Preston co. which has a taxable payroll of

If it has more than employees, only wages paid to employees while they were not working or who had a reduction in hours during the shutdown period are qualified wages. Wages paid to employees for services performed e. From May 1, through Sept. Therefore, any wages or healthcare expenses paid to employees that ABC could not yet bring back to work would be eligible wages. Wages for excess hours not worked with respect to employees who were brought back below their normal level of work e.

For purposes of determining whether there are more than employees, the rules of Section H apply. These are the same rules that apply for the purposes of determining the number of employees under the Affordable Care Act provisions.

In general, only full-time employees are counted which includes an employee who, with respect to any calendar month in , had an average of at least 30 hours of service per week or hours of service in the month.

An employer that operated its business for the entire 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 and dividing that number by Employers that began their business in only count full months that they were in operation and those that began in use a similar rule but applied to current year employees.

In counting employees, the aggregation rules of Sections 52 a , b , m , o also apply. Therefore, all entities treated as a single employer under those sections are considered one employer for the employee retention credit. These aggregation rules are the same rules that apply in determining whether a business is a small business for various other income tax accounting concepts, including the exemption from the business interest limitation of Section j and whether the business qualifies for the small business exception which would allow the cash receipts and disbursements method of accounting to be followed.

Even though these rules can be very complex, many businesses will have already made these determinations for other purposes and may simply need to refer back to previous analyses. The retention credit is a refundable payroll tax credit. An employer is permitted to retain payroll taxes and withholdings up to the amount of the credit in order to take advantage of the credit contemporaneously with when wages are paid. An employer is permitted to retain any amounts that would otherwise be due to the federal government, which consists of employee and employer Social Security taxes, employee and employer Medicare taxes, and employee federal income tax withholdings.

The retained amounts can be related to any wages paid for the period and do not need to relate to the qualified wages. To the extent that there are not enough withholdings to cover the full amount of the credit, the employer can either 1 wait until the end of the quarter and request a cash refund with its quarterly payroll tax return, or 2 file Form to obtain an advance refund for the credit in the current quarter.

Advanced payments of credits were broadly available for the credit. However, for the credit this has been restricted to employers that did not exceed the employee threshold in For this purpose, special rules apply to seasonal employers and those that were not in existence in The employee retention credit can also be claimed retroactively for a prior quarter by filing an amended quarterly payroll tax return.

The amended filing option may be particularly helpful for employers that obtained PPP loans in and are retroactively eligible for the retention credit in that year. In addition, this may be helpful in cases where an employer is unsure about its eligibility during the calendar quarter and simply wishes to wait until the quarter has concluded to revisit retention credit opportunities. The IRS has issued Notice , providing that an employer will not be subject to any failure to deposit penalties with respect to payroll taxes retained in an amount equal to the anticipated credit.

Employers should consider whether the possibility of failure to deposit penalties being assessed on any required credit repayments would be mitigated by requesting advance payments of credits rather than retaining payroll taxes.

Employers without good data to calculate credits or that are at a high risk of becoming disqualified may also consider only taking advantage of the credit by requesting refunds on quarterly payroll tax filings to potentially avoid the imposition of additional penalties. Further penalty relief guidance is expected from the IRS to clarify these matters.

In any case, the credit is reported and reconciled on each quarterly payroll tax filing. Retroactive claims for any prior calendar quarter will be claimed through the filing of an amended payroll tax filing e.

The common-law employer of the employee who is paid qualified wages is entitled to the retention credit. This is true regardless of whether the employer uses a third-party payer such as a payroll service provider, professional employer organization, certified professional employer organization, or Section Agent to report and pay federal employment taxes.

A common-law employer that is a client of a third-party payer can retain applicable withholding taxes that the third-party payer would have otherwise collected. If the third-party payer files aggregate payroll tax filings for multiple clients, it would reconcile all such amounts from all clients on that filing. A common-law employer is also permitted to request the advance payment of the retention credit on Form even if its employment tax return information is included on the aggregate employment tax return of a third-party payer.

