and begin the process of capturing all the funds available to help your business survive and grow.

 

What is the Employee Retention Credit?

In March 2020, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law to provide relief to employers that were being negatively impacted by COVID-19. The 335-page document covers a lot of ground but within Section 2301, employee retention credits were established to aid businesses that were subject to closure or otherwise impacted financially due to the pandemic.

The CARES Act initially set up ERC for the 2020 calendar year, then subsequent legislative acts modified and extended ERC into 2021. These refundable credits were available to be captured within your quarterly Form 941 returns, however, if they weren’t taken, amended returns can be filed for a limited time.

How Much is the Employee Retention Credit?

Employers are allowed to take employee retention credits for up to $5,000 per employee per year for 2020 and up to $7,000 per quarter for 2021. Determining the exact amount of the credit for qualified businesses takes some effort and is calculated differently for 2021 than it was for 2020.

The ERC program ended for most businesses at the end of the third quarter in 2021 on September 30, 2021. Recovery startup businesses are the exception. They may claim ERC for wages paid through December 31, 2021.

How is the ERC calculated?

For 2020: 

• The credit is limited to $5,000 for the whole year for each employee.
• The amount of the credit is 50% of the first $10,000 of qualified wages.
• For employers with less than 100 employees, the credit is allowed for all employees during the qualifying period.
• For employers with more than 100 employees, only wages that were paid for the time the employees were not working are included during the qualifying period.

For 2021:

• The credit increased significantly to $7,000 for each quarter for each employee.
• The amount of the credit is 70% of the first $10,000 of qualified wages during the quarter.
• The employee limit was increased from 100 employees to 500 employees.
• For employers with less than 500 employees, the credit is allowed for all employees during the qualifying period.
• For employers with more than 500 employees, only wages that were paid for the time the employees were not working are included during the qualifying period.

 

Does your Business or Nonprofit Qualify for ERC Credits?

There are two primary ways to qualify for ERC and they vary by year. Exceptions exist for those who did not have employees in 2019, who started their business after February 15, 2020, and for certain government entities.

• The organization was required to shut down—either fully or partially—due to a government order due to COVID-19 in any quarter OR
• They incurred a significant decline in gross receipts in any quarter compared to the same—or an adjacent—quarter in 2019.

 

Nonprofits may qualify for ERC if they were impacted by lockdown or quarantine requirements. And as with most IRS and government regulations, what seems simple, can get complex very quickly. Two quick examples: 1) the definition of “decline in gross receipts” changes depending on the coverage year and 2) companies may interpret the point where the headcount is taken differently.

Confidence Check

If you’re confident that your business has captured all the Employee Retention Credits that it is entitled to, we applaud you. If you have some doubt about whether you’ve received all the benefits of the ERC that your organization is entitled to (or you know you haven’t), please reach out to a BKM Sowan Horan professional to help you take advantage of this opportunity before its availability ends.

The U.S. Securities and Exchange Commission (SEC) has publicly stated that advisory fees and how fees are assessed, calculated, and disclosed to potential investors in the offering memorandums or financial statements will be an area of focus for 2022.

In November 2021, the SEC Division of Examination issued a Risk Alert dealing with deficiencies noted in the examination of several hundred retail advisors. The SEC Staff believe that the issue arose because of poor policies and procedures over the advisory fee calculation and billing area. Numerous errors in the calculation, and disclosure-related issues, were discovered in the advisory fee area.

In October 2021, after a separate series of examinations of advisors to registered funds, the SEC Staff observed again what they believe are poor policies and procedures over the allocation of fees and expenses from the advisor to the funds. The Staff seemed to have concluded that the discrepancies in the allocation and disclosure of fees and expenses were failures in the compliance programs employed by the advisor.

While private fund managers may not believe that these risks relate to them, you should think again. One of Chairman Gary Gensler’s comments was that fees in the registered fund’s space have come down due to competition while advisor fees in private funds are still working off the old “2 and 20 model”. Hence, he is asking the SEC Staff to focus on the transparency of advisory fee arrangements thinking that transparency will encourage more competition among fund managers.

In preparation for year-end, we are recommending those fund managers consider the following steps:

• Review your disclosures and assure that the fees assessed are consistent with your offering memorandums and Form ADV Part II Brochure.
• Review the policies and procedures over advisory fee billings and disclosures in your offering memorandums and financial statements.
• Test your calculations and that the design and application of such calculations are correct.
• Consider the appropriateness of updating SEC disclosures of side letter arrangements, if any.

For your convenience, click below for each of the links to the SEC proposed rules:

• https://www.sec.gov/rules/proposed/2022/ia-5955.pdf
• https://www.sec.gov/rules/proposed/2022/ia-5950.pdf

For a deeper discussion, contact either Richard Sowan or Amber Rhodes:

1. Richard J. Sowan, Managing Partner 214-545-3971
2. Amber Rhodes, Assurance Director 214-545-3982

The Internal Revenue Service (IRS) adjusts many tax provisions for inflation annually to prevent taxpayers from being pushed into higher income tax brackets or to have a reduced value from credits and deductions due to inflation instead of any increase in real income.

