The Consolidated Appropriations Act of 2021 (CAA), signed into law on December 27, 2020, is a further legislative response to the coronavirus (COVID-19) pandemic. The more than 5,500 page law contains numerous provisions that relate to payroll. Some highlights are listed below.

Employee Retention Credit Expansion and Extension

Under the CARES Act, the employee retention credit (ERC) provides a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant (50%) reduction in gross receipts. Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits.

ERC for 2020

The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:

• Employers that received PPP loans may qualify for the ERC with respect to wages that are not paid with proceeds from a forgiven PPP loan.
• The Act clarifies how tax-exempt organizations determine “gross receipts.”
• Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.

Insights

• Employers that received a PPP loan and that were previously prohibited from claiming the ERC may now retroactively claim the ERC for 2020.
• With respect to the retroactive measures in the Act, employers that paid qualified wages in Q1 through Q3 2020 may elect to treat the qualified wages as being paid in Q4 2020. This should allow employers to claim the ERC in connection with such qualified wages via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an amended return (IRS Form 941-X) for the prior quarter(s) in 2020.

Under the CARES Act, the employee retention credit (ERC) provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee.

Section 206 and 207 of the TCDTR extends and expands the following ERC provisions from January 1, 2021 through June 30, 2021: (1) increases the ERC rate from 50% to 70% of qualified wages; (2) expands the eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility; (3) increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter; (4) increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees; (5) allows certain public instrumentalities to claim the credit; (6) removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers; (6) allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year; and (7) provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.

Paycheck Protection Program Second Draw Loans

The ACRR allows certain small businesses who received a Paycheck Protection Program (PPP) loan) and experienced a 25% reduction in gross receipts to take a second PPP loan of up to $2 million. These prior PPP borrowers must meet the following conditions to be eligible: (1) employ no more than 300 employees per physical location, (2) have or will use the full amount of their first PPP loan; and (3) show at least a 25% reduction in gross receipts in the first through third quarters of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021 are eligible to use gross receipts from the fourth quarter of 2020.

Eligible entities for the loans include for-profit businesses, certain non-profit organizations, housing cooperatives, veterans’ organizations, tribal businesses, self-employed individuals, sole proprietors, independent contractors, and small agricultural co-operatives.

Loan forgiveness. As with the first PPP loan, the second loan can be 100% forgivable if it is used for payroll costs (with some exceptions) of up to 60% and nonpayroll costs (i.e., rent, mortgage, interest and utilities) of up to 40%.

Application of exemption based on employee availability. The ACRR extends current safe harbors on restoring full-time employees and salaries and wages. Specifically, it applies the rule of reducing loan forgiveness for the borrower by reducing the number of employees retained and reducing employees’ salaries in excess of 25%.

Paycheck Protection Program Continuation

Under the CARES Act, a PPP loan is generally 100% forgivable if the loan is used to pay certain payroll and nonpayroll costs. PPP loan forgiveness doesn’t give rise to taxable income and the Internal Revenue Code generally doesn’t allow a taxpayer to deduct expenses that are paid with tax exempt income.

Section 276 of the CAA makes a clarification that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. This provision also says that deductions are allowed for otherwise deductible expenses paid with the proceeds of a PPP loan that is forgiven and that the tax basis and other attributes of the borrower’s assets will not be reduced as a result of the loan forgiveness. This is true as well for the second draw PPP loans.

Additional PPP loan expenses.  Section 304 provides additional allowable and forgivable uses for PPP funds such as covered: operations expenditures, property damage costs, supplier costs, and worker protection expenditures.

Definition of seasonal employer.  Section 315 defines a seasonal employer to be an eligible recipient which: (1) operates for no more than seven months in a year and (2) earned no more than 1/3 of its receipts in any six months in the prior calendar year.

Business Meals

Temporary allowance of full deduction for business meals.  Section 210 of the TCDTR amends Code Sec. 274(n)(2) to allow for full deduction of expenses for food and beverages paid or incurred to a restaurant after December 31, 2020 and prior to January 1, 2023. The credit was limited to 50% from December 31, 2017 through December 31, 2025.