The employer is required to provide the third-party payer copies of the Form s so it can reconcile the credits on the aggregate employment tax return.

Still, the business is permitted to obtain the full cash benefit of the credit through the payroll tax system, and any additional income tax is paid through estimated taxes, which may not be due until much later than when the credit is received.

The impact of this income adjustment may also be deferred to the extent that in it reduces net operating losses that cannot be carried back because income does not exist in the previous five years, or in it reduces net operating losses that are no longer permitted to be carried back.

State income tax consequences from receiving the credit will vary. The IRS has issued Notice , discussing how employers can retain payroll tax and other withholdings without being penalized, a frequently asked question list discussing a variety of rules, Form and its instructions discussing advance repayments, and an updated Form and its instructions.

It is unclear whether the IRS will undertake a more formal guidance project for the retention credit, but we would expect future guidance to closely follow the logic of these FAQs. Our employee retention credit resource center and the IRS Coronavirus Tax Relief site will continue to be updated with all guidance on the employee retention credit. Please note that this program has not been extended for deposits on payroll paid after Dec.

The payroll tax deferral could be calculated prior to calculating any of the other payroll tax credits discussed in this alert.

By calculating the deferral-amount first, an employer was able to maximize the cash flow from each of these incentives. If the tax credits were applied first, the employer would have absorbed most or all of the amount that would have been eligible for deferral, leaving little or nothing left to defer. The payroll tax deferral was initially reported on the second- quarter payroll tax filings e. The IRS forms and instructions have been updated to report this deferral.

The IRS indicated that only amounts that had not yet been paid were eligible to be deferred. Therefore, employers were not permitted to catch-up on deferrals that they may have been eligible for at a later date by claiming a credit on a payroll tax filing for amounts previously paid even though the employer may have been eligible for deferral on that amount. It was critical that employers closely scrutinized any payroll tax filings, including those done by a third-party payer, to ensure that they were timely taking advantage of this provision.

Likewise, an equivalent portion of self-employment taxes was eligible for deferral. The self-employed individual was permitted to adjust estimated tax payments for to take this into account. The same Payroll Protection Program limitations applies to self-employed individuals. Similar rules apply whereby amounts cannot be deferred after they have already been paid. However, as self-employment taxes are paid via estimated tax payments but are not separately distinguished as payments are made, the last tax dollars due for the year are deemed to be the self-employment tax.

Therefore, if a self-employed individual is fully paid in with its tax return, it will not be eligible for any deferral. In general, employers will only be able to deduct these payroll taxes against their taxable income in the year that they are paid. However, employers wishing to accelerate tax deductions for these deferred payroll taxes into a year earlier than or may consider advanced payment options. The paid sick leave credit is also a refundable payroll tax credit similar to the employee retention credit.

Qualified sick leave wages only included those wages required to be paid by an employer under the FFCRA. An employer who voluntarily paid sick leave, paid sick leave prior to the April 1, effective date, or paid an amount in excess of the required amount was not eligible for credits on those amounts. The CAA provided a narrow extension of this credit program into Specifically, an employer is eligible for the credit on qualified sick leave wages that would have been required to be paid if the FFCRA program had been extended until March 31, The CAA did not extend the mandate to provide paid sick leave in Thus, the credit is available for employers that choose to extend such leave and would have been subject to the mandate if the program had been extended.

Please see Example 11 below for clarification. In addition to the credit, employers are not subject to payroll taxes on qualified wages. The 6. In effect, this credit is meant to entirely make the employer whole with respect to those wages that the FFCRA required it to pay. These Social Security and Medicare tax provisions are applicable to all employers in that were required to provide paid sick leave. However, for , those provisions only apply to employers that are eligible for the payroll tax credit.

