Pandemic Relief Programs Keep Tax Practitioners Busy

As the words “Did you get your stimmy?” became a recognized part of the American lexicon — referring to direct payments to taxpayers under COVID-19 pandemic relief plans — businesses received “stimmies” of their own under such legislation as the American Rescue Plan Act of 2021 (ARPA). Most have tax implications.

“A lot of programs at the federal level do have an impact at the state and local level,” said Keith Eisenstein, a state-and-local tax principal with Ernst & Young LLP and chair of the Practising Law Institute’s Hot Topics in State and Local Tax program. “Every time, we have to look at whether that change will flow down.”

While businesses large and small grappled with closed offices and new laws, the federal government thankfully saw fit to delay tax season. In 2020, the deadline for returns was pushed from April to July.

“Last year having tax season delayed by three months, that really helped us and our practice as well as our clients,” said Brett R. Cotler, a lawyer in the Taxation Group at Seward & Kissel, LLP, a firm with offices in New York and D.C. known for its expertise in financial service and maritime law. “We had offshore clients that file taxes in the U.S. whose offices were just reopening. . . . A lot did not have access to their records. We also work with accounting firms and the shift from being in the office to working at home was difficult for us as well. That delay of tax season was one of the best things the government did.”

This year, the deadline for filing federal individual income tax returns or extensions was extended from April 15 to May 15. The shorter period is perhaps a reflection that the worst of the pandemic is behind us, but federal programs still generate many tax issues. 

Tax Credit Programs Abound

The ARPA is the latest federal stimulus and relief package. The Biden Administration signed the package into law on March 11, almost a year to the day after the federal government declared the pandemic a national emergency. The ARPA extends many of the benefits conferred by the Coronavirus Aid, Relief and Economic Security Act enacted by the Trump administration in March 2020 and extended for the first time by an appropriations bill enacted in December 2020, according to the website of the U.S. Department of the Treasury.

An analysis by Ernst & Young, “ARPA Expands Credits, Subsidies, and Executive Compensation Provision,” dated March 18, 2021, indicates that the ARPA extends and modifies the employee retention credit (ERC), among other things.

“The employee retention credit is very valuable to a lot of employers out there,” Eisenstein said. “It helps keep people employed by giving employers a benefit against federal withholding.”

ERCs, which first appeared in the CARES act, were extended by the ARPA through the end of 2021. The program provides a credit against payroll taxes based on qualified wages paid by an eligible employer. The ARPA modified the credits as well, the Ernst & Young analysis said. Now, the credit is applied against an employer’s share of the Medicare tax, rather than the Social Security tax.

Employers are eligible for ERCs if they experienced a full or partial suspension of operations due to pandemic-related government orders or if they suffered “a significant decline in gross receipts,” the analysis said. 

The decline is measured on a quarter-over-quarter basis, according to Eisenstein. “In the prior year, the threshold was a 50 percent decline,” he said, but with the 2020 appropriations bill and the ARPA, “it is a 20 percent decline. They have made it a lot easier to qualify. Public institutions can also qualify.”

Also new in the ARPA: Businesses who do not otherwise qualify, but who started up after February 15, 2020, and whose gross receipts do not exceed $1 million, can receive a total credit of $50,000 per quarter for all employees.

For large employers — those who employ more than 500 people — the wages must have been paid to an employee who was not providing services due to a shut-down order or the precipitous loss of revenue, the analysis said. Small employers don’t have to worry about this distinction. Any wages are eligible whether the employee provided services or not so long as they were paid during a shut-down and came during the calendar quarter “for which the gross receipts test was met.” 

The ARPA also allows any employer that experienced more than a 90 percent decline in gross receipts to benefit from these credits without limitation on the determination of qualified wages.

Another pandemic-era federal law, the Families First Coronavirus Response Act, required some businesses to provide paid leave if workers were absent for COVID-related reasons. The act also allowed a payroll tax credit for the amount paid out for the leave. While this form of relief expired in large part at the end of 2020, the ARPA extended it through September for employers who voluntarily offer paid leave. Also, “leave taken because the employee is receiving or recovering from a vaccination is now also eligible for the [paid-leave] credit,” the Ernst & Young analysis said.

Like the ERCs, these paid-leave credits are now applied against an employer’s Medicare tax, rather than its Social Security tax.

Loans for the Pandemic-Afflicted

In addition to the tax credits, the CARES Act — followed by the ARPA — have made federal loans available during the pandemic. These also have tax implications.

Administered by the U.S. Small Business Administration, the Payroll Protection Plan is designed to help companies retain their employees and otherwise cope with the disaster of government shutdowns. PPP provides an incentive for small businesses to keep their workers on payroll, according to the SBA. The first round, which ran from March to August 2020, helped “5.2 million small businesses keep 51 million American workers employed,” an SBA press release said. Another round began in January and extends through the end of May, 2021.

“One of the things the ARPA corrected was a technical glitch regarding PPP loans,” said Cotler from Seward & Kissel. “The idea was, if you got PPP, you could use it for payroll, a mortgage, or rent. If you used it for payroll and then the loan was forgiven, those funds would not be viewed as taxable income.”

On the flip side, under the CARES Act, forgiven loans were viewed as taxable income unless you used them for payroll. Congress changed this in the ARPA, allowing business to take deductions for business expenses other than payroll even if those expenses were paid with a PPP loan that was later forgiven.

Congress “used tax policy to further provide tax stimulus or relief,” Cotler said.

Employers who aren’t eligible for PPP loans can apply for the Economic Injury Disaster Loan program, also administered by the SBA. The COVID-related program started in September of 2020, funded by the CARES Act. Per information posted on the SBA’s website, the program is designed to help businesses “meet financial obligations and operating expenses that could have been met had the disaster not occurred.” Unlike the PPP, an EIDL is specifically meant to cover operating expenses such as the continuation of health-care benefits, rent, utilities, and fixed-debt payments. The maximum loan amount is $500,000. Though loans under the program are not forgivable, certain kinds of funds, termed “advances,” can be forgiven.

These loan may interact with other facets of pandemic stimulus and relief. “If you’ve been the recipient of either [the PPP or the EIDL] and the loans were not paid back,” Cotler said, “you’re ineligible for the employee retention tax credits.”

Cotler also said he advised clients that the PPP program was “economically the best deal. You could get the loan forgiven but also take a deduction for your expenses.”

---

Elizabeth M. Bennett was a business reporter who moved into legal journalism when she covered the Delaware courts, a beat that inspired her to go to law school. After a few years as a practicing attorney in the Philadelphia region, she decamped to the Pacific Northwest and returned to freelance reporting and editing.