The American Rescue Plan Act of 2021 (the “Act”) is the most extensive COVID relief bill yet. Its provisions are intended to boost the economy, increase availability of COVID-19 vaccines and other emergency medical supplies, and assist schools, health centers and state and local governments in their recovery efforts.
While the legislation is not particularly income tax focused, there are a number of significant tax provisions affecting individuals and businesses as well as enhancements to prior COVID support. This support includes the Paycheck Protection Program, Employee Retention Credit, Shuttered Venue Operator Grants, and Economic Injury Disaster Loans.
- Recovery Rebates: The Act provides for payments of $1,400 to qualifying individuals, $2,800 for married taxpayers filing jointly plus $1,400 for each dependent. As before, it is actually an advance payment of a tax credit.
The credit has a lower adjusted gross income (“AGI”) threshold than previous stimulus checks. For single taxpayers, the phase out begins at $75,000. Taxpayers with an AGI of $80,000 or above will not receive a check. For married filing jointly, the corresponding amounts are $150,000 and $160,000. For heads of household the AGI range is $112,500 to $120,000. AGI is determined based on the taxpayer’s 2019 or 2020 (if filed) return.
- Unemployment Income Exclusion: The Act provides that for 2020 only, the first $10,200 of unemployment benefits received by individuals whose AGI is less than $150,000 will not be taxable. It is not clear if affected individuals who already filed their 2020 returns will now have to file amended returns or if the IRS will adjust the returns for them automatically.
Federal supplemental unemployment insurance benefits of $300 per week were extended through September 6, 2021.
- Child Tax Credit: The credit is extended to cover children who haven’t turned age 18 by December 31, 2021. The credit is increased to $3,000 per child and $3,600 for each child who is under the age of 6 as of the end of the year. The increased limit phasedoutatamodifiedAGI of $75,000 for singles, $112,500 for heads of household, and $150,000 for married couples filing jointly. After the phase out, the existing child tax credit continues to apply subject to its own phase out and limitation rules.
• The credit is fully refundable for 2021 for certain taxpayers based on residence but without regard to any income tests.
• The Act also directs the IRS to make monthly advance payments of the credit to certain eligible taxpayers for the period July 1, 2021 through December 31, 2021 and establish a portal for taxpayers to make modifications to the advance credit amount or opt out of the program.
- Child and Dependent Care Credit: This credit is now also fully refundable for 2021. The dollar limit is increased to $8,000 for one qualifying individual and $16,000 for two or more. It was $3,000 and $6,000. The top percentage limit of 35% was increased to 50%.
- Employer Provided Dependent Care: For 2021, the exclusion is increased from $5,000 to $10,500.
- Health Insurance Premium Support: The refundable health insurance premium tax credit was increased for 2021 and 2022 and more taxpayers are eligible for the credit. Any excess Advance Premium Tax Credit payments received on an exchange purchased qualified health plan in 2020 do not have to be repaid.
Also, certain eligible individuals can receive COBRA premium subsidies for the period between April 1, 2021 and September 30, 2021.
- Student Loan forgiveness: The act provides that gross income for tax purposes does not include income from the discharge of any student loan after December 31, 2020 and before January 1, 2026.
- Economic Injury Disaster Loan (“EIDL”) Advances: The Act both expands and provides additional funding for the Targeted EIDL which was enacted as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) in December 2020. One-third of the new money is for advances to business whose revenues declined by 50% and who employ fewer than 10 people. The rest is for businesses that received the full amount previously, are located in a low-income community and meet certain other qualifications. The Act makes clear that expenses paid with EIDL advances are fully deductible and the grants themselves are not taxable income.
- Restaurant Revitalization Grants: A new grant program has been added to help restaurants – one of the industries most severely affected by the pandemic. Grants of up to $10 million per business plus $5 million per physical location are available to a wide range of affected businesses. The grants are based on the revenue loss of the entity due to the pandemic – in other words, the difference between the gross receipts of the business for 2020 and 2019. There are special rules for new business start-ups.
