By Dama Hergner, CPA
On March 11, 2021, President Biden signed into law the latest COVID-19 relief package, The American Rescue Plan Act of 2021 (“the Act”). Congress passed the $1.9 Trillion piece of legislation on March 10 after the House approved the measure by a 220-211 vote. The Act was originally passed by the House on February 27 but was amended in the Senate to ensure passage in the evenly divided chamber and to meet Senate rules. In order to secure approval, this legislation was passed under the budget reconciliation rules which require only a simple majority for approval in the upper chamber. One elimination which was the originally included was the provision of a $15 minimum wage.
The Act largely aligns with the framework presented by President Biden and includes extensions of the enhanced unemployment relief, increased funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools aimed to bring students back into the classroom.
The Act includes a number of tax provisions which include a third round of direct stimulus payments, enhancements of many personal credits aimed to benefit those with lower incomes and children, extensions of payroll tax credits for employers, and other relief provisions.
While the listing below is not a comprehensive review, this is an overview of some of the Act’s key measures. Please note that details are subject to clarification and administrative guidance.
Relief for Individuals
2021 Recovery Rebate to Individuals
The Act provides for another round of direct payments to individuals in the amount of $1,400 ($2,800 for joint filers), plus $1,400 for each qualifying dependent of the taxpayer. The payments are credits against 2021 taxes but are fully refundable and payable in advance. Any amount for which the taxpayer would have been entitled but did not receive will be creditable when preparing their 2021 tax return.
The payment amount shall be reduced if the taxpayer’s adjusted gross income (AGI) exceeds $75,000 ($150,000 for joint filers) and would be phased out entirely when AGI reaches $80,000 ($160,000 for joint filers). The payment amount to Head of Household filers shall be reduced if AGI exceeds $112,500 and would be phased out entirely at $120,000. The AGI used for determination of payment will be the taxpayer’s 2020 tax return or 2019 if the 2020 tax return is not yet filed.
Child Tax Credit Improvements for 2021
The Act provides special rules for 2021 regarding the Child Tax Credit. For 2021, if the taxpayer has a principal place of abode in the United States for more than one-half of the taxable year or is a bona fide resident of Puerto Rico, the child tax credit will apply to dependents up to age 17. The maximum amount of the credit shall be $3,000 or $3,600 for a qualifying child under the age of 6. The credit shall be reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer’s modified AGI exceeds $75,000 ($150,000 if a joint filer or $112,500 for head of household). Another change to the Child Tax Credit is that the Act makes the credit fully refundable which provides for a refund if the credit exceeds the filer’s income tax liability.
Advance Payment of Child Tax Credit
The Act directs establishment of a program for making periodic payments to taxpayers beginning on July 1, 2021 which equal the annual advance amount determined for such calendar year. The annual advance amount is estimated to be equal to 50% of the child tax credit on the taxpayer’s 2021 tax return based on the reference taxable year which will be 2020 or 2019 if the 2020 tax return is not yet filed. The advance amount may be modified due to updated information. The Act also directs establishment of an online portal which will allow taxpayers to provide information relevant to modification such as change in number of qualifying children, change in marital status, change in income, or to elect to not receive payments.
Timing of Payments
These direct payments related to advance payment of the Child Tax Credit are to be issued within the period July 1, 2021 and December 31, 2021. The remaining half of the credit not paid in advance is to be received when filing the 2021 return as the full amount is claimed on the 2021 tax return and reduced by the total amount received in advance. The taxpayer shall be provided with a written notice which provides the aggregate amount of such advance payment and any other relevant information needed to reconcile on their 2021 tax return.
Earned Income Tax Credit
The Act provides for the strengthening of the earned income tax credit (EITC) for individuals with no qualifying children. For 2021, the maximum EITC for adults without children has been raised from $543 to $1,502 and increases the threshold for phaseout of the credit from $8,880 to $11,610. Additionally, the age eligibility for those without children has been lowered to 19 from 25 and eliminates the upper age limit.
Child and Dependent Care Assistance
The Act temporarily increases the value of the child and dependent tax care credit which currently covers 35% of care expenses up to $3,000 for one qualifying dependent or $6,000 for two or more qualifying dependents. For 2021, the Act increases the maximum allowable care expenses to cover 50% of care expenses up to $8,000 for one qualifying dependent or $16,000 for two or more qualifying dependents and allows for the credit to be refundable to the taxpayer.
Expanded Unemployment Benefits
The Act provides for an extension of the $300 per week payment of unemployment compensation by increasing the number of weeks of benefits in the Pandemic Emergency Unemployment Compensation (PEUC) from 24 weeks to 53 weeks as well as extending the time workers can receive PEUC benefits if they have exhausted regular state unemployment benefits to September 6, 2021.
The Act also exempts the first $10,200 of unemployment compensation received by the taxpayer (or each spouse if joint filers) from federal income tax for households with AGI less than $150,000.