Thus, for example, government employers cannot exclude wages from the Social Security taxes. In general, only employers with less than employees were required to provide such sick leave. This is a different approach to counting and aggregation than applies for the employee retention credit.

These circumstances included employees that 1 were subject to a federal, state, or local quarantine isolation order related to COVID; 2 had been advised by a healthcare provider to self-quarantine due to concerns related to COVID; or 3 were experiencing symptoms of COVID and were seeking a medical diagnosis. In both circumstances, wages were only required to be paid and employers were eligible for the credit with respect to a maximum of 10 days or 80 hours for all of These per employee amounts were not increased for determining credit eligibility in Therefore, an employer that provided a full days of FFCRA paid sick leave to an employee in is ineligible to obtain a credit for additional paid sick leave since the maximum required leave has already been provided.

The amount of the credit is required to be included in the taxable income of the employer, which effectively negates the deduction claimed for the underlying wage and healthcare expenses.

The credit is not allowed to the federal government, the government of any state or political subdivision, or any of their respective agencies or instrumentalities. However, not-for-profit entities are eligible for the credit.

Wages included in this credit may not be included in any other employment-related credits such as the Work Opportunity Tax Credit or the employee retention credit. An employer is able to obtain cash with respect to the credit using the same procedures as with the employee retention credit discussed above. That is, it can retain any payroll taxes and withholdings otherwise required to be deposited in an amount up to its anticipated credit including payroll taxes and withholdings on amounts unrelated to qualified sick leave.

Common-law employers using third-party payers are eligible for the credit. See the discussion on the employee retention credit above for further details. The IRS has issued a detailed FAQ on this credit, Form and its instructions discussing advance repayments, and updated Form and its instructions. This credit is also available for paid family leave that is provided during the first quarter of to the extent that the employer would have been required to provide such leave if the program had been extended until March 31, Similar to the paid sick leave provisions discussed above, the mandate to provide paid family leave expired at the end of All of the provisions applicable to the sick leave credit discussed above apply to the paid family leave credit as well, including employee counting and aggregation, the method in which the credit is converted to cash, the fact that qualified wages are not subject to employer Social Security taxes, and the treatment of common-law employers and third-party payers.

The calculations in Examples 12 and 13 above would work in the same manner for the family leave credit as well.

The IRS guidance listed above with respect to the sick leave credit also covers the family leave credit. A final payroll tax-based program implemented during provided a deferral opportunity for employee payroll taxes. While the employer would have implemented this program, it is the employee that retained the benefit of the deferred taxes, not the employer.

This program was initially implemented through the issuance of Notice and was subsequently modified by the CAA and Notice Under this program, employees could retain the 6.

The deferred payroll taxes are then required to be repaid between Jan. Notice indicates that the repayment is completed through ratable withholdings from paychecks during the repayment period. Any deferred taxes not paid by Jan. Participation in the deferral program required an affirmative choice by both the employer and the employee. See this article for further details.

Then take action. Financial Services. Real Estate. Commercial Real Estate. International Services. Risk Management. Transaction Advisory Services. Wealth Management. View Webinars View Events. Contact Subscribe. International Locations U. February 19, Article 30 min read. During it was updated to address additional guidance from the IRS related to the payroll tax deferral and the employee retention credit, as well as changes made by the PPP Flexibility Act of The most recent edit, published on Feb.

Background information on legislative developments Two main pieces of legislation from provide several tax incentives for employers through the payroll tax system. Employer payroll tax deferrals: Employers were eligible to defer an unlimited amount of employer Social Security taxes on wages paid between March 12, and December 31, The deferred taxes will be paid in two equal installments at the end of and Payroll credit for required sick leave: A refundable payroll tax credit is available in an amount equal to any payments of the new required sick leave.

The sick leave mandate only applied to , but the credit extends into on a limited basis. Payroll credit for required family leave: A refundable payroll tax credit is also available in an amount equal to any payments of the new required family leave. The paid family leave mandate similarly expired at the end of , but the credit extends into on a limited basis.

