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On December 27 2020, then-President Trump signed the Consolidated Appropriations Act of 2021 (CAA). This comprehensive bill contained important changes related to PPP loans and a second round of PPP funding. In addition, the bill reformed the Employee Retention Tax Credit (ERTC) for the 2020 tax year and expanded its use beginning January 1, 2021. Along with these changes, the CAA enacted certain important business tax changes, as discussed below.
As outlined by the CARES Act, the ERTC was a credit of up to 50% of qualified wages paid to employees applied against employer-side social security taxes. The credit was available for up to $10,000 of qualified wages per employee for the entire life of the credit. When first enacted, the ERTC was in effect for wages paid starting March 12, 2020 and ending for wages paid after December 31, 2020.
Under the original provisions, an employer was eligible for the credit if, during any calendar quarter in 2020, the operation of the employer’s trade or business was fully or partially suspended due to orders from governmental authorities limiting commerce, travel, or group meetings due to COVID-19, or if the employer was within a period of significant decline in gross receipts. Qualified wages for an eligible employer with 100 or fewer employees included all wages paid to employees, but, if an employer had more than 100 full-time employees, qualified wages only included wages paid to employees when they were not working. In addition, an employer was deemed to be in a period of significant decline in gross receipts if the gross receipts in any calendar quarter in 2020 were less than 50% of the gross receipts in that same quarter in 2019. Importantly, however, in its original form, this credit was not available to an employer if they had also received a PPP loan.
Employers are now able to claim the ERTC even if they received a PPP loan
The CAA enacted changes to the ERTC as it existed for the year ending December 31, 2020. Specifically, effective for the year ending December 31, 2020 and forward, employers are able to claim the ERTC even if they received a PPP loan. Thus, employers who were previously ineligible to claim the credit due to obtaining a PPP loan may be able to qualify for the ERTC. The credit can be claimed by amending the quarterly payroll tax return for which the employer had qualifying wages, or by doing a catch-up on the fourth quarter payroll tax return for credits actually earned in earlier quarters.
However, employers should note that they cannot claim a credit for any wages paid with forgiven PPP loan proceeds. As a result, when applying for PPP loan forgiveness, PPP loan recipients may wish to utilize as many non-payroll costs as possible in order to increase their potential for an ERTC.
As described above, the ERTC, as originally enacted, expired for wages paid after December 31, 2020. However, the CAA extended the availability of the ERTC to wages paid through the first two quarters of 2021. In addition, the credit was increased to from 50% to 70% of qualified wages paid. The CAA also increased the limit per employee from $10,000 per year to $10,000 per quarter; thus, a maximum credit of $14,000 could be claimed per employee through the first two quarters of 2021.
Another important change was raising the employee threshold to 500 – after the changes enacted in the CAA, employers who have 500 or fewer employees can claim the credit for qualified wages for employees whether they are working or not.
These changes make the ERTC a robust tool for increasing cash flow during the ongoing COVID-19 pandemic.
Finally, the threshold for a significant decline in gross receipts was modified, such that an employer will be deemed to be in a period of significant decline in gross receipts if the gross receipts are less than 80% of gross receipts for the same quarter in 2019. Employers also have the option to look at gross receipts for the immediately preceding calendar quarter and compare that to the relevant quarter in 2019. For example, in order to qualify for first quarter in 2021, the employer could compare the first quarter of 2021 to the first quarter of 2019 OR the employer could compare the fourth quarter of 2020 to the fourth quarter of 2019. If the employer had less than 80% of gross receipts in either instance, the employer would be eligible for the ERTC. These changes make the ERTC a robust tool for increasing cash flow during the ongoing COVID-19 pandemic.
In addition to the changes to the ERTC, the CAA also made other changes to various business tax laws. First, the CAA expanded the deduction for business meals. For the last several years, the deduction for business meals has been 50% of costs for such meals. However, the CAA increased that deduction to 100% for business meals for tax years 2021 and 2022, but only if those meals consist of food and beverages provided by a restaurant.
Finally, the CAA decreased the depreciable period for those in a real property trade or business who had elected not to be subject to the interest deduction limitation enacted under the Tax Cuts and Jobs Act in 2017. Specifically, for those taxpayers, the CAA decreased the depreciable period for certain assets from 40 years to 30 years.
P&N’s dedicated professionals are committed to understanding and applying this information to help our clients. Please contact us or connect with your P&N advisor to discuss your organization’s questions, concerns, and priorities.