• Restaurants, food trucks/stands, caterers, taprooms, and other defined businesses "in which the public or patrons assemble for the primary purpose of being served food or drink"
• Those entities may be located in an airport terminal or be a Tribally-owned concern
• Businesses that as of March 13, 2020 owned or operated more than 20 locations (including those operated by any affiliates
• Entities receiving Shuttered Venue Operator Grants (“SVOG”)
• A State or local government operated business
• A publicly traded company
|Observation: Hotels, since they are not specifically enumerated, do not appear to be eligible for the grant. When the regulations are released it is possible that the restaurant or other food service activities of the hotel may be eligible.|
The grants can be used for payroll costs, mortgage principal or interest, rent, utilities, and other designated costs. And, as with the other programs, the expenses paid for with grant funds are deductible and the grant itself is not taxable income. Wages paid for with these grants are not qualified wages for purposes of the Employee Retention Credit.
- Employee Retention Credit (“ERC”): The ERC is now extended through the third and fourth quarters of 2021. For wages paid after June 30, 2021 and before January 1, 2022, the credit is applied to the employer’s share of Medicare tax. There is still a provision to apply for the credit in advance and any overpayment due to the credit is fully refundable.
There are now also two new classes of employers eligible for the ERC:
• Severely Financially Depressed Large Employers – those who suffered more than a 90% decline in gross receipts, will be treated as small employers for purposes of determining the credit. In other words, the wages of all employees are credit eligible.
• Recovery Startup Businesses – those who began business after February 15, 2020 and have gross receipts of less than $1 million.
• It is not clear over what period the gross receipts are measured. The Act says three preceding years but, if the business started in 2020, what years would that be?
• These businesses are limited to $50,000 of credit per quarter.
These changes also apply only to wages paid after June 30, 2021 and before January 1, 2022.
- Paycheck Protection Program (“PPP”): Initially, recipients of SVOG were not eligible for PPP loans. However, since implementation of the SVOG has been, shall we say, “slow,” grant recipients are now eligible for PPP loans. The amount of the PPP loan will reduce the grant amount.
Other changes to PPP include an expansion of eligible not-for-profits and certain internet publishing organizations. Also, the COBRA premium assistance is allowable as a PPP payroll cost.
|Stay tuned – Congress may extend the deadline for the PPP program from March 31 to May 31, 2021. The Biden Administration is in favor of this but is not sure it can extend the date administratively.|
- Families First Corona Virus Response Act (“FFCRA”) Credits: The Act extends the tax credits for employer provided paid sick and family leave through September 30, 2021. The wage amount for purposes of the paid family leave credit is increased from $10,000 to $12,000 per employee. These changes also apply to self-employed individuals.
Other tax law changes: Because there was a felt need to include some revenue raising provisions in the Act, these additional changes were included.
- Deductibility of Excess Business Losses: The Tax Cuts and Jobs Act, the 2017 tax reform, introduced a new limit on the deductibility of so-called “excess business losses” by non-corporate taxpayers. Originally set to expire at the end of 2025, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed in 2020 retroactively suspended application of the limitation for 2018 through 2020. The Act now extends the provision. Instead of expiring on January 1, 2026, it will expire on January 1, 2027.
- Limitation on Excessive Employee Compensation: Under current law, public companies may deduct only the first $1 million of compensation paid to the CEO, CFO and the next three highest paid officers. For tax years beginning after December 31, 2026, it will now be the CEO, CFO and the next five highest paid officers.
- Worldwide Interest Allocation: The Act repeals a long delayed but not yet effective provision allowing certain affiliated groups to allocate interest expense on a worldwide basis.
We continue to analyze the Act and other guidance released by the government agencies at the Federal and State level. Later this month, Friedman will be hosting a webinar to cover the Act as well as the recent updates to the Employee Retention Credit. In the meantime, please contact your Friedman LLP advisor with any questions.