The American Rescue Plan Act of 2021 (ARPA), which passed largely along party lines, has been signed by President Biden. This latest stimulus package is estimated to have a cost of $1.9 trillion and follows almost a year after the approximately $2 trillion Coronavirus Aid, Relief and Economic Security Act (CARES Act). This alert will focus on some of the key business and individual related provisions of the Act.
- Federal unemployment compensation is extended until September 6, 2021 at a $300 weekly rate.
- Up to $10,200 of unemployment compensation will be exempt from 2020 taxation for households earning less than $150,000 per year. In the case of joint returns, the $10,200 exclusion is applied to each spouse, thus exempting up to $20,400 of unemployment compensation from tax.
- A new round of stimulus checks will be coming to households this year. For each eligible taxpayer that is below the income thresholds listed below, the advanced payment will be $1,400 ($2,800 for married filing jointly) plus an additional $1,400 for each dependent of the taxpayer. Therefore, a family of four will be eligible for an advance payment of up to $5,600.
Taxpayers below the following thresholds will receive 100% of the advance payment, with the amount of the payment phased down with adjusted gross income exceeding these limits:
Married filing jointly - $150,000, advance payment reduced to zero at $160,000 and above
Head of household - $112,500, advance payment reduced to zero at $120,000 and above
All other taxpayers - $75,000, advance payment reduced to zero at $80,000 above
Expanded child tax credit with advanced payments
• For 2021, subject to phase-outs, the child tax credit (“CTC”) has been increased to $3,000 per child ($3,600 per child under the age of 6 at end of 2021) from $2,000 per child. In addition, for 2021 17-year-old children are eligible for the CTC. The extra amount of CTC ($1,000 or $1,600 for children under 6) is phased out with taxpayers above the following modified adjusted gross income thresholds:
Married, filing jointly - $150,000
Head of household - $112,500
All other taxpayers - $75,000
The $2,000 base CTC is subject to the phase out rules from the law prior to ARPA.
Beginning in July 2021 through December 2021, the IRS will issue monthly advance payments of the CTC equivalent to 1/12 of the expected CTC based on either the taxpayers 2020 tax return, or if 2020 has not been filed, their 2019 return.
Example – Assume taxpayer A is below the income thresholds and would be eligible for a CTC of $6,000 (two eligible children). The IRS will send advance monthly payments of $500 per month ($3,000 total for period) beginning in July 2021.
Child and dependent care credit
- ARPA makes the child and dependent care credit refundable while also increasing the percentage of the credit, the qualifying expense limits, and the phase out range. The credit is increased to 50% (from 35 percent ) of eligible expenses of up to $8,000 (increased from $3,000) for one qualifying individual or $16,000 (increased from $6,000) for two or more qualifying individuals.
- For taxpayers with adjusted gross income in excess of $125,000, the applicable percentage of 50 percent is reduced by one percent for every $2,000. Thus, taxpayers with adjusted gross income in excess of $185,000 will be limited to a 20 percent credit. For taxpayers with adjusted gross income in excess of $400,000 the applicable percentage will be further reduced, by one percent for every $2,000. Thus taxpayers with adjusted gross income in excess of $440,000 will not be eligible for the child and dependent care credit.
Excess business loss limitation
- The Tax Cuts and Jobs Act (TCJA) limited the amount of trade or businesses losses that an individual could deduct against non-business income for tax years 2018 through 2025. The CARES Act suspended those provisions for the tax years 2018, 2019 and 2020, thus allowing taxpayers to generate net operating losses which could be carried back to generate cash flow through refunds. ARPA has extended the TCJA limitation on using business losses for one additional year, 2026.
Employee Retention Credit
- The employee retention credit (ERC) which was due to expire June 30, 2021 has been extended through December 31, 2021. The ERC provides businesses that have been fully or partially shut down by a government order, or that have incurred a decrease in quarterly revenues of more than 20% as compared to 2019, a credit equal to 70% of qualifying wages for a maximum credit of $7,000 per employee per quarter.
- For 2021, if an entity has more than 500 full time equivalent employees, the amount of credit is based on wages paid to which an employee is not providing services during the qualifying periods. For the 3rd and 4th calendar quarters of 2021, ARPA expands the ability for employers that are considered severely financially distressed with more than 500 full time equivalent employees to take the ERC on all wages paid to employees during the qualifying period. A severely financially distressed employer is an employer that experiences a reduction of gross receipts of more than 90% during the quarter as compared to the same quarter in 2019.
