Tax Provisions of the American Rescue Plan Act (ARPA)
(March 18, 2021) The American Rescue Plan Act of 2021 (ARPA), which Congress passed and President Biden signed into law on Thursday, March 11, grants relief to taxpayers and extends and/or modifies certain relief measures initially enacted in prior bills, such as the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the most recently enacted Consolidated Appropriations Act, 2021 (CAA 2021). Below is a brief summary of the tax provision sections of the ARPA that are likely to affect you and/or your business.
For Individuals and Families
2021 Recovery Rebates (Stimulus Payments)
- $1,400 recovery rebate credit ($2,800 for married taxpayers filing jointly) plus $1,400 for each dependent for 2021, including college students and qualifying relatives who are claimed as dependents.
- For single taxpayers, the amount phases out with adjusted gross income (AGI) between $75,000 and $80,000. For married taxpayers who file jointly, the phaseout will begin at an AGI of $150,000 and end at AGI of $160,000. And for heads of household, the phaseout will begin at an AGI of $112,500 and be complete at AGI of $120,000.
- The act uses 2019 AGI to determine eligibility, unless the taxpayer has already filed a 2020 return.
- This credit will be reconciled on your 2021 tax return.
Extensions of Certain Unemployment Benefits
- The new legislation extends continued unemployment provisions of $300 per week through Sept. 6, 2021.
- It does not extend the 50% credit for reimbursing employers.
Suspension of Tax on Portion of Unemployment Compensation
- The first $10,200 in unemployment benefits received in 2020 is not included in gross income for taxpayers with AGIs under $150,000. (However, for joint filers below the AGI limit, the $10,200 exclusion applies separately to each spouse.) *NOTE: If you have already filed your tax return the IRS advises you to NOT file an amended return until the IRS issues further guidance.
Child Tax Credit
- For any tax year beginning in 2021, the child tax credit is increased to $3,000 from $2,000 ($3,600 for children under age 6) and is expanded to include children that are 17 years old.
- The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.
Earned Income Tax Credit
- For tax years beginning after December 31, 2020, and before January 1, 2022, the act introduces special rules for individuals with no children. The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased.
- In addition, for 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
- The credit would be allowed for certain separated spouses.
- The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
- Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
Child and Dependent Care Credit
- Effective for 2021 only, the credit is refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
- The exclusion for employer-provided dependent care assistance is increased to $10,500 for 2021.
Premium Tax Credit
- Premium tax credit is expanded for 2021 and 2022 and applicable percentage amounts have changed. Taxpayers who received too much in advance premium tax credits in 2020 will not have to repay the excess amount. A special rule is added that treats a taxpayer who has received, or has been approved to receive, unemployment compensation for any week beginning during 2021 as an applicable taxpayer.
COBRA Continuation Coverage
- The act provides COBRA continuation coverage premium assistance for individuals who are eligible for COBRA continuation coverage between the date of enactment and Sept 30, 2021. The act also allows a COBRA continuation coverage premium assistance credit to taxpayers. The credit is allowed against the Medicare tax. The credit is refundable, and the IRS may make advance payments to taxpayers of the credit amount.
- The credit applies to premiums and wages paid after April 1, 2021, and through Sept 30, 2021.
- A penalty is imposed for failure to notify a health plan of cessation of eligibility for the continuation coverage premium assistance.
- Taxpayers who receive the COBRA continuation coverage premium assistance credit are not eligible for the health coverage tax credit.
- Continuation coverage premium assistance is not includable in the recipient’s gross income.
- Gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.
For Businesses and Other Organizations
Paid Sick and Family Leave Credits
- Extends the FFRCA paid sick time and paid family leave credits from Mar. 31, 2021, through Sept. 31, 2021.
- Provides that paid sick and paid family leave credits may each be increased by the employer’s share of Social Security tax (6.2%) and employer’s share of Medicare tax (1.45%) on qualified leave wages.
- Increases the amount of wages for which an employer may claim the paid family leave credit in a year from $10,000 to $12,000 per employee.
- The number of days a self-employed individual can take into account in calculating the qualified family leave equivalent amount for self-employed individuals increases from 50 to 60.
- The paid leave credits will be allowed for leave that is due to a COVID-19 vaccination.
- The limitation on the overall number of days taken into account for paid sick leave will reset after March 31, 2021. For self-employed individuals, the 10-day reset applies to sick days after January 1, 2021.
- The credits are expanded to allow 501(c)(1) governmental organizations to take them.
Employee Retention Tax Credit (ERC) Extension
- Extends the ERC from June 30, 2021 until December 31, 2021 and continues the ERC rate of credit at 70% for this extended period of time.
- Continues to allow for up to $10,000 in qualified wages for any calendar quarter.
- Qualified wages paid by an employer taken account as payroll costs under (1) Second Draw PPP loans; (2) shuttered venues assistance; and, (3) restaurant revitalization grants are not eligible for the ERC.
- Allows the credit to be claimed against Medicare (1.45%, Hospital Insurance – HI) taxes only.
Payroll Protection Program Modifications
- The new legislation allocates an additional $7.25 billion towards PPP funding, however, the application period has not been extended and remains March 31, 2021.
- Adds “additional covered nonprofit entity” as an eligible nonprofit eligible for First Draw and Second Draw PPP loans. An “additional nonprofit entity” is an organization listed in Code Sec. 501(c) other than 501(c)(3), 501(c)(4), 501(c)(6) or 501(c)(19). An “additional nonprofit entity” is eligible for a PPP loan if: (1) the organization employs no more than 300 employees; (2) it does not receive more than 15% of its receipts from lobbying activities; (3) lobbying activities do not comprise more than 15% of the organization’s total activities; and, (4) the cost of lobbying activities does not exceed $1,000,000 during the most recent tax year that ended prior to February 15, 2020.
- Adds the following to eligible entities for PPP loans: (1) 501(c)(3) nonprofit and veterans’ organizations with up to 500 employees; and (2) 501(c)(6) nonprofit organizations (business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues); and (3) domestic marketing organizations with no more than 300 employees per physical location.
- Adds Internet-only news publishing and Internet-only periodical publishers to businesses eligible for First Draw and Second Draw PPP loans. To be eligible, the organization must employ no more than 500 employees.
- Provides that amounts used from First Draw and Second Draw PPP loans for premiums used to determine the credit for COBRA premium assistance as provided under Code. Sec. 6432 are eligible for loan forgiveness.
Economic Injury Disaster Loan (EIDL) Modification
- The act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants.
This is just an overview; obviously, there is much more to this historic legislation that will be analyzed in the days and weeks to come. Cover & Rossiter is committed to keeping you fully informed on matters that impact the economic well-being of our clients, their families and businesses. If you have any questions or need assistance, please do not hesitate to reach out to us.