President Biden signed the widely reported $1.9 trillion American Rescue Plan Act of 2021 (the Act) into law on Thursday, March 11, 2021.
This follows the $900 billion of COVID relief included in the Consolidated Appropriations Act, 2021 (CAA), signed into law by President Trump on December 27, 2020.
Much of the near-term relief is provided via direct payments (stimulus checks or automatic deposits), extended unemployment insurance benefits, and expansion of the child tax credit. The $1,400 direct payments are estimated to aggregate $410 billion, expanded unemployment benefits are estimated to aggregate $289 billion, and the expanded child tax credit and earned income tax credits combine for another $135 billion.
The most significant measures included in the Act are the following:
- A third round of stimulus payments to individuals and their dependents
- Extension of enhanced supplemental federal unemployment benefits through September 2021
- Expansion of the child tax credit and child and dependent care credit
- Extension of the Employee Retention Credit (ERC)
- $7.25 billion in aid to small businesses, including for the Paycheck Protection Program (PPP)
- Increased federal subsidies for COBRA coverage
- Over $360 billion in aid directed to states, cities, U.S. territories, and tribal governments. The Senate also added $10 billion for critical infrastructure, including broadband internet and $8.5 billion for rural hospitals
- $160 billion earmarked for vaccine and testing programs to improve capacity and help curb the spread of COVID-19; the plan includes funds to create a national vaccine distribution program that would offer free shots to all U.S. residents regardless of immigration status
- Other measures that address nutritional assistance, housing aid, and funds for schools.
The original House version of the bill included a plan to gradually increase the federal minimum wage to $15/hour. This minimum wage provision was stripped from the Senate version after the Senate parliamentarian ruled that the minimum wage provision did not conform to the budget reconciliation rules.
Additional detail about the American Rescue Plan Act, particularly on tax-related changes, is found below.
Measures Primarily Impacting Individuals
The Act includes an additional 2021 stimulus payment of $1,400 for each qualifying adult ($2,800 for those married filing joint) plus $1,400 for each qualifying dependent (including adult dependents such as college students or parents, unlike prior stimulus payments that were limited to dependents 16 and younger). The payments phase out as follows: for single filers with adjusted gross income between $75,000 and $80,000; for head of household between $112,500 and $120,000; and for married filing joint between $150,000 and $160,000.
If 2020 returns have already been filed, the payments will be based on these 2020 returns the IRS has received. Otherwise, the IRS will base the payments on 2019 tax return information.
The stimulus payments are not federally taxable to the recipients.
Extended Unemployment Benefits
The American Rescue Plan Act increases the total number of weeks unemployment benefits are available to 79 (from 50). The current federal supplemental benefit of $300 per week is maintained through September 6, 2021. The Act increases the number of weeks from 24 to 53 for which federal unemployment insurance benefits are provided after state benefits end. The extension also covers the self-employed and individual contractors who typically are not entitled to unemployment benefits.
The Act also contains a retroactive provision whereby up to $10,200 of unemployment benefits received in 2020 are exempt from federal income tax. For married taxpayers, each spouse receiving unemployment compensation is eligible for the $10,200 exclusion. This applies when 2020 modified AGI, which includes unemployment income, is less than $150,000. The same limit applies regardless of filing status, and there is no “phase-out” for this provision. The IRS website indicated that “the IRS strongly urges taxpayers to not file amended returns” if they had already filed showing the income as taxable, at least until the IRS provides further guidance.
Expansion of Certain Credits
The Act significantly expands the Child Tax Credit (CTC) for 2021 (the expansion is currently only for 2021).
The 2020 CTC was $2,000 per dependent child under age 17, subject to phase-out for high-income taxpayers.
For 2021, regardless of the level of earned income, a CTC of $3,600 for a dependent child under age 6 and $3,000 per child up to age 17 (under 18 rather than under 17 under prior law) is allowed. The credit is fully refundable for 2021, and there is no earnings floor of $2,500. The IRS is supposed to pay part of the credit out in advance from July to December 2021 (with any excess being claimed on the 2021 returns when filed).
