On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the Act), which updates several previously enacted tax benefits and credits passed in response to COVID-19. In a much-anticipated change, the Act permits deductions for otherwise deductible expenditures that result in forgiveness of a Paycheck Protection Program (PPP) loan under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition, the Act generally expands eligibility for COVID-19-related payroll tax credits, including those provided for by the Families First Coronavirus Response Act (FFCRA) and the Employee Retention Tax Credit (ERTC) provisions of the CARES Act.

Deductibility of PPP Loan Expenditures

The Act overrides prior IRS guidance (Notice 2020-32, released on April 30, 2020) that had provided no deduction would be allowed for an otherwise deductible expenditure if the payment of the expenditure results in forgiveness of a PPP loan (see prior coverage here). At the time Notice 2020-32 was released, leading members of the House Ways and Means Committee and Senate Finance Committee expressed their disappointment with the conclusion. The Act provides that forgiveness of a PPP loan will not result in a denial of a deduction or a basis increase, or a reduction in tax attributes of the borrower, if such deduction, basis increase, or tax attribute is otherwise permitted by the Internal Revenue Code.

Payroll Tax Credits

The FFCRA included a number of refundable payroll tax credits for the cost of paid sick leave and paid family leave for certain small businesses (see prior coverage here). These payroll tax credits were generally available only for wages paid through December 31, 2020. The Act extends the applicability of these credits to wages paid through March 31, 2021.

The ERTC is a refundable payroll tax credit available for businesses that retain employees during the COVID-19 uncertainty (see prior coverage here). The Act materially broadens the amount and availability of the ERTC in a number of ways, including the following:

• The period for which the ERTC is available is extended through June 30, 2021 (from December 31, 2020).
• The amount of the credit is increased from 50 percent of qualified wages to 70 percent, and the per-employee limitation is increased from $10,000 for all quarters to $10,000 per calendar quarter.
• The Act expands the scope of employers that are eligible for the ERTC:
  • One triggering condition is that an employer experience a "significant decline" in gross receipts in a calendar quarter compared to the same quarter in 2019. The threshold for a "significant decline" in gross receipts is reduced from a 50 percent drop year-over-year to a 20 percent drop year-over-year. In addition, employers may elect to use the prior quarter's gross receipts to determine eligibility.
  • The Act includes rules allowing companies that were not in existence for all or part of 2019 to take advantage of the ERTC.
  • Under the CARES Act, "small employers" are eligible for the ERTC for any wages paid during a closure or a period of significant decline in gross receipts, rather than only for wages paid with respect to employees who are not providing services. The Act raises the threshold to qualify as a "small employer" for this purpose from 100 employees to 500 employees.
• Under the CARES Act, an employer that receives a PPP loan is not eligible to claim the ERTC. The Act revises the CARES Act to provide that an employer that receives a PPP loan is eligible to claim the ERTC, but only for payroll costs that are not taken into account toward forgiveness of a PPP loan.

On August 8, 2020, the President issued a Presidential Memorandum directing the Secretary of the Treasury to defer the withholding, deposit, and payment of certain payroll tax obligations. On August 28, 2020, the IRS released Notice 2020-65, which provided that employers could defer the withholding and payment of the employee's portion of certain payroll taxes for certain employees that would otherwise be due between September 1, 2020, and December 31, 2020, and pay such taxes ratably during the period between January 1, 2021, and April 30, 2021, without penalties and interest. The Act extends this interest- and penalty-free period to the period between January 1, 2021, and December 31, 2021.