As of the passing of the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.

The new inflation adjustments are for tax year 2022, for which taxpayers will file tax returns in early 2023.

2022 Federal Income Tax Brackets and Rates

In 2022, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows. There are seven federal income tax rates in 2022: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. The top marginal income tax rate of 37 percent will hit taxpayers with taxable income above $539,900 for single filers and above $647,850 for married couples filing jointly.

2022 Tax Brackets for Single Filers, Married Couples Filing Jointly, and Heads of Households

2022 Tax Rate	For Single Filers	For Married Individuals Filing Joint Returns	For Heads of Households
10%	$0 to $10,275	$0 to $20,550	$0 to $14,650
12%	$10,275 to $41,775	$20,550 to $83,550	$14,650 to $55,900
22%	$41,775 to $89,075	$83,550 to $178,150	$55,900 to $89,050
24%	$89,075 to $170,050	$178,150 to $340,100	$89,050 to $170,050
32%	$170,050 to $215,950	$340,100 to $431,900	$170,050 to $215,950
35%	$215,950 to $539,900	$431,900 to $647,850	$215,950 to $539,900
37%	$539,900 or more	$647,850 or more	$539,900 or more

Source: Internal Revenue Service

2022 Standard Deduction and Personal Exemption

The standard deduction will increase by $400 for single filers and by $800 for joint filers.

The personal exemption for 2022 remains at $0 (eliminating the personal exemption was part of the Tax Cuts and Jobs Act of 2017 (TCJA).

2022 Standard Deduction

Filing Status	Deduction Amount
Single	$12,950
Married Filing Jointly	$25,900
Head of Household	$19,400

Source: Internal Revenue Service

2022 Alternative Minimum Tax (AMT)

The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding the individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.

The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.

The AMT exemption amount for 2022 is $75,900 for singles and $118,100 for married couples filing jointly.

2022 Alternative Minimum Tax (AMT) Exemptions

Filing Status	Exemption Amount
Unmarried Individuals	$75,900
Married Filing Jointly	$118,100

Source: Internal Revenue Service

In 2022, the 28 percent AMT rate applies to excess AMTI of $206,100 for all taxpayers ($103,050 for married couples filing separate returns).

AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches $539,900 for single filers and $1,079,800 for married taxpayers filing jointly.

2022 Alternative Minimum Tax (AMT) Exemption Phaseout Thresholds

Filing Status	Threshold
Unmarried Individuals	$539,900
Married Filing Jointly	$1,079,800

Source: Internal Revenue Service

2022 Earned Income Tax Credit (EITC)

The maximum Earned Income Tax Credit (EITC) in 2022 for single and joint filers is $560 if the filer has no children. The maximum credit is $3,733 for one child, $6,164 for two children, and $6,935 for three or more children.

2022 Earned Income Tax Credit (EITC) Parameters

Filing Status		No Children	One Child	Two Children	Three or More Children
Single or Head of Household	Income at Max Credit	$7,320	$10,980	$15,410	$15,410
	Maximum Credit	$560	$3,733	$6,164	$6,935
	Phaseout Begins	$9,160	$20,130	$20,130	$20,130
	Phaseout Ends (Credit Equals Zero)	$16,480	$43,492	$49,399	$53,057
Married Filing Jointly	Income at Max Credit	$7,320	$10,980	$15,410	$15,410
	Maximum Credit	$560	$3,733	$6,164	$6,935
	Phaseout Begins	$15,920	$26,260	$26,260	$26,260
	Phaseout Ends (Credit Equals Zero)	$22,610	$49,622	$55,529	$59,187

Source: Internal Revenue Service

2022 Child Tax Credit

The maximum Child Tax Credit is $2,000 per qualifying child and is not adjusted for inflation. The refundable portion of the Child Tax Credit is adjusted for inflation and will increase from $1,400 to $1,500 for 2022.

2022 Capital Gains Tax Rates & Brackets (Long-term Capital Gains)

Long-term capital gains are taxed using different brackets and rates than ordinary income.

2022 Capital Gains Tax Brackets

	For Unmarried Individuals, Taxable Income Over	For Married Individuals Filing Joint Returns, Taxable Income Over	For Heads of Households, Taxable Income Over
0%	$0	$0	$0
15%	$41,675	$83,350	$55,800
20%	$459,750	$517,200	$488,500

Source: Internal Revenue Service

2022 Qualified Business Income Deduction (Sec. 199A)

The Tax Cuts and Jobs Act of 2017 (TCJA) includes a 20 percent deduction for pass-through businesses. Limits on the deduction begin phasing in for taxpayers with income above $170,050 (or $340,100 for joint filers) in 2022.

2022 Qualified Business Income Deduction Thresholds

Filing Status	Threshold
Unmarried Individuals	$170,050
Married Filing Jointly	$340,100

Source: Internal Revenue Service

2022 Annual Exclusion for Gifts

In 2022, the first $16,000 of gifts to any person are excluded from tax, up from $15,000. The exclusion is increased to $164,000 from $159,000 for gifts to spouses who are not citizens of the United States.