The American Rescue Plan Act also increases the amount of the 2021 Earned Income Tax Credit for adults without children from about $530 to $1,500, and the related income tax cap is increased from about $16,000 to about $21,000. It is expanded to include individuals age 19-24 who are not full-time students and those over 65.
The Child and Dependent Care Tax Credit will be expanded for 2021 to cover up to 50% of qualifying childcare expenses up to $4,000 for one child and $8,000 for two or more children for 2021 (currently the credit is up to 35% of $3,000 for one child or 35% of $6,000 for two or more children). The credit will be refundable so that families with low tax liability will be able to benefit; the refund will be fully available to families earning less than $125,000 and partially available for those earning between $125,000 and $400,000.
Income from discharge/forgiveness of student loans that occurs between December 2020 and January 2026 will not be federally taxable. Note that the Act does NOT forgive student loans; it merely makes forgiveness nontaxable if it does occur.
Measures Affecting Businesses
Small Businesses and Paycheck Protection Program
An additional $7.25 billion is allocated to small business assistance and the Paycheck Protection Program (PPP) loans. The current eligibility rules remain unchanged for small businesses wishing to participate in the PPP, but there is a provision that will make more non-profit organizations eligible for a PPP loan if certain requirements are met.
The PPP—which was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020—is designed to help small businesses that have suffered from the disruptions and shutdowns related to the coronavirus pandemic and keep them operational by granting federally guaranteed loans to be used to retain staff at pre-COVID levels. A PPP loan may be forgiven in whole or in part if certain requirements are met.
The Economic Aid Act, which is part of the CAA, had earmarked an additional $284 billion for PPP loans, with specific set-asides for eligible borrowers with no more than 10 employees or loans of $250,000 or less to eligible borrowers in low- or moderate-income neighborhoods. The program ends the earlier of March 31, 2021 (the application period under the PPP is not extended under the ARP bill), or the exhaustion of the funds—additional funds are now allocated under the ARP bill.
Employee Retention Credit
The ERC, originally introduced under the CARES Act and enhanced under the CAA, aims to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the COVID-19 pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.
The CAA extended the eligibility period of the ERC to June 30, 2021, for Q1 and Q2 2021, increased the ERC rate from 50% to 70% of qualified wages, and increased the limit on per-employee wages from $10,000 for the year to $10,000 per quarter ($50,000 per quarter for start-up businesses).
The American Rescue Plan Act extends the ERC for another six months to December 31, 2021, under the same terms as provided in the CAA (for 2021 maximum credit per employee of $7,000 per quarter or $28,000 per year). Under the Act, the ERC can offset the IRC section 3111(b) Medicare tax (employer share of Medicare, currently 1.45% of wages).
The ERC may be filed via amended Forms 941-X for prior quarters. Under prior law, there were generally at least three years to timely file the Form 941-X (from the date of the original Form 941 filing). The Act has extended this period to five years (though we would assume most taxpayers will file as soon as practical).
For severely distressed employers (gross receipts less than 10% of the same quarter in 2019), the Act allows the employer to treat all wages paid as qualified for ERC, regardless of the number of full-time equivalent employees.
The IRS issued Notice 2021-20 recently providing additional ERC-related guidance. There are many complexities addressed in the notice; here are a few specifics of broad interest:
- Confirmed as referenced in the CARES Act that a deduction for wages/payroll is disallowed consistent with section 280C(a) in the amount of the ERC generated by the wages/payroll. The deduction disallowed is in the tax return for the year the wages generating the ERC were “paid or incurred.” For example, if you intend to claim an ERC for Q3 or Q4 2020, those ERC credits should reduce wage expense in the 2020 income tax return. We are aware this presents difficult issues for tax filers but absent Congressional action or revised guidance from the IRS, both of which are unlikely, this is what the law requires).
