2021 Consolidated Appropriations Act Makes Important Changes to CARES Act Tax Provisions

As a response to the economic circumstances brought on by the novel Coronavirus Pandemic (COVID-19), Congress enacted the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”).

The CARES Act established the framework for forgivable loans under the Paycheck Protection Program (“PPP Loans”), and also provided multiple tax relief measures.  One such relief measure provided that forgiveness of a PPP Loan would not result in taxable income for the borrower for federal income tax purposes. The IRS subsequently took the position that expenditures funded with forgiven PPP Loans would not be deductible for federal income tax purposes. 

The CARES Act also established a new employee retention credit (the “ERC”), to be claimed by employers that continued to pay their workers in 2020 during periods in which their business either underwent a significant decline in revenues due to COVID-19 or was shut down pursuant to a COVID-19 governmental order. This ERC, however, was not available to taxpayers that received PPP Loans. In addition, testing for whether a taxpayer had received a PPP Loan was based on an aggregation of commonly controlled companies and affiliated service companies, meaning that the receipt of a PPP Loan by one affiliate could negate ERC eligibility for all other affiliates.

Congress enacted its latest COVID-19 response in December 2020 in the form of the Consolidated Appropriations Act, 2021 (the “CAA”). In addition to providing fiscal stimulus payments, the CAA made important changes to the tax relief measures put in place under the CARES Act. First, the CAA permits taxpayers to deduct PPP Loan-funded expenditures, retroactive to 2020. The CAA also revised the ERC in important respects: (i) the credit is extended to the first two calendar quarters of 2021; (ii) eligibility requirements for the ERC have been relaxed; and (iii) the amount of the credit has been increased.

The tax-related changes in the CAA create opportunities for taxpayers to obtain more tax benefits in 2020 (e.g., by deducting PPP Loan-funded expenditures and potentially claiming the ERC even if they received a PPP Loan) and to qualify for an increased ERC in 2021. Please contact one of the members of the Honigman Tax Practice Group to discuss how your business may benefit from these legislative changes.