Employee payroll tax deferrals: Employees were able to defer their share of Social Security taxes on wages not exceeding an income threshold that were paid between Sept. The deferred taxes are repaid through additional withholding during Employee retention credit — and Employer payroll tax deferrals — only Payroll credit for required paid sick leave — and Payroll credit for required paid family leave — and Employee payroll tax deferral — only Summary of COVID employer tax incentives Employee retention credit — and The CARES Act created a new employee retention credit to incentivize employers to continue paying employees adversely impacted by the COVID outbreak.

Entities eligible for the retention credit Entities which are either 1 carrying on a trade or business during or 2 a Section c organization are potentially entitled to the credit.

The entity suffers a decline in gross receipts for a calendar quarter when compared to the same quarter in the calendar year. These tests are discussed in greater detail below. Reduction in gross receipts An employer can also be an eligible employer if it meets the gross receipts test even if its operations are not fully or partially suspended.

These notes should be classified on the balance sheet of Lance Company as a. Which of the following is not true about the discount on short-term notes payable? The Discount on Notes Payable account has a debit balance. The Discount on Notes Payable account should be reported as an asset on the balance sheet.

When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. All of these are true. Which of the following may be a current liability? Withheld Income Taxes b. Deposits Received from Customers c. Deferred Revenue d. All of these Which of the following items is a current liability? Bonds for which there is an adequate sinking fund properly classified as a long-term investment due in three months.

Bonds due in three years. Bonds for which there is an adequate appropriation of retained earnings due in eleven months. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue. Which of the following should not be included in the current liabilities section of the balance sheet? Trade notes payable b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable d. All of these are included Preferred dividends in arrears b.

A dividend payable in the form of additional shares of stock c. A cash dividend payable to preferred stockholders d. Stock dividends distributable should be classified on the a. Current Liabilities and Contingencies 13 - 3 Of the following items, the only one which should not be classified as a current liability is a.

An account which would be classified as a current liability is a. Which of the following is a characteristic of a current liability but not a long-term liability? Unavoidable obligation. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Transaction or other event creating the liability has already occurred. Which of the following is not considered a part of the definition of a liability? Why is the liability section of the balance sheet of primary importance to bankers?

To evaluate the entity's credit quality. To assist in understanding the entity's liquidity. To better understand sources of repayment. To evaluate operating efficiency. What is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within the company's operating cycle or one year if less. Current liabilities are the result of operating transactions. Current liabilities can't exceed the amount incurred in one operating cycle.

There is no relationship between the two. What is the relationship between present value and the concept of a liability? Present values are used to measure certain liabilities. Present values are not used to measure liabilities. Present values are used to measure all liabilities. Present values are only used to measure long-term liabilities.

What is a discount as it relates to zero-interest-bearing notes payable? The discount represents the lender's costs to underwrite the note.

The discount represents the credit quality of the borrower. The discount represents the cost of borrowing. The discount represents the allowance for uncollectible amounts. Where is debt callable by the creditor reported on the debtor's financial statements?

Long-term liability. Current liability if the creditor intends to call the debt within the year, otherwise a long- term liability. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability. Current liability. Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Intend to refinance the obligation on a long-term basis. Obligation must be due with one year. Demonstrate the ability to complete the refinancing. Subsequently refinance the obligation on a long-term basis. Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?

Management indicated that they are going to refinance the obligation. Actually refinance the obligation. Have capacity under existing financing agreements that can be used to refinance the obligation. Enter into a financing agreement that clearly permits the entity to refinance the obligation. A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation? Record a liability for cumulative amount of preferred stock dividends not declared.

Disclose the amount of the dividends in arrears. Record a liability for the current year's dividends only. No disclosure or recognition is required. Which of the following situations may give rise to unearned revenue? Providing trade credit to customers.

Selling inventory. Selling magazine subscriptions. Providing manufacturer warranties. Which of the following statements is correct? A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.