- The notice clarifies what is “nominal” in determining whether a business is subject to a partial suspension of operations for purposes of ERC eligibility. To be eligible, the CARES Act required that a governmental order resulted in the suspension of more than a “nominal” portion of its business operations. There was no definition of “nominal” in the CARES Act. The IRS notice effectively provides a safe harbor for applying this rule. It states that the partial shutdown by government order will be considered more than “nominal” for these purposes if either: a) the gross receipts from the partially suspended business operations are not less than 10% of the total gross receipts, both using the same calendar quarter in 2019, or b) the hours of service by employees from the partially suspended business operations are not less than 10% of the total hours of service for the entire business, both using the same calendar quarter in 2019.
- The term “full-time employee” means an employee who, for any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code. An employer that operated its business for the entire 2019 calendar year determines the number of its full-time employees by taking the sum of the number of full-time employees in each calendar month in 2019 and dividing that number by 12.
- Many organizations ignored the ERC in 2020 because, until the enactment of the CAA on December 27, 2020, any organization with a PPP loan was not ERC eligible at all. The CAA allowed PPP borrowers to be ERC eligible but provided little guidance on how to properly utilize both programs. Notice 2021-20 provides specific examples of organizations utilizing both PPP and ERC and how to coordinate the benefits being claimed.
Other Provisions in the American Rescue Plan Act & Considerations
- Employers offering COVID-19-related paid medical leave to their employees would be eligible for an expanded tax credit through September 30, 2021.
- The Act increases the proposed subsidies of insurance premiums for individual workers eligible for COBRA after they were laid off or had their hours reduced to 100% (85% under the version of the bill passed by the House) through September 30, 2021.
- Funds are allocated for targeted Economic Injury Disaster Loan advance payments, as well as for particularly hard-hit industries such as restaurants, bars, other eligible food and drink providers, shuttered venue operators, and the airline industry.
- Effective for taxable years beginning after December 20, 2020, the bill repeals IRC section 864(f), which allows U.S. affiliated groups to elect to allocate interest on a worldwide basis. This provision was enacted as part of the American Jobs Creation Act of 2004 and has been deferred several times. The provision is relevant in computing the foreign tax credit limitation under IRC section 904.
- The limitation on excess business losses of noncorporate taxpayers, enacted as part of the Tax Cuts and Jobs Act, will be extended by one year through 2026.
- The threshold for third-party payment processors to report information to the IRS is lowered substantially. Specifically, IRC section 6050W(e) is revised so that the current threshold of $200,000 for at least 200 transactions is reduced to $600. As a result, such payment processors will have to provide Form 1099K to sellers for whom they have processed more than $600 (regardless of the number of transactions). This change, which applies to tax returns for calendar years beginning after December 31, 2021, will bring many more sellers, including “casual” sellers, within the 1099K reporting net.
- Under the American Rescue Plan Act, the $1 million per person section 162(m) limitation on public company deductions for compensation of the CEO, CFO, and three next highest-paid officers is modified to include the eight next highest-paid employees beginning in 2027.
- Wages for employees involved in qualified research included in PPP loan forgiveness applications will no longer reduce a taxpayer’s qualified research expenses (QREs) or have a negative impact on the R&D tax credit. Taxpayers that are eligible for the ERC and that claim R&D credits should analyze their ERC and R&D-credit qualified wages to mitigate the impact on both credits. To lessen the negative impact on the 2021 R&D credit, taxpayers should claim as ERC-eligible qualified health plan expenses and qualified wages expenses that are not potentially QREs as well, e.g., expenses related to employees who did not perform any R&D-creditable “qualified service.”
Disclaimer: The information contained in this communication, including attachments and enclosures, is not intended to be a complete analysis of all related issues. Nor is it sufficient to avoid tax-related penalties. It has been prepared for informational purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Perkins & Company, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.