President Trump signed the second federal COVID-19 stimulus package, the Consolidated Appropriations Act 2021, into law on December 27, 2020. The legislation, which is retroactive to the effective date of the CARES Act, contains significant favorable retroactive changes and enhancements to the employee retention tax credit and covered expenses under the CARES Act.

These changes may provide an immediate refund opportunity for some Paycheck Protection Program (PPP) loan borrowers. Borrowers should carefully evaluate their loan forgiveness to determine the most favorable assignment of expenses and payroll costs to provide them with the greatest benefits.

The credit is available to eligible employers if the business was forced to close either fully or partially by a COVID-19 lockdown order, or for a quarter in 2021, if gross receipts are less than 80% of gross receipts for the same quarter in 2019.

Employee Retention Tax Credit Changes

A summary of the legislation's employee retention tax credit changes is as follows:

Period of availability: For qualified wages paid after March 12, 2020, and before July 1, 2021, extending availability of the credit to the first two quarters of 2021. These periods may be outside the covered period for many Paycheck Protection Program loan borrowers, and the employee retention tax credit is likely available.

Credit amount: The credit amount is increased from 50% to 70% of qualified wages, which is amended to include the cost to continue providing health benefits.

Maximum credit amount: The credit cap is increased to $7,000 for each of the first two quarters of 2021 ($10,000 in qualified wages X 70% tax credit rate), so that the maximum credit for 2021 will be $14,000. This aggregate $14,000 per employee maximum credit for the first two quarters of 2021 is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.

Credit eligibility threshold: A company with 500 or fewer employees will be eligible for the credit, even if employees are working. Note that in calculating this 500-employee threshold, the employees of all affiliated companies sharing more the 50% common ownership are aggregated.

PPP and the credit: A business that receives a PPP loan is no longer prohibited from claiming the employee retention tax credit; however, a credit may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven. No double dipping is allowed. This change is retroactive to the effective date under the original law (for wages paid after March 12, 2020).

An example: A borrower received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan. That excess used to pay wages is eligible for the credit. Amended employment tax returns should be filed to claim the credit.

Advance Payment clause: Advance payment of the credit is allowed for companies with 500 or fewer employees, based on 70% of average quarterly payroll for the same quarter in 2019. Businesses may be allowed to collect the payment prior to the payment of wages. If the advance payment is larger than the credit calculated, the company will need to repay the excess to the government.