A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued. None of these. Current Liabilities and Contingencies 13 - 5 The ability to consummate the refinancing of a short-term obligation may be demon- strated by a.

Which of the following statements is false? A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. Cash dividends should be recorded as a liability when they are declared by the board of directors.

Under the cash basis method, warranty costs are charged to expense as they are paid. FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

Which of the following is not a correct statement about sales taxes? Sales taxes are an expense of the seller. Many companies record sales taxes in the sales account. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except a. In accounting for compensated absences, the difference between vested rights and accumulated rights is a.

An employee's net or take-home pay is determined by gross earnings minus amounts for income tax withholdings and the employee's a. Which of these is not included in an employer's payroll tax expense? Federal unemployment taxes c. State unemployment taxes d. Federal income taxes Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

The obligation relates to the rights that vest or accumulate. Payment of the compensation is probable. The obligation is attributable to employee services already performed. All of these are conditions for the accrual. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should a.

The amount of the liability for compensated absences should be based on 1. Either 1 or 2 is acceptable. What are compensated absences? Unpaid time off. A form of healthcare. Payroll deductions. Paid time off. Which gives rise to the requirement to accrue a liability for the cost of compensated absences? Payment is probable. Employee rights vest or accumulate. Amount can be reasonably estimated. All of the above. Under what conditions is an employer required to accrue a liability for sick pay?

Sick pay benefits can be reasonably estimated. Sick pay benefits vest. Sick pay benefits accumulate.

Current Liabilities and Contingencies 13 - 7 Which of the following taxes does not represent a common payroll deduction? Federal income taxes.

FICA taxes. State unemployment taxes. State income taxes. What is a contingency? An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.

An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur. When is a contingent liability recorded? When the amount can be reasonably estimated. When the future events are probable to occur and the amount can be reasonably estimated.

When the future events are probable to occur. When the future events will possibly occur and the amount can be reasonably estimated. Which of the following is an example of a contingent liability? Obligations related to product warranties.

Possible receipt from a litigation settlement. Pending court case with a probable favorable outcome. Tax loss carryforwards. Which of the following terms is associated with recording a contingent liability? Which of the following is the proper way to report a gain contingency? As an accrued amount. As deferred revenue.

As an account receivable with additional disclosure explaining the nature of the contingency. As a disclosure only. Which of the following contingencies need not be disclosed in the financial statements or the notes thereto? Probable losses not reasonably estimable b. Environmental liabilities that cannot be reasonably estimated c. Guarantees of indebtedness of others d.

All of these must be disclosed. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? Amount of loss is reasonably estimable and event occurs infrequently. Amount of loss is reasonably estimable and occurrence of event is probable. Event is unusual in nature and occurrence of event is probable. Event is unusual in nature and event occurs infrequently.

Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, , due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire.

Beck appears inclined to accept the Railroad's offer. The Railroad's financial statements should include the following related to the incident: a. A contingency can be accrued when a. A contingent liability a. A company is legally obligated for the costs associated with the retirement of a long-lived asset a.

Current Liabilities and Contingencies 13 - 9 Assume that a manufacturing corporation has 1 good quality control, 2 a one-year operating cycle, 3 a relatively stable pattern of annual sales, and 4 a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs.

Any liability for the warranty a. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months.

What accounting recognition, if any, should be accorded this situation? No recognition b. Note disclosure only c. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be a. Espinosa Co. The loss amount can only be reasonably estimated within a range of outcomes.

No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be a. Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and a.

Use of the accrual method in accounting for product warranty costs a. Which of the following best describes the accrual method of accounting for warranty costs?

Expensed when paid. Expensed when warranty claims are certain. Expensed based on estimate in year of sale. Expensed when incurred. Which of the following best describes the cash-basis method of accounting for warranty costs?

Expensed when liability is accrued. Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach? Estimated liability under warranties. Warranty expense.