- For the third and fourth calendar quarters of 2021, ARPA also expands the ERC to include a “recovery startup business”. A recovery startup business is a business that 1) began operations after February 15, 2020, 2) with average annual gross receipts of $1 million or less for the three taxable year period preceding the quarter of the credit, and 3) which was not fully or partially shutdown or had a requisite reduction in gross receipts that would have otherwise qualified for the ERC. Qualifying startup businesses will be eligible for up to $50,000 in aggregate ERC per quarter.
Paid sick and family leave tax credits
- ARPA provides an extension of the paid sick and family leave credits under the Families First Coronavirus Response Act until September 30, 2021 (from March 31, 2021). ARPA also made other changes to the paid sick and family leave credits, some of which are:
- The maximum amount of wages for purposes of the family leave credit is increased $12,000 from $10,000 per employee.
- For self-employed individuals, ARPA increases the number of days from 50 to 60 days to calculate the family leave equivalent when calculating the credit.
- Resets the number of days taken into account for paid sick leave (10 days) after March 31, 2021 and after December 31, 2020 for self-employed.
- Allows the paid sick and paid family leave credits to be increased by the employer’s share of Social Security tax (6.2%) and Medicare tax (1.45%).
Payroll Protection Program
- ARPA makes yet another change to the Paycheck Protection Program (PPP) by expanding the employers eligible to receive PPP assistance to include:
- “Additional covered nonprofit entity” which is an organization listed in 501(c) except for 501(c)(3), 501(c)(4), 501(c)(6) or 501(c)(19) entities. An additional covered nonprofit entity is eligible for a PPP loan if 1) it has no more than 300 employees per physical location, 2) has no more than 15 percent of its receipts from lobbying activities, 3) lobbying activities do not comprise more than 15 percent of its activities, and 4) lobbying activity costs do not exceed $1,000,000 for the tax year ended prior to February 15, 2020.
- Internet only news publishing and periodical publishers that do not employ more than 500 employees.
- Changes the eligibility requirement for 501(c)(3) organizations from having no more than 500 (300 for second draw) total employees to no more than 500 (300 for second draw) employees per physical location. In addition, eligible 501(c)(6) organizations also changed from no more than 300 employees to no more than 300 employees per physical location.
Restaurant revitalization grants
- ARPA provides for non-taxable grants to qualifying restaurants of up to $5,000,000 per physical location but not to exceed $10,000,000 in aggregate. An eligible entity includes a restaurant, food truck, food cart, caterer, saloon, inn, tavern, bar, lounge, brewpub, tasting room, taproom, licensed facility or premises of a beverage alcohol producer where there are tastings, samplings or purchase of products, or other similar place of business in which patrons assemble for the primary purpose of being served food or drinks. An entity that is publicly traded or that has more than 20 locations, whether or not operating under the same name, is not eligible for the grant.
The amount of the grant is equal to the pandemic related revenue loss, which is measured by the decrease in gross receipts from 2019 to 2020. The grant amount must be reduced by any PPP loans that the entity receives.
The grant can be used on expenses between February 15, 2020 and December 31, 2021 or if determined by the Administrator, no later than two years after the enactment of ARPA (date of enactment - March 11, 2021). The grant can be used on the following expenses that were incurred as a direct result of or during the pandemic: payroll costs, payments of mortgage principal or interest, rent, utilities, maintenance expenses, supplies (including protective equipment and cleaning materials), food and beverage expenses, covered supplier costs, operations expenses, paid sick leave, and any other expense the Administrator determines.
Other tax provisions
- Student Loans – While there are no provisions within the Act to forgive student loan interest, the Act does provide that qualifying student loans forgiven during 2021 through 2025 shall not be subject to tax.
- Excessive Employee Remuneration – Effective for tax years beginning after December 31, 2026, the ARPA expands the limitation on publicly held corporations’ ability to deduct compensation paid to the CEO, CFO and the three highest paid employees to CEO, CFO and the top eight paid employees.
- Worldwide Interest – ARPA repeals the election to allocate interest expense of members of a worldwide affiliated group on a worldwide basis, effective for taxable years beginning after December 31, 2020.
As mentioned this alert only focuses on a few of the provisions with the $1.9 trillion bill. There are many targeted provisions within the bill that Congress and President Biden believe will accelerate the growth of the economy and provide employment, while providing support in the fight against COVID-19.