By James J. DeLuca, CPA, MST
Senior Tax Manager

The recently enacted Consolidated Appropriations Act makes several modifications to the rules applying to the Paycheck Protection Program (PPP) and to the Employee Retention Tax Credit (ERTC) originally provided under the CARES Act. As a result, businesses will be able to deduct certain costs on their tax returns that previously were not deductible and will have access to expanded tax credits.

One of the most significant provisions removes the restriction that prevents employers that obtained PPP loans from claiming the Employee Retention Tax Credit. Now, employers can claim the ERTC on any eligible wages not used to support PPP loan forgiveness. In other words, if you received a PPP loan, you cannot apply the ERTC against wages that were paid with the PPP funds. However, the new law allows you to utilize the credit and apply it against wages and healthcare benefit costs that were not paid for with PPP funds.

Additionally, the ERTC itself has been extended through June 30, 2021, and increased to 70% of up to $10,000 of qualified wages paid per quarter in 2021, up from the original 50%. This will allow employers to claim a maximum of up to $14,000 per employee in 2021 if they are eligible in both of the first two quarters. 

These retroactive changes to the ERTC create an immediate refund opportunity for many business owners, and those with PPP loans should review how their payroll costs might be covered by both the PPP and the ERTC to determine which provision to apply. 

Congress passed the massive Consolidated Appropriations Act in the waning days of 2020, and it was signed into law on December 27, 2020. Besides many measures extending or expanding Covid-19 relief programs and tax incentives, the 5,000-plus page law includes hundreds of provisions unrelated to the pandemic. With the 116th Congress about to expire, congressional leaders saw the must-pass Covid-19 stimulus bill as a vehicle to carry many other bills over the finish line.

Some of the more prominent provisions relating to business include:

• A return to 100% deductibility for business meals purchased from restaurants. The Tax Cuts and Jobs Act of 2017 had halved the business meal deduction to 50%, but Congress boosted it back to the previous 100% level – just for 2021 and 2022 – to support the restaurant industry, which continues to suffer significant losses due to Covid-19.
• The extension and expansion of the ERTC, which was originally created by the CARES Act. Besides the extension through June 30, 2021, and the increased amount of the credit, the legislation expands the eligibility for the credit by lowering the threshold of gross receipt losses businesses must demonstrate to utilize it.
• The extension through 2025 of the Work Opportunity Tax Credit (WOTC), which had been slated to expire December 31, 2020. The WOTC incentivizes employers to hire veterans, workers who have experienced long periods of unemployment and other targeted groups.
• The extension through 2025 of the New Markets Tax Credit. Created by the Tax Cuts and Jobs Act, this credit stimulates community development by incentivizing investment in distressed communities.
• The 179D Energy Efficient Commercial Building deduction was made permanent, and the 45L Energy Efficient Home Credit was extended to the end of 2021. Both had been slated to expire December 31, 2020.
• Clarification that forgiveness of Economic Injury Disaster Loans EIDL and Emergency EIDL grants is not taxable income and expenses paid with these funds are deductible.
• The extension of the Family and Medical Leave tax credit through 2025.
• The extension through March 31, 2021, of payroll tax credits for paid leave required under the Families First Coronavirus Response Act.

This is just a brief look at the business-related provisions of this complex new law. We will keep you informed as more provisions become understood and as the IRS and other federal agencies issue guidance as to how to comply with the law. Please contact us if you have any questions.