On December 27, 2020, the President signed into law the Consolidated Appropriations Act, 2021 (the Act). The Act, among many other things, expands the employee retention tax credit and includes favorable changes to other employer-related tax provisions.

Revised and Expanded Retention Tax Credit

The Act extends and expands the availability of the retention tax credit through June 30, 2021; however, certain provisions of the Act apply only after December 31, 2020.

The Act amends the employee retention credit to be equal to 70% of qualified wages paid to employees after December 31, 2020 and prior to July 1, 2021.

During the first two quarters of 2021, a maximum of $10,000 in qualified wages for each employee per calendar quarter may be counted in determining the 70% credit (i.e., the maximum tax credit that can be claimed by an eligible employer in 2021 is $7,000 per employee per calendar quarter.)

With respect to a calendar quarter during this period (and during which an employer is carrying on a trade or business), the employer is eligible for the credit if:

• if the employer’s operations were fully or partially suspended due to orders from a governmental authority for specified reasons due to COVID-19; or
• the gross receipts of such employer for the calendar quarter are less than 80% of the gross receipts of such employer for the same calendar quarter of 2019, the employer is eligible for the credit that quarter. The Act provides a special rule that allows employers to determine gross receipts based on the prior calendar quarter.

For eligible employers that averaged 500 or fewer full-time employees, the tax credit available in 2021 is based on the qualified wages paid to all employees after December 31, 2020 and prior to July 1, 2021, regardless of whether the wages were paid for services performed.

For eligible employers that averaged more than 500 full-time employees, the credit is based on qualified wages paid to those employees not providing services due to the suspension of operations or decline in gross receipts.

The Act provides that qualified wages taken into account in determining the employee retention credit may not be counted as payroll costs under the Paycheck Protection Program (PPP), but that employers may elect not to have wages count as qualified wages for purposes of the employee retention tax credit. Of particular note, if a PPP loan is ultimately not forgiven, such election will not prevent the wages from counting as qualified wages for purposes of the employee retention credit. This means that employers who received PPP loans will remain eligible for the employee retention credit with respect to wages that are not counted as forgiven payroll costs under the PPP.

The Act clarifies that qualified wages include amounts paid to maintain a group health plan – only to the extent excluded from employees’ gross income – and such amounts count as qualified wages even if no cash wages are paid to employees.

Tax Treatment of Forgiveness of Covered Loans

The Internal Revenue Service (IRS) previously issued Notice 2020-32 in which it stated that no deduction is allowed for an eligible expense that is otherwise deductible if the payment of the eligible expense results in forgiveness of a covered PPP loan. The IRS then reaffirmed and elaborated on this position in Revenue Ruling 2020-27.

The Act reverses the IRS’ position by providing that no deduction may be denied, no tax attribute may be reduced and no basis increase may be denied due to the exclusion from gross income of debt forgiveness under the PPP. This right to a deduction applies to both existing and new loans under the PPP. This provision significantly increases the value of the forgiven PPP loans to employers.

Extension of Credits for Paid Sick and Family Leave

The Act extends the period during which credits for emergency paid sick leave and paid family leave under the Families First Coronavirus Response Act (FFCRA) are available until March 31, 2021. The credits are available as if the emergency paid sick leave and paid family leave provisions under the FFCRA.

Extension of Deferred Payroll Taxes

IRS Notice 2020-65 provided guidance on the employment tax deferral, with the due date for the withholding and payment of the employee’s share of Social Security taxes on certain wages being postponed until the period beginning on January 1, 2021 and ending on April 30, 2021. The Act extends the deadline for employees to repay such deferred taxes until December 31, 2021.

Temporary Allowance of Full Deduction for Business Meals

The Act allows a 100% deduction for business expenses for food or beverages provided by a restaurant that are paid or incurred between January 1, 2021 and December 31, 2022.

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