The IRS has stated that additional guidance will be issued regarding those provisions that could impact taxpayer’s 2020 tax return including the retroactive provision regarding unemployment benefits. Currently, the IRS urges taxpayers to not file an amended return until such guidance has been issued.
Relief for Businesses
Credits for Paid Sick and Family Leave
The Act extends tax credits for employer provided paid sick and family leave as established under the Families First Coronavirus Response Act through September 30, 2021. This extension also increases the wages covered by the paid family leave credit to $12,000 per worker (an increase from $10,000) and allows for coverage up to 60 days for self-employed individuals (an increase from 50 days). However, no credit shall be allowed to any employer if their paid leave favors highly compensated employees, full-time workers, or employees based on their tenure.
Extension of Employee Retention Credit
The Act extends the availability of the Employee Retention Credit (ERC) to the third and fourth quarters of 2021. An eligible employer shall be allowed a credit against applicable quarterly employment taxes for the amount equal to 70% of the qualified wages for each employee. The amount of qualified wages for any employee for the calendar quarter shall not exceed $10,000.
A large employer that is severely financially distressed can utilize the small employer all employee wages rule to determine their credit. Severely financially distressed is defined as those with more than a 90% decline in gross receipts.
The Act allows a provision for Recovery Startup Businesses which is any employer which started business after February 15, 2020, that is otherwise not eligible for the ERC under the gross receipts or governmental order test. These businesses can receive up to a $50,000 credit per calendar quarter.
As the ERC is claimed through payroll filings and any advance payments of credits are reconciled on the payroll tax filings of the entity, we recommend reaching out to your payroll processing company for further guidance as to the eligibility and application of these credits.
Paycheck Protection Program (PPP)
The Act provides for an additional $7.25 billion to the Small Business Administration (SBA) for purposes of carrying out the PPP. Additionally, it expands the organizations and entities eligible to receive PPP loans. Among the eligibility expansion is for nonprofit organizations. The Act allows for a nonprofit organization to apply for first round of PPP if they have less than 500 employees per physical location of the organization OR to apply for second round of PPP if they have less than 300 employees per physical location of the organization.
The Act does not extend the March 31, 2021 program deadline.
Restaurant Revitalization Grant
The Act establishes a new grant program, the restaurant revitalization fund, which contains $28.6 billion in available funds. An eligible entity can qualify for a grant up to the amount of pandemic related revenue loss to the entity. This revenue loss is defined as the gross receipts of the eligible entity during 2020 compared to the gross receipts of 2019. There are special provisions for entities not in operations for the entirety of 2019, those entities which opened between January 1, 2020 and enactment of the Act, and those entities not yet opened but have incurred eligible expenses.
Grants are limited to a maximum of $10 million with an additional limit of $5 million per physical location of the eligible entity. Eligibility is reduced for any amounts received from a covered loan made under the 2020 or 2021 PPP.
Eligible entities include a restaurant, food stand, food truck, food cart, caterer, saloon, inn, tavern, bar, lounge, brewpub, tasting room, taproom, certain breweries or other similar places of business in which the public or patrons assemble for the primary purpose of being served food or drink. Excluded entities are those which are state or local government operated businesses, entities which own or operates (together with any affiliated business) more than 20 locations regardless of whether or not those locations operate under the same or multiple names, entities with pending application or have received a grant under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, or publicly traded companies.
Grant funds can be used for payroll costs, payments of principal or interest on any mortgage obligation, rent payments, utilities, maintenance expenses, supplies, food and beverage expenses, covered supplier costs, operational expenses, paid sick leave, or any other expense that the SBA deems essential to maintaining the eligible entity.
During the initial 21-day period for awards of grants, the SBA is to prioritize grants to eligible entities that are small business concerns owned and controlled by women, veterans, or socially and economically disadvantage small business concerns.
Miscellaneous Relief Provisions (Not All Inclusive)
Preserving Health Benefits for Workers
The Act provides subsidy for 100% of premiums for individuals eligible for COBRA continuation coverage if they lose their job through September 30, 2021. The worker would not be required to pay the premium for coverage, and the employer or health insurance plan could claim a refundable tax credit against its Medicare payroll tax liability for the cost of the premiums.
Targeted Economic Injury Disaster Loan (EIDL) Advances and Restaurant Revitalization Grants
Amounts received through SBA in the form of a targeted EIDL advance or in the form of a restaurant revitalization grant shall not be included in the gross income of the recipient and shall be treated as tax exempt income.
Modification of Treatment of Student Loan Forgiveness
The Act expands the exclusion of forgiven student loan amounts applicable to loans discharged after 2020 and before 2026. During this period, this expansion allows for the exclusion to apply to any discharge of student loans for any reason.
The Act does not provide for student loan forgiveness.