COVID-19 Phase 4 limited legislative relief, tax extenders, and what else to expect in the near term

The year-end spending package approved by Congress and signed into law by the President on December 27, 2020, also known as an “omnibus” package, contains a number of tax provisions designed to help employers deal with the impact of the coronavirus 2019 (COVID-19) pandemic on their business operations, including their workforce, largely consisting of enhancements and adjustments to CARES Act provisions reflecting public comment and need that has developed since March.

Additionally, the legislation also moves forward on extension of more than 30 temporary tax provisions that were otherwise set to expire at the end of 2020.

The key tax provisions are as follows:

I. Employee Retention Credit (ERC)

• Enhanced valuation: The ERC is extended through the first two quarters of 2021 (ie, July 2021) at a rate of 70 percent (an increase from the prior 50-percent threshold and $10,000 per quarter in the CARES Act) for a total possible credit of $14,000 per employee.
• Decline in gross receipts threshold significantly reduced, relaxing qualification: The alternative gross receipts test for an employer to qualify for the ERC is modified for months going forward into 2021 to afford a threshold of only a 20-percent decline in gross receipts to qualify for the full amount of the credit.
  • Specifically described within the legislative text as: “A reduction of less than 80 percent in gross receipts for the same quarter as in 2019” (as opposed to a 50-percent reduction in the Cares Act) with no reduction in the credit amount (prior proposed versions would have reduced the credit amount for less than a 50-percent reduction in gross receipts).
• New companies established in 2020 can now qualify: Special rules allow employers not in existence in 2019 to qualify based on gross receipts in prior quarters in 2020.
• Alternate “governmental orders hindering operations test” will continue as option: The governmental order test remains in effect as an alternative ERC qualifying test for the first two quarters of 2021 (Congress kept the test given the increasing number of government-ordered shutdowns this fall and winter).
• Expanded application to certain public employers: The ERC in 2021 is available to public universities and hospitals (the CARES Act did not allow the credit for any governmental employees).
• Relaxed threshold for what constitutes “large employer” for assessing universe of qualified wages: The threshold to be considered a large employer for which the ERC applies only with respect to wages paid for “not providing services” due to COVID-19 is increased from 100 to 500 employees, and Treasury will advise small employers of their potential credit eligibility.
• “30-day rule” repealed going forward in 2021, but remains in place for 2020: The 30-day rule limiting the amount of credit based on the amount an employee was paid during the 30-day pre-COVID-19 period is repealed for 2021.
• Finally! Relief from ERC/PPP interaction prohibition: The rule prohibiting employers (including any members of an aggregated group) from claiming both the ERC and PPP loans is repealed retroactively so that employers may qualify for the ERC with respect to wages not paid with forgiven PPP funds (employers that did not claim ERC in 2020 because they also had a PPP loan should consider claiming the ERC under the new rule).
• Healthcare expenses formally clarified as applicable for the purpose of assessing “qualified wages”: Congress clarified by statute that employer-paid healthcare expenses qualify as wages for the ERC even if qualifying employees are receiving no other wages.

II. Tax extenders/miscellaneous issues

• Extenders: Provisions expiring in 2020 are extended, some for five years (WOTC, look-through rules, New Markets tax credits, for example), some for two years, and others for one year.
• PPP loan deductibility: The Treasury Department position that business expenses paid with forgiven PPP loan funds were not deductible is reversed.
• Natural disaster tax relief: Tax provisions assisting employers and employees affected by declared natural disasters prior to 2020, including an employee retention credit, are extended to 2020 as well.

III. Looking forward/near-term expectations

The incoming Biden Administration appears likely to ask Congress for additional economic incentives to address the continued impact of the pandemic early in 2021, which has also been further supported by the assertion of many leading congressional Democrats that the just-passed measure is a mere “down payment” for a more robust package once a Biden Administration is in place in January.

As we continue to get further clarity as to the development of economic and tax priorities both across the incoming Biden Administration, as well as both the House and Senate, our team looks forward to continuing to advise clients as new proposals and priorities continue to emerge over the holidays and in the coming weeks that will continue to better shape and clarify pathways forward in tax planning and strategizing. If you have any questions regarding these developments, please contact the authors or your DLA Piper relationship attorney.

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