On March 11, 2021, President Biden signed the $1.9 trillion aid package—the American Rescue Plan Act of 2021 (“ARPA”)—which will provide another round of significant tax and non-tax stimulus. Our SC&H Tax team is sharing a breakdown of what this bill will mean for businesses, individuals, and our national economy as we head into our second year of the Covid-19 global pandemic.
SC&H’s Key Takeaways
Impact on Businesses
SC&H’s Key Takeaways
Paycheck Protection Program (PPP)
There is $7.25 billion allocated for PPP, now allowing various nonprofit organizations to qualify for these loans/grants. Organizations involved in lobbying would need to meet certain tests to qualify. Notably, the current iteration of PPP loans expires on March 31, 2021 with about 40% of the funding left. No extension was provided in this legislation, though Congress and the SBA are being asked to provide a 60-day extension. Nonprofits now eligible for PPP loans must:
- Have no more than 300 employees
- Not receive more than 15% of their revenue from lobbying activities
501(c)(3) organizations that employ no more than 500 employees per location and 501(c)(6) organizations that employ no more than 300 employees per location will also now qualify for PPP loans.
SC&H Insight – with limited funding here, our advice for qualifying organizations is to contact your bank immediately to develop a game plan and get familiar with the loan application and related submissions needed to apply for a PPP loan.
Employee Retention Credit
- The Employee Retention Credit (ERC), which was just extended by the Consolidated Appropriations Act in January of 2021, is again extended—this time through December 31, 2021. Many of those same provisions remain—20% revenue loss, partial or full shutdown, etc.
- The 70% credit on the first $10,000 of qualified wages remains in place.
- In a change from previous rules, the ERC in the third and fourth quarters of 2021 can only be applied against Medicare taxes. This would generally mean that employers would take longer to receive the benefit. Form 7200 could be filed to accelerate the benefit for qualifying employers.
- New businesses that began in 2020 will have special rules to follow but should otherwise qualify for the credit.
SC&H Insight – as stated by SC&H before, the ERC is now available to employers who received a PPP loan. This continues to be a somewhat overlooked relief provision. For additional details, read our ERC Updates Guidance on PPP Coordination Issues blog.
Employer Dependent Care Assistance Plans
Section 9632 of ARPA provides temporary modifications to the amount an employee can elect for salary deferral—increasing it from $5,000 to $10,500 for 2021 only. Employer plans would need to adopt this change and they may do so retroactively.
Restaurant Revitalization Grants
Eligible restaurant businesses may apply for grants from the SBA under ARPA Section 5003. These grants, similar to EIDL grants and PPP loans, will not be taxable to the recipient and related deductions will be allowed. The ERC will not apply to wages taken into account under these grants; again, similar to the rules that are in place for PPP loans, no double–dipping.
SC&H Insight – with limited funding here, our advice for qualifying businesses is to develop a game plan and get familiar with the grant application process as soon as the SBA puts forth guidance.
COBRA Premium Subsidy
For the period of April 1 through September 30, 2021, individuals may be eligible for up to a 100% subsidy towards their COBRA premiums. Employers will need to notify employees of this subsidy and former employees must notify their former employer when they are once again covered under an employer plan. Employers will qualify for a payroll tax credit for premiums not paid by the former employee and COBRA assistance will not be taxed to recipients.
Paid Sick Leave and Family Leave Tax Credits
ARPA codifies these credits created by the Families First Coronavirus Response Act and extends this credit through September 30, 2021. Credits may now be increased by the employer’s share of Social Security and Medicare tax, employer paid health plan expenses and certain pension contributions, and the amount of qualifying wages will be increased to $12,000 per employee, effective April 1, 2021.
- IRC 461(l) limitations on excess business losses will be extended through 2027
- IRC 864(f) is repealed, impacting affiliated groups worldwide interest allocation elections
Impact on Individuals
Recovery Checks for Individuals
- Single filers will receive rebates of up to $1,400 and joint filers will receive up to $2,800 (plus an additional $1,400 per child). These rebates are subject to phase-outs beginning at $75,000/$150,000 adjusted gross income (AGI) for single filers/joint filers. The amount is completely phased-out at the following thresholds:
- Single taxpayers with incomes exceeding $80,000
- Head of household filers with one child at $120,000
- Joint filers earning more than $160,000
- The IRS will base these amounts on the taxpayer’s 2020 federal tax return, if filed, or the 2019 return if the 2020 return is not yet in their system.
- As with the other rounds of recovery rebates, the IRS will send funds automatically, taxpayers need not take any action. True–up of available credits would occur on 2021 returns.
SC&H Insight – given that these rebates checks are paid based upon tax return data in the IRS system, consider the timing for filing your 2020 returns.
Child Tax Credit Expansion for 2021
- The $2,000 per child credit will be increased to $3,000 per child under the age of 18 and $3,600 for children under 6 years of age.
- The incremental increase in these credits is subject to phase-outs beginning at $75,000/$150,000 adjusted gross income (AGI) for single filers/joint filers and $112,500 for head-of-household filers. The original child tax credit amounts and limitations still apply.
- The credit will be fully refundable.
- The IRS is required to develop a program and an online portal where 50% of this credit can be paid to taxpayers in advance during the second half of 2021.
- Unemployment compensation received in 2020 would be partially excluded from income on amounts up to $10,200 for a single filer and $20,400 for a joint taxpayer. This exclusion is available to taxpayers with AGI under $150,000—regardless of filing status.
- Some states, like Maryland, will allow some unemployment compensation to be excluded from income in 2020, but most states tax this income.
- Taxpayers who have filed their 2020 returns may want to amend the return once IRS guidance is issued on this topic.
- SC&H Insight – Taxpayers who may qualify for this income exclusion but have not filed their 2020 return should consider extending their return to await further IRS guidance on how to report the exclusion, as well as receive guidance on state conformity issues. Maryland is generating a new form for 2020 related to subtracting unemployment income from federal taxable income as of the writing of this article.
- Existing Pandemic Unemployment Assistance would be extended through September 6, 2021 at the current rate of $300 per week.
- Extend the CARES Act subsidy for employers who provide unemployment compensation on a reimbursable basis through September 6, 2021.
Earned Income Tax Credit
This individual tax credit is greatly expanded for tax year 2021 in many ways:
- Expansion for taxpayers without children.
- Children without a taxpayer identification number will not be excluded.
- Recipients may have up to $10,000 of investment income and still qualify for the credit in 2021.
- Taxpayers may elect to use their 2019 earned income to determine their eligibility in 2021.
Dependent Care Tax Credit
Several changes have been made to this credit for tax year 2021:
- The credit will be refundable.
- The limitations on qualifying expenses increases from $3,000 for one child and $6,000 for more than one child to $8,000 for one child/dependent and $16,000 for more than one dependent.
SC&H Insight – compare the benefit you can generate with this provision versus the benefit of the enhanced employer dependent care assistance plan discussed above. You cannot defer salary and receive a credit on the same spend.
Student Loan Forgiveness Taxation
ARPA will expand the types of events that allow for exclusion from income from the forgiveness of student loan debt for tax years 2021 through 2026. Given that Congress will likely be taking up some measure of blanket student loan forgiveness, these changes may impact many student loan borrowers in 2021. Post-secondary educational loans made, insured or guaranteed by a federal, state or local government or educational institution would qualify, as would private education loans and loans made by educational institutions qualifying as tax-exempt organizations. Other qualifications apply, ARPA Section 9675 should be